The global trade policy commentary and actions are becoming increasingly hawkish, and a potential victory by Donald Trump in the upcoming presidential election could result in significant tariffs on U.S. imports, potentially leading to retaliation and escalation, according to Goldman Sachs economists.
As a result of this, trade policy uncertainty indices have surged to their highest levels since the 2018-2019 trade war.
“This rise in uncertainty poses a moderate downside risk to global growth, as companies might delay investments until the policy outlook becomes clearer,” economists wrote.
They quantify this risk to investment and growth in three ways.
First, during the 2018-2019 trade war, companies in the U.S. and Europe that mentioned trade uncertainty in their earnings calls significantly reduced investment. At the peak of the trade war, mentions of trade policy uncertainty were linked to a 0.5 percentage point decrease in year-over-year investment growth in the U.S. and a 1.3 percentage point decrease in the Euro area on a capital expenditure-weighted basis.
Second, public companies that the market perceived as more exposed to trade risk—measured by equity returns in the five days around tariff announcements during the China-U.S. trade war—also reduced investment disproportionately, especially in the materials and industrials sectors.
Regression estimates relating equity returns during these periods to investment suggest that trade-war risks lowered year-over-year public-company investment growth by 0.3 percentage points in the U.S. and over 2 percentage points in the Euro area.
Third, cross-country evidence from before the 2018-2019 trade war indicates that a rise in the U.S. trade policy uncertainty index to its trade war peak is associated with a 2 percentage point decline in year-ahead investment growth in major economies, with a larger 3 percentage point decline among major exporters.
“Averaging across these three approaches, our estimates suggest that a rise in trade policy uncertainty as large as the increase observed during the 2018-2019 trade war could lower GDP growth by around 0.3pp in the US and 0.9pp in the Euro area,” said Goldman’s economists.
“Although a rise to 2018-2019 levels is not our base case, our analysis suggests that rising trade policy uncertainty poses a moderate downside risk to growth in 2024H2 and 2025, particularly in Europe,” they added.
