America’s isolation on trade policy, which will be on full show at this weekend’s G7 summit in Canada, raises the (admittedly still small) risks of a worst-case scenario in which the US tears up NAFTA or launches an all-out trade war with China. Such an outcome would not on its own be enough to kill the economic expansion, but it would worsen the slowdown we anticipate next year, and add to the revival in inflationary pressures already underway.
Under our base-case scenario, in which tit-for-tat trade measures are pursued but a major escalation with China is avoided and NAFTA remains intact, export growth is likely to be more influenced by movements in the dollar and the health of the global economy. Both factors suggest that net trade will be broadly neutral for economic growth over the next year or so.
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