Can the US Economy Weather the Trade Wars?

Aluminum. Cars. Solar panels. It’s hard to track the tariffs without a scorecard. As headlines continue to swirl, many investors worry about the impact on the US economy. Clearly, tariffs and trade wars hurt growth, but we don’t think the impact will be big enough to derail the economy just yet.

Clearly, tariffs and trade tensions are a headwind for growth—both in the US and in other countries. However, the US economy is robust, and in our assessment, it can absorb the potential hit without too much disruption. Of course, with both announced and threatened tariffs coming and going by the day, the true impact is a fast-moving target.

From our perspective, there are three channels through which trade measures can exert their influence on the economy:

1) Direct Impact: Less than in Most Other Countries

The good news for the US is that its economy isn’t particularly trade sensitive. In technical terms, the US is a relatively “closed” economy: Trade is a relatively small percentage of gross domestic product (GDP) (Display). So, a 10% tariff on $200 billion of imported goods, for example, would reduce gross domestic product (GDP) growth by $20 billion—or about 0.1% of GDP.

The direct growth impact of the ongoing trade war will likely be larger in other countries. For one thing, their overall economies are significantly smaller than that of the US. And they’re more “open” than the US economy: Trade is a bigger share of their GDP. That makes them more exposed to the direct impact of tariffs and restrictions.