Global Economics_ Shock simulation_ A US tariff increase with retaliation

Industry/Company Involved * Industry: Global Economics, specifically focusing on the impact of tariffs and trade policies. * Company: Not explicitly mentioned, but the analysis is based on simulations and models developed by Citi Research. Core Points and Arguments 1. Tariff Increase Simulation: The report simulates a 10pp increase in tariffs on US imports from major trading partners (Canada, China, Japan, Mexico, Taiwan, South Korea, the UK, and the EU) and an equivalent retaliation by these countries. * Impact: Sustained output loss in the US and elsewhere, with a peak loss in US output of around 1.5%. * Reasons: The US is both the origin and target of multiple shocks, while other trading partners only see their bilateral trading relationship with the US affected. 2. Global Economic Impact: The output loss in the rest of the world is persistent, though less pronounced, with a gap to the baseline scenario converging to around 0.6%. * Reasons: A slow grind towards a new equilibrium rather than a sudden shock followed by an incomplete recovery. 3. Trade Growth and Global Integration: The results suggest a longer-lasting loss in trade growth and a less integrated global economy for several years after the shock. * Impact: Global trade growth remains slow, and global integration (proxied by the ratio of trade to GDP) will decline for a while. 4. US Trade Balance: Despite a more noticeable and more permanent US real exchange rate appreciation in the unilateral tariff scenario, the US trade balance (as a share of GDP) improves by more in the current scenario with retaliation. * Reasons: Weakened demand from the US in the scenario with retaliation. Other Important Points * Policy Rates: US policy rates stay lower than in the baseline as a result of weaker (core) inflation of around 0.2pp in magnitude. * Central Bank Reaction: Central bank reaction functions show policy rates converging to a lower steady state, at least in some cases enabled by lower inflationary pressures. * Limitations: The model only allows tariff simulation for a specific set of countries, which account for 77% of US imports.