Trump's Threatened Tariffs Could Cause Recession in 9 Months if Implemented, Morgan Stanley Warns

President Donald Trump's trade war with China could drive the global economy into recession in nine months if he implements threatened 25 percent tariffs on an additional $300 billion of imports from China, Morgan Stanley economists said in a Monday note.

Trump threatened last week to escalate his long-running trade war with China, which has resulted in 25 percent tariffs on $250 billion of imports. The president said he would impose tariffs on an additional $300 billion of Chinese imports on September 1, initially starting the tariff at 10 percent. He said the tariff rate could rise to 25 percent. The threat, which came amid ongoing trade talks over policy differences between the world's two largest economies, sent global markets into a tailspin.

Amid uncertainty caused by trade tensions, global growth is slowing. Trump's tariff announcements "raise downside risks significantly," the Morgan Stanley note said.

"If the U.S. were to implement 25% tariffs on all imports from China for 4-6 months and China were to respond with countermeasures, we believe we would see the global economy entering recession in three quarters," said the note, which estimated that global growth would fall to a 7-year low by the end of 2019 if the new tariffs are implemented and China responds with countermeasures.

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The new round of tariffs would hit consumers hard. Previous rounds were intended to exempt consumer products, but retail items like iPhones, toys and clothes will be included if new tariffs are put in place.

Morgan Stanley said in its note that about two-thirds of items subject to tariff if new import duties are levied are consumer products. Oxford Economics told Newsweek that if the tariffs are implemented at 25 percent, the average American household would be paying $900 per year.

Trump said on Saturday that the trade war is "going along very well" even as evidence of its impact on the economy is becoming harder to ignore. U.S. GDP rose 2.1 percent last quarter, a full percent drop from the first three months of the year. Manufacturing activity also slowed to a level close to a three-year low last month.

China has responded with its own tariffs on U.S. imports, further exacerbating the trade war's toll. The country's currency weakened more than the seven-to-one-dollar ratio on Monday, falling below that symbolic threshold for the first time in more than 10 years.

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Treasury Secretary Steven Mnuchin has warned China against manipulating its currency, which the administration worries will provide an unfair advantage to Chinese exporters. The renminbi's drop in value evoked a quick response from Trump, who tweeted that "China has always used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers' wages and harm our farmers' prices. Not anymore!"

Global stock markets quickly fell after the value of the yuan decreased. The Dow Jones dropped 1.8 percent. France's CAC 40 declined 1.79 percent, and the United Kingdom's FTSE fell 2.4 percent.

Trump
President Donald Trump and Vice President Mike Pence enter the Diplomatic Reception Room of the White House to make remarks on August 5. Alex Wong/Getty Images
Trump's Threatened Tariffs Could Cause Recession in 9 Months if Implemented, Morgan Stanley Warns | U.S.