Comments and actions on global trade policy are becoming increasingly hawkish, and a potential victory by Donald Trump in the upcoming presidential election could lead to the imposition of significant tariffs on U.S. imports, potentially leading to retaliation and escalation, according to economists at Goldman Sachs.
As a result, indicators of trade policy uncertainty rose to their highest levels since the 2018-2019 trade war.
“This rise in uncertainty poses a moderate downside risk to global growth, as companies may delay investments until the policy outlook becomes clearer,” the economists wrote.
They measure this risk to investment and growth in three ways.
First, during the 2018-2019 trade war, companies in the United States and Europe that mentioned trade uncertainty in their earnings calls significantly reduced their investments. At the height of the trade war, a signal of trade policy uncertainty was associated with a 0.5 percentage point decline in year-on-year investment growth in the United States and a 1.3 percentage point decline in the euro area on a capital expenditure-weighted basis.
Second, public companies that the market deemed most exposed to trade risk—as measured by stock returns in the five days following tariff announcements during the U.S.-China trade war—also cut back on investments disproportionately, especially in the materials and industrial sectors.
Regression estimates relating stock returns over these periods to investment indicate that trade war risks reduced year-on-year public corporate investment growth by about 0.3 percentage points in the United States and more than 2 percentage points in the euro area.
Third, cross-country evidence prior to the 2018-19 trade war suggests that a rise in the U.S. trade policy uncertainty index to the trade war peak is associated with a 2 percentage point drop in next year’s investment growth in major economies, with a 2 percentage point drop in next year’s investment growth in major economies and a larger 3 percentage point drop among major exporters.
“Using averages across these three approaches, we estimate that a rise in trade policy uncertainty of the magnitude observed during the 2018-19 trade war could reduce GDP growth by about 0.3 percentage points in the United States and 0.9 percentage points in the euro area,” Goldman Sachs economists said.
“Although a rise to 2018-19 levels is not our base case, our analysis suggests that rising trade policy uncertainty poses a moderate downside risk to growth in the second half of 2024 and 2025, especially in Europe,” they added.