Trump trade war = economic recession in the United States?

NEW YORK (CNNMoney) –

The risk of a global trade war is increasing. This could plunge the US economy into a recession, ending the second-longest expansion in US history.

Although the economy is strong right now, companies and investors are increasingly concerned about President Trump's trade crackdown. Tensions increase, increasing the chances that the trade dispute will become an absolute trade war.

China on Friday accused the United States of initiating the "biggest trade war of economic history" when tariffs came into effect. 34 billion US dollars of Chinese products and immediately retaliate against tariffs on US products for the same value.

US economist Michelle Meyer of Bank of America Merrill Lynch warned late last month that "a major global trade confrontation would likely push the United States and the rest of the world to the brink of recession."

Here's how dominoes might fall: First, companies would be affected by the high costs caused by tariffs. Then companies will not be able to find a way to get the materials they need. Finally, trust between managers and households would decrease. Companies would react by drastically reducing expenses.

Trump has already imposed tariffs in Canada, Mexico and the European Union, and these allies have responded quickly. The first round of tariffs on China came into effect on Friday, and Trump threatened further. The administration also badesses import duties on cars and restrictions on Chinese investment in US technology.

Of course, there is a big difference between a trade dispute and a direct trade war.

has so far only affected a small fraction of the US economy. In its report, Bank of America estimated that more than 100,000 million goods would be affected, or about 4.2 percent of total merchandise imports.

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"We are still several steps away from a total trade war," wrote Meyer,

. However, he said, "trade tensions may worsen before they improve."

The problem is that uncertainty over trade policy could freeze the investment decisions of major corporations and be costly to others.

Confidence is already down among business leaders in Germany, which is heavily dependent on exports. The IFO business climate index dropped in June, driven by a sharp decline among companies involved in global trade.

In the United States, Harley-Davidson warned that retaliation from the European Union could cost up to 100 million dollars a year. The company is removing part of the production of motorcycles from the United States.

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Atlanta Federal Reserve Chairman Raphael Bostic said in June that companies are setting the bar too high to invest in new projects. He said that "optimism" about the corporate tax cut "has almost completely disappeared among my contacts."

And the minutes of the last Federal Reserve meeting showed that Reserve officials more concerned about the economic damage caused by the Trump administration's trade policies.

Reserve trade contacts "expressed concern about the possible negative effects of tariffs and other proposed trade restrictions, both at the national and national levels." Meyer said that A wave of tariffs would hurt consumer sentiment and damage corporate supply chains by causing "bottlenecks" and disruptions.

A decline in confidence and interruptions in the supply chain could magnify the trade shock, leading to a total recession. "

US economic growth has recently accelerated, and the outlook were brilliant, largely due to corporate tax cuts and an increase in public spending.

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Greg Valliere, global chief strategist at Horizon Investments, wrote in a note to customers last month that talking about a recession "seems exaggerated."

Others are in agreement, for the moment, at least – they argue that the powerful combination of tax cuts and government spending has kept them at risk of recession.

But Meyer said that a "new escalation", including auto rates, would force Bank of America to "re-evaluate" the outlook for the US economy.