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Global trade war would weigh on living standards, says OECD

Tim Wallace
Donald Trump is positioning for a trade war. If it erupts into a global conflict and worldwide retreat into protectionism, the consequences for economic growth and living standards will be severe - and get worse over time, the OECD says. - REUTERS

Living standards are in danger of being held back because a global resurgence in protectionism could undo the benefits brought about by slashing trade tariffs in the past, the Organisation for Economic Cooperation and Development (OECD) has warned.

Countries pushing tariffs back up to the same level they were at in 1990 would cut growth in GDP per capita by around 0.5 percentage points per year, its economists estimate.

Such a change is much larger than the wave of bilateral tariffs currently being implemented by the the Trump administration in the US and its trading partners including China, but the study could illustrate the effect if this turns into a wider move away from free trade.

Such a scenario’s consequences add up over time so by 2060 the world could miss out on a 14pc increase in living standards.

This is because trade introduces extra competition, encouraging specialisation by workers and boosting productivity. It also increases the spread of new technologies but gumming up trade with barriers slows these processes down.

The effect is biggest in countries such as the Brazil, Russia, India, Indonesia, China and South Africa - the BRIICS - which would see a 6.6 percentage point rise in average tariffs. Other recent liberalisers including Australia, Mexico, New Zealand and Switzerland would also see major rises in taxes.

In the worst cases they will lose as much as 25pc of a gain in living standards.

But it also impacts countries that have not changed their tariffs over the years, such as Norway, because their growth is affected by protectionism elsewhere in the world.

Britain would be among the least affected, with a cumulative loss of around 5pc in GDP per head, relative to a scenario with no trade war.

The eurozone’s potential loss is a touch smaller at 4.5pc, as its member states do a lot of trade with each other and EU tariffs were already low in 1990.

The warning comes as part of the OECD’s study into potential economic developments over the next forty years.

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Overall its baseline prediction is for a gradual slowdown in economic growth as the BRIICS mature.

As a result global GDP growth will decline from 3.4pc in 2019 to 2pc per year by 2060, with the rich-world OECD members and the emerging market BRIICS all converging to roughly the same rate.

By 2060 China and India are forecast to make up around 20pc of global GDP each.

Economic reforms could hasten this convergence and raise living standards more quickly across the emerging markets.

Making improvements to the rule of law and to education systems as well as cutting tariffs and opening up to more world trade would have a significant effect, particularly when compounded over decades, the OECD believes.

Its proposals for “ambitious” reforms that are “conceivable considering the experiences of some eastern European countries over the past 20 years” would boost living standards in the BRIICS by between 30pc and 50pc compared to the baseline over the next 40 years.