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Trump's policies could have 'severe consequences' worldwide, say global economists

“The trade policy is really working against the tax policy."

New data suggests that the United States’ policies on taxes and trade could drag down global growth and create long-term economic fallout on a par with the 2008 recession.

The World Bank draws a sobering conclusion in a new analysis: A trade war, it said, could cause as much damage to the global economy as the financial crisis that began a decade earlier. Developing countries would be the most vulnerable, but advanced economies would also be hit. The institution warned that a worldwide hike in tariffs would have “major adverse consequences for global trade and activity.”

A new survey of nearly 1,000 international economists by Germany’s ifo Institute finds that President Donald Trump’s tax and trade policies are expected to hurt the economies of advanced and developing nations, while the tax cuts implemented at the beginning of this year might help out the United States, but at a cost.

“The main takeaway is both reforms are seen in a rather negative light around the globe,” said Carla Krolage, a junior economist at the ifo Institute.

Most economists believe that the U.S. economy will benefit from the tax code overhaul, but there are indications that this could come at the expense of other countries’ growth. Roughly half of survey respondents believe their own country’s economy will be hurt; by contrast, roughly two-thirds expect a positive outcome for the U.S. economy.

Roughly half of survey respondents believe their own country’s economy will be hurt by Trump's tax policies.

“In the intermediate term, the tax bill has been stimulative,” said Eric Toder, co-director of the Urban-Brookings Tax Policy Center. “It’s probably accelerated economic growth this year [but] that’s not going to last very long because we’re approaching full capacity,” he said. Long term, accelerating the growth of the national deficit will increase interest rates and the cost of capital, which could crimp further growth, Toder said.

“The tax reform really has two aspects. One, to simplify the tax code, but also to provide greater incentives for U.S. multinationals to operate inside the United States,” said Michael O. Moore, a professor of economics and international affairs at George Washington University. “You’re moving investment around,” he said, so to the extent that U.S.-based companies do bring business and revenues back into the country, this will be a loss of investment elsewhere — that is, unless other countries take action of their own.

“Many experts think they can do something against it,” Krolage said. Roughly two-thirds of economists surveyed want to see their countries respond in kind with tax measures to boost investment incentives, by cutting their own tax rates or offering targeted incentives aimed at intellectual property and R&D investment, a response for which the United States is likely unprepared, Krolage said.

“I think the U.S. hasn’t taken it into account that much,” she said.

In addition, experts say any tax benefits accrued by the United States could be counteracted by damaging trade outcomes. On trade, economists’ views were much more closely aligned with one another: Nearly 80 percent think the U.S.’s protectionist trade policies will hurt their own country’s economies, and two-thirds think these policies will damage the U.S. economy, as well.

Others agree. The World Bank found that if countries all raised tariffs up to the maximum allowed under current trade law, global trade flows could fall by 9 percent, equal to the drop that took place during the financial crisis of 2008-2009. In addition, countries and industries would have to contend with non-tariff costs that could include logistical, legal and regulatory complications.

“The trade policy is really working against the tax policy, from our point of view,” Toder said.

It’s possible that the economists surveyed might have been even more pessimistic had the administration’s current threats already been borne out. While steel tariffs are nominally disruptive on the margin, more sweeping tariffs — such as Trump’s threat to ban German luxury cars — would create more wide-ranging and painful economic fallout.

“There’s a tremendous amount of uncertainty on how this will develop and whether we’ll have a trade war,” Krolage said. The World Bank found that just a trade war between the United States and China could have a spillover effect on industrial supply chains around the world, hurting everything from labor markets to investment activities.

While economists by and large supported retaliatory tax measures, they were more restrained in their opinion of trade-related retaliation: Only 2 percent favored retaliatory action, and 21 percent said their own governments should take no action.

This may spare the U.S. economy in the short run, but international trade experts warn that the Trump administration could be sowing the seeds for a secular decline of American influence in global trade policy development.

“Trade barriers don’t help anybody,” Toder said. “Supply chains are so complex and so specialized that when you throw a monkey wrench into that you’re really making everybody poorer. It doesn’t matter if other countries retaliate,” he said.

“I think it’s also important to understand we’re not heading into the 1930s in the sense that everybody wages a trade war against everybody else. It’s really the United States that’s waging a trade war against everybody else, including its allies,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics. “Everybody is trying to diversify away from the United States,” he said.

Ultimately, this could prove more damaging than punitive tariffs — and is more likely. More than two-thirds of economists in the survey said their countries should expand their trading relationships with other partners. “The standards are being rewritten while we’ve placed ourselves on the sidelines,” Kirkegaard said.

In retreating to a protectionist stance, the United States leaves a vacuum for the E.U. or even China to step into a leadership position on global trade, making critical decisions on everything from intellectual property to dispute resolution that could have reverberations for decades to come.

“There’s definitely a risk that countries decide to cooperate more with China, for example,” Krolage said. “This is definitely a risk for the United States,” she said.

The Trump administration’s disengagement means that the country, and the American economy, will increasingly be left out of global commerce as other countries move forward without it, Kirkegaard warned. “This will come at tremendous economic costs to the United States,” he said.