WASHINGTON, July 19, 2018 (BSS/AFP) – The US economy is “especially
vulnerable” to damage from the burgeoning global trade war, which could shave
hundreds of billions of dollars off global GDP, IMF chief Christine Lagarde
said Wednesday.
In remarks ahead of this weekend’s meeting of Group of 20 finance
ministers in Argentina, Lagarde said there were signs global growth could
begin to decline and called on policymakers to prepare.
The International Monetary Fund on Monday called the increasing trade
restrictions “the greatest near-term threat” to the world economy.
Through 2019, the IMF estimated the world economy should grow by 3.9
percent but “this may be the high-water mark,” Lagarde said in a blog post.
“Already growth is beginning to slow in the Euro Area, Japan, and the
United Kingdom,” she said, adding that recent US fiscal stimulus would soon
wane.
IMF economists prepared a report for the G20 ministers with simulations
showing the worst-case scenario, where all the tariffs threats and
retaliation are implemented, and business confidence erodes, could cut a half
point or $430 billion off global GDP in 2020.
“While all countries will ultimately be worse off in a trade conflict, the
US economy is especially vulnerable because so much of its global trade will
be subject to retaliatory measures,” said Lagarde.
Because US President Donald Trump launched the current trade war,
retaliation and negative impact will be focused on the US economy, leaving
other regions to continue trading amongst themselves.
Trump, who said trade wars were “good and easy to win,” imposed steep
tariffs on all steel and aluminum imports, angering key allies and prompting
swift retaliation.
He also hit China with 25 percent duties on $34 billion in goods, with
another $16 billion on the way. And $200 billion more could be targeted as
soon as September.
– A range of bad outcomes –
The IMF report to the G20 presents a range of scenarios showing the
subtraction from global GDP is likely to be minor unless Trump imposes
blanket tariffs on the US auto sector.
Blanket tariffs on the hundreds of billions of dollars in foreign autos
Americans buy annually would reduce US GDP by 0.6 points in the first year,
while Japan would lose 0.2 percentage points, the report showed.
If he follows through on threats to impose 10 percent duties on an
additional $200 billion in Chinese imports, this could shave 0.2 points off
US growth in the first year, according to the IMF.
Lagarde also cited other problems on the horizon, including stuttering
emerging market economies, as investors have taken $14 billion out of the
markets between May and June, causing some central banks to raise interest
rates.
The capital flight could worsen as the US Federal Reserve continues to
raise interest rates, making investment in the US more attractive.
She once again urged emerging market authorities to maintain flexible
exchange rates, tamp down credit growth and reduce debt levels to prepare
themselves.
Furthermore, IMF member countries may not fully appreciate how technology
is changing the composition of their labor forces, and how it could worsen
inequality.
She said countries should take “bold” steps to modernize their social
safety nets, increase education and improve digital infrastructure.