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S&P: Global retaliation to new US tariffs may drag down GDP

The newly signed U.S. tariffs on steel and aluminum imports would have minimal direct impact on the country's GDP, but looming retaliatory action from global trade partners may weigh on the economy, S&P Global Ratings warned in a new report.

S&P said the direct macroeconomic effects of the tariffs are likely to be "very small" since the levies only cover a small fraction of total goods imports. In 2017, steel and aluminum only accounted for about $46 billion of the $2.4 trillion total goods imported.

However, the overall impact is less certain and would depend on the response of other governments such as the EU and China, which have warned of retaliation, according to S&P Global Ratings economist Paul Gruenwald.

"More important are the potential second-round effects on consumer and business confidence and spending, which would ultimately drag down GDP," Gruenwald said.

And while a full-scale trade war is not expected, the U.S. tariffs may lead to an "escalation" of punitive, retaliatory levies, which would reduce trade, confidence and economic output.

"The retaliatory spiral could lead to a breakdown in the global rules-based trading system and raise the risk of an all-out trade war, eventually hurting exporters both in the U.S. and globally," the S&P report said.

Gruenwald said the result would be deterioration in economic conditions leading to downward revision of macroeconomic forecasts.

"The fear is that these tariffs are just a start to a longer game of tit-for-tat tariff retaliations and pose a fundamental threat to the rules-based trading system," added Beth Ann Bovino, U.S. chief economist at S&P.

According to the S&P report, U.S. domestic steel and aluminum producers would benefit from the tariffs, while the aerospace and defense, capital goods, and midstream energy industries are likely to suffer from higher input costs.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.