World Bank warns global trade war would be 'devastating' for economic growth

World Bank CEO Kristalina Georgieva. Photo / AP

A global trade war would be "devastating" for economic growth as even modest hikes in tariffs would cause as much damage to trade as the financial crisis.

The stark warning from the World Bank is based on Governments raising taxes on imports to the maximum level currently allowed under current trade rules - not even the introduction of new barriers.

In its Global Economic Prospects report, the World Bank said: "A worldwide escalation of tariffs up to the limits permitted under existing international trade rules could lead to cumulative trade losses equivalent to those experienced duringthe global financial crisis in 2008-09, with particularly severe consequences for emerging markets.

"Protectionist threats cast a dark cloud over future growth. If these threats lead to trade wars, the consequences could be devastating."

Hiking these tariffs by 2020 would knock 6.2 per cent off advanced economies' trade and 14 per cent from emerging markets' and developing economies' trade, the World Bank estimates.

Even without a trade war breaking out, its threat could be enough to reduce business investment.

This comes at a time when global economic growth is already moderating. GDP is expected to grow by 3.1 per cent in 2018, matching 2017's spurt, before slowing to 3 per cent in 2019 and 2.9 per cent in 2020.

The US will slow from 2.7 per cent in 2018 to 2 per cent in 2020, the eurozone from 2.1 per cent to 1.5 per cent over the same time period and Japan from 1 per cent to 0.5 per cent.

Britain will defy the rich world trend with a modest acceleration from 1.4 per cent this year to 1.7 per cent in 2020. Other threats to growth include higher interest rates.

"A sudden tightening of global financing conditions, combined with disorderly exchange rate movements, would leave highly indebted emerging markets and developing economies particularly vulnerable, with rising debt service costs hampering investment and heightening financial stability risks," the report said.

Corporate debt levels in emerging markets stand at 86 per cent of GDP, up by 30 percentage points in the past decade.

Much of that has come in China. But even excluding China the figure is up 10 percentage points.

Almost half of the rise in corporate debt in those non-Chinese emerging markets has been raised in foreign currencies, potentially making the borrowers vulnerable to exchange rate shifts.

This could emerge through further hikes in interest rates by the US Federal Reserve, which is expected to tighten policy several times over this year and 2019.

"Rising borrowing costs could substantially increase the burden of debt servicing. In turn, rising debt service costs could lower medium-term growth," the World Bank warned.