Deutsche Bank is suggesting the worst-case scenario for a looming trade war is brewing, which would trigger anything from a relatively mild recession to something on the scale of the 2008 financial crisis.
While the most likely scenario is something considerably more benign, as in more measured responses from the U.S. trading partners to the tariffs, the bank's economists list a series of events indicating that a full-blown trade war has become more likely. The principal combatants would be the U.S., China, Mexico and Canada, but the ramifications would be widespread.
There are four items in particular that raised the likelihood of a more adverse outcome: The tariffs President Donald Trump recently announced on imported steel and aluminum; National Economic Council head Gary Cohn's resignation over the levies; Trump's tweet that "trade wars are good and easy to win," and White House saber rattling that more tariffs could be coming, this time on China.
When Trump ran for election in 2016, economists listed a potential trade war as the biggest risks posed by the Republican's victory. Now that the president is heading down the tariff path, fears are increasing that a global commerce battle could be at hand.
It appears the biggest fears come from the possible inflationary impacts of a trade war. Should Trump continue to deem other nations' levies as a threat to national security and subsequently expand the tariffs, that would invite reciprocal moves.
From there, inflationary pressures kick in as the added cost to imported goods push up consumer prices, slow down consumption and derail economic momentum.
