Full trade war threatens 2008-style recession, warn French government advisors

PARIS (Reuters) - A full-scale trade war would likely be as devastating for the world economy as the 2008-2009 recession, warned France’s Council of Economic Advisors, a body which gives input to the country’s prime minister.

The United States and China could see a permanent loss of three percent of economic output and the European Union (EU) four percent in the case of a full-blown trade war, it estimated on Tuesday.

In the EU’s case, that translates into the loss of 1,250 euro (1,104.53 pounds) annually per habitant, it added.

It defined a generalised trade war as a 60 percentage point hike in tariffs on manufactured goods and restrictions on services among major trade partners.

The Council of Economic Advisors’ chairman Philippe Martin said tariff hikes of that magnitude were on par with increases seen during the 1930s. By comparison, tariffs are currently less than three percent on average in the United States and the EU.

The economic losses from a full-scale trade war would be worst for relatively small, open economies, topping 10 percent of gross domestic product for Canada, Ireland, Mexico, South Korea and Switzerland.

Even in a more limited trade war, the impact would still be huge with a nearly 60 percent drop in bilateral trade between China and the United States if the two countries hit each other with a 25 percent tariff hike on all trade between them.

Against that backdrop, the body recommended coordinating counter-measures to Washington’s current and planned tariff hikes with trade partners such as Japan and Canada, while pushing for reforms at the World Trade Organisation (WTO).

It also said Europe should keep seeking bilateral trade deals as an “insurance policy” that could limit the impact of a full-blown trade war.

However, the EU should not accept future deals unless the partner country has ratified the Paris Climate Accord and OECD standards for closing cross-border corporate tax loopholes.

($1 = 0.8614 euros)

Reporting by Leigh Thomas; Editing by Sudip Kar-Gupta