The International Monetary Fund, in a report released last week, warned that further escalation of trade wars between the United States and China could have major repercussions in both countries next year.
The IMF notes that China's growth could become the biggest casualty due to the trade wars. The world economy could also suffer as a consequence.
Based on the trade tariffs that are already in place, the IMF revised down the global growth estimates by 0.2 percentage points. Still, the global economy is expected to rise at a healthy pace of 3.7%.
The IMF said that assuming the United States administration imposes fresh tariffs on all imports from China, the effect of this on the business and consumer confidence along with a negative financial market could shave off more than 0.9 percentage points from the U.S. GDP for 2019.
The U.S. President Trump had threatened on various occasions to impose a blanket tariff on all imports from China.
For China, it could potentially shave off 1.6 percentage points from its GDP, the International Monetary Fund warned. The IMF said that such an economic consequence could potentially increase the risks of a full-blown trade war. It estimates that the consequences could be more or less severe than its projections.
Imposing a blanket ban on imports from China could mean that the U.S. would go ahead with additional tariffs on more than $267 billion goods. This would cover almost all imports.
The IMF's financial model also assumes that the U.S. will impose tariffs on automotive part imports. This could potentially hit many other trading partners including Canada and Germany.
So far, the United States administration has imposed a 25 percent tariff on imports from China. This affects goods worth $50 billion. In early September, an additional 10% tariffs were imposed on an extra $200 billion worth of goods imported from China.
A further 25 percent tariff is being talked about if China does not succumb to the U.S. demands and makes trade concessions by January 1, 2019.
In response to the U.S. tariffs, China retaliated by imposing tariffs of 25 percent on U.S. imports on goods worth $50 billion. It then imposed a variable tariff between 5 and 10 percent on further $60 billion goods imported from the United States.
The trade barriers are expected to weigh heavily on the global economy. As a result, the consequences could be felt not just in the two countries but the global economy as well. It is expected to undermine the business confidence and could also hit the financial markets.
The IMF's simulations showed that in the event of an all-out trade war, the global economy could close by 0.8 percentage points by 2020. Growth is expected to remain around 0.4% in the long term.
Based on the current forecasts, the IMF assumed no new trade protection measures. Still, growth by 2019 is expected to be 0.2 percentage points lower for both the countries.
While the U.S. is the world's leading economy, China is the second biggest economy in the world.
The IMF noted that the U.S. economy could average around 2.9% in 2018 and then ease to 2.5% by 2019. For China, it expects growth to ease from 6.9% in 2017 to 6.6% for 2018 and fall to 6.2% by 2019.
In the medium term, China's growth is forecast to eventually slow to 5.6% with the economy transitioning to a more sustainable growth path. Recent GDP reports suggest that a slowdown in economic growth is imminent for China.