IMF: U.S, China trade war threatens global growth

Ongoing trade war between the United  States (U.S.) and China over tariff hike could slash global economic output by 0.5 per cent next year, the International Monetary Fund (IMF) warned yesterday. The warning is coming ahead the meeting of global finance leaders in Japan this weekend.

IMF Managing Director Christine Lagarde said in a note for G20 finance ministers and central bank governors that taxing all trade between the two countries, as President Donald Trump has threatened, would cause some $455 billion in gross domestic product (GDP) to evaporate – a loss larger than G20 member South Africa’s economy.

“These are self-inflicted wounds that must be avoided. How? By removing the recently implemented trade barriers and by avoiding further barriers in whatever form,” she said in the note.

The IMF said U.S. tariffs and Chinese retaliatory measures put in place thus far, including a recent increase in U.S. tariffs to 25 per cent on a $200 billion list of Chinese imports, could cut 2020 growth by 0.3 per cent. More than half of that impact comes from negative effects on business confidence and financial market sentiment.

“The fact is that protectionist measures are not only hurting growth and jobs, but they are also making tradable consumer goods less affordable – and disproportionately harming low-income households,” Lagarde said.

The trade tensions had already contributed to the IMF cutting 0.4 percentage point from its 2019 growth forecast in April to 3.3 per cent.

Yesterday, the Fund said incoming data suggested that its expectations were on target for a modest pickup in growth in the second half of this year due to more accommodative monetary policy and economic stimulus measures in China.

The IMF is predicting 3.6 percent global growth for next year, but said this outlook is vulnerable to trade tensions, uncertainty over Britain’s exit from the European Union (EU), uncertain recoveries in some stressed economies such as Argentina and Turkey.

If growth falters, the IMF said that policymakers should act in a coordinated fashion including “decisive” actions to ease monetary policy and fiscal stimulus in countries that have available resources. These would be more effective if the policy response was “synchronised” across the globe and coupled with structural reforms aimed at improving economic efficiency, the IMF said.

Lagarde also argued for stepped-up efforts to strengthen World Trade Organisation (WTO) rules, especially on subsidies, intellectual property protections and trade in services. She cited IMF research showing that liberalising trade in services could add about $350 billion to global GDP in the long run.