The latest analysis by Goldman Sachs economists suggests that the global trade policy landscape is taking a more aggressive turn, with potential ramifications if Donald Trump were to win the upcoming presidential election. The imposition of significant tariffs on U.S. imports could trigger a chain reaction of retaliation and escalation, impacting global economic growth.
This heightened uncertainty around trade policies has led to a surge in trade policy uncertainty indices, reaching levels not seen since the 2018-2019 trade war. The economists caution that this uncertainty poses a moderate downside risk to global growth, as businesses may hold off on investments until there is more clarity on the policy front.
The economists have identified three key ways in which this uncertainty could impact investment and growth. Firstly, during the previous trade war, companies in the U.S. and Europe that mentioned trade uncertainty in their earnings calls significantly scaled back their investments. Secondly, public companies perceived as more exposed to trade risks reduced their investments, particularly in the materials and industrials sectors. Lastly, historical evidence shows that a spike in the U.S. trade policy uncertainty index could lead to a decline in investment growth in major economies.
Goldman’s economists estimate that a return to the levels of trade policy uncertainty witnessed during the previous trade war could reduce GDP growth by around 0.3 percentage points in the U.S. and 0.9 percentage points in the Euro area. While they do not consider this scenario as their base case, they highlight the potential impact on growth in the latter half of 2024 and 2025, especially in Europe.