Escalations in Trump's trade war could wipe out $600 billion from the world economy, OECD warns

If trade relations continue to deteriorate, the Organization for Economic Cooperation and Development forecasts that global gross domestic product would fall by as much as 0.7% by 2021.
Greater uncertainty could be particularly costly in advanced economies.
View Markets Insider's homepage for more stories.

Further escalation in the yearlong trade war between Washington and Beijing would hammer away at growth at a time when the global economy is already set to slow, the Organization for Economic Cooperation and Development warned Tuesday.

The Paris-based think tank said in a biannual report that broader trade barriers between the largest economies would further slow trade flows and damage sentiment. The US and China have together levied steep tariffs on roughly $360 billion worth of each other's products.

If trade relations continue to deteriorate, the OECD forecasts that global gross domestic product would fall by as much as 0.7%, or roughly $600 billion, by 2021. Bloomberg Economics has made similar estimates.

"Further uncertainty about trade policies, and a growing concern that new restrictions might be applied on a much wider range of items affecting many economies, is likely to check business investment plans around the world," the report said.

By increasing investment risk premia in financial markets and the cost of capital for companies, the OECD said greater uncertainty could be particularly costly in advanced economies.

President Donald Trump has threatened to extend duties to all remaining Chinese imports to the US, which are valued at about $300 billion. Tensions between the US and China escalated further last week after the Trump administration banned telecommunications gear from "foreign adversaries" in a move seen as targeting certain Chinese companies.

This all comes at a time when the world economy is expected to cool. The OECD estimates that world global gross domestic product growth will slow to 3.2% this year down from 3.5% in 2018 and 3.8% in 2017.

"The global economy was expanding in sync less than two years ago, but challenges to existing trade relationships and the multilateral rules-based trade system have now derailed global growth by raising uncertainty that is depressing investment and trade," said Laurence Boone, the chief economist at OECD.