The governor of the Bank of England has warned Donald Trump that further escalation of US trade disputes around the world would damage the America the most, as the world’s largest economy and China prepare to launch the opening salvos of a trade war on Friday.
Speaking hours before the world’s top two economies prepare to launch tariffs on one another’s imports, Mark Carney said further escalation would have serious and damaging consequences for global GDP. He cautioned that US growth could be hit by as much as 5%, compared with a slowdown for the rest of the world of up to half that amount.
The intervention from the head of a G7 central bank against another member of the club of wealthy nations marks one of the boldest criticisms levelled against the US president so far.
Speaking in Newcastle on Thursday, Carney said the current round of import tariffs from the US and retaliatory measures against the country, including spats with the EU, had already slowed the global economy.
Carney believes any additional measures would have a significantly more damaging impact. He said: “At the moment, protectionism is largely just talk (and tweets). But what if rhetoric becomes reality?”
He revealed forecasts made by Threadneedle Street showing the American economy would suffer a 2.5% drop in GDP as a result of falling trade volumes alone over three years, should the White House increase US import tariffs by about 10 percentage points on all of its trading partners.
The world economy would take a hit to GDP of just over 1%, while there would be a smaller impact on the EU and the UK.
The fallout from the scenario – akin to a full-scale trade war – would, however, be exacerbated by weaker levels of business investment and higher borrowing costs for companies as central banks raised interest rates, meaning the hit for growth could be doubled.
“There is a growing possibility that trade uncertainty could crystallise the longstanding risks of a snap back in long-term interest rates, increased risk aversion and a general tightening in global financial conditions,” Carney said.
Barring any last minute developments, the US and China will carry through their threats to impose $34bn (£25.7bn) of import tariffs on Friday, from as early as one minute past midnight in Washington. The US tariffs will apply to a range of Chinese goods including nuclear reactors, boats and aircraft. The targets of tit-for-tat Chinese measures include soya beans, meat and cars. The anti-Chinese tariffs follow taxes imposed by the White House on steel and aluminium imports from the EU and other countries including Canada and Mexico.
Brussels has hit back with tariffs on American consumer goods including whisky, Levi’s jeans and Harley-Davidson motorcycles. Trump has said the US could go one step further by imposing tariffs on European cars, which economists fear would do far greater damage than any of the existing measures.
Carney said the impact from the president’s use of import tariffs against major trading partners including the EU and China, alongside their retaliatory measures, was already being seen through measures of global exports and manufacturing in recent weeks.
“There are some tentative signs that this more hostile and uncertain trading environment may be dampening activity,” he said.
Surveys of factory output in the US and the eurozone earlier this week showed firms were facing higher prices as a consequence of the import tariffs, as well as American manufacturers having the longest delivery delays on record.
Alongside the threat of higher taxes on European cars, Carney said the US would have the highest import tariff regime for more than half a century. He said the impact of higher taxes and uncertainty over how the president will react next may have an adverse impact for business investment.
Comparing the situation to a slowdown for firms ploughing money into the UK as Britain leaves the EU, he said: “The experience of Brexit underscores that the impact of global trade war will be greater the more business confidence is affected, the more financial conditions tighten and – most fundamentally – the more permanent the loss of openness is expected to be.”
China accused the US on Thursday of “opening fire” on the world as both nations prepare to use import tariffs amid a long-running dispute over trade. Trump has previously accused the Asian country of using “unfair” trade practices, including anticompetitive support for the Chinese steel industry and the alleged theft of US firms’ intellectual property.
Trump has threatened to escalate the trade conflict between the two countries with tariffs worth as much as $450bn if China retaliates.