Wharton professors have projected that even if the recently imposed tariffs are removed, GDP will be permanently smaller relative to having had no trade war. Extending the current trade war by several more years will lead to smaller losses in GDP in 2020 but will reduce GDP by more in the long run.
Short Small Trade War -0.1% GDP
Long Small Trade War -0.4% GDP
Permanent Small Trade War -0.8% GDP
Short Big Trade War -0.3% GDP
Long Big Trade War -0.6% GDP
A permanent small trade war takes off -0.8% GDP every decade that it lasts according to the Wharton model.
They are also showing that the trade war is returning overall tariff and trade situation in the US would be returning to levels seen in the 1980s.
In the short-run, lower openness to foreign investment flows actually boosts GDP because U.S. households provide more labor supply, which, in part, ameliorates the consequences of lower domestic capital stock in the future.
After 2019, the “no trade war” scenario has the highest GDP, but the U.S. has been in a trade war since 2018. Notice that extending the current trade war, that is, going from scenario (1) to scenario (2), actually improves GDP in 2020. In all trade wars, the consequence of a temporary decrease in openness, however, creates a permanently lower private capital stock. Even when previous openness is restored, the temporary drop in openness causes U.S. capital to be lower over the long-run and permanently reduces GDP.
Written By Brian Wang, Nextbigfuture.com