World leaders have been warned that a Donald Trump-inspired trade war could trash the global economic recovery with protectionist policies tearing up global supply chains and killing off the green shoots of productivity growth.
The intervention by the International Monetary Fund (IMF) comes amid rising tensions over trade deficits, the decline of manufacturing jobs, and rivalry between the US and China on the global economic stage.
Politicians must “resolve trade disagreements without resort to exceptional measures”, IMF boss Christine Lagarde warned, to avoid "trade wars [which] not only hurt global growth, but they are also unwinnable".
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She issued the warning ahead of next week's G20 meeting of global politicians and central bankers in Buenos Aires, in the wake of the US decision to impose tariffs on steel and aluminium imports, and the EU's threats to retaliate.
@realDonaldTrumpWhen a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
5:50 AM - Mar 2, 2018
"We know that the self-inflicted harm of import tariffs can be substantial even when trade partners do not retaliate with tariffs of their own," she said.
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"We also know that protectionism is pernicious, because it puts the biggest strain on the poorest consumers who buy relatively more low-priced imports. In other words, harming trade is bad for the economy and bad for people."
The IMF's Global Prospects and Policy Challenges report said the G20 leaders should prioritise co-operation and co-ordination in trade policies.
"The global expansion is gaining strength from the pick-up in international trade, and it should not be put at risk by the adoption of inward-looking policies," the report said.
“The modernization of the rules-based multilateral trade system should continue, anchored in the World Trade Organization, with well-enforced rules that promote competition and a level playing field. Co-operation is also needed to tackle excess global imbalances.”
If this is not done, then “the re-emergence of unilateral trade restrictions may escalate tensions and fuel global protectionism, disrupting worldwide supply chains and affecting long-term productivity."
The North American Free Trade Agreement, a core pillar of the trade system between Mexico, Canada and the US is being renegotiated following demands from President Trump that it be either modernised or scrapped.
Analysts at credit ratings agency Moody's warned that "risks to Nafta renegotiation are rising" and "the US and Canadian economies would suffer" if the deal falls apart, imposing tariffs of WTO or higher levels.
At the same time other risks are mounting in the global economy, bringing its ability to cope with a slowdown into question, the world’s lender of last resort has warned.
This is particularly critical as the IMF believes momentum in the world economy will slow by 2020, as the surge to growth of 3.9pc in both 2018 and 2019 recedes.
Threats to prosperity are also building as markets become more volatile and governments fail to address their debt burdens, the IMF said.
“Even though the sun still shines in the global economy, there are more clouds on the horizon,” Ms Lagarde said.
The international body was fiercely critical of US economic management. It pointed to the economic gamble made by the Trump administration to imposing sweeping tax cuts, which it said could result in smaller tax hauls if economic growth does not make up the difference to government coffers.
The US should reduce these cuts, it warned, adding that the nation should “adopt policies to bring public debt towards a sustainable path”.
Ms Lagarde told world leaders that policies to reduce imbalances and improve the sustainability of growth domestically in each country should also reduce demands for protectionist policies.
"The way to address global economic imbalances is not to raise new obstacles to trade. Using fiscal means to address global imbalances is critical. This includes, for example, lowering deficits in the US to bring public debt towards a sustainable path, and stronger infrastructure investment and education spending in Germany," Ms Lagarde said.
"And importantly, those who are adversely affected by globalization and technological progress should receive more support to ensure that they can invest in their skills and transition to higher-quality jobs."
Among the greatest dangers to growth was the rapid accumulation of private sector debt. This was a particular concern for China’s economy. Authorities have tried to crack down on shadow banking by limiting the amount of credit available outside traditional banks. The IMF warned that this was not going far enough. It said that “further measures” were needed to address the risks in smaller banks and the wider system.
India, Italy and other eurozone economies urgently need to address the non-performing loans in their banking systems, the IMF said. As economies move through the boom-bust cycle and interest rates rise the number of loans likely to fall into default will i. This will leave both debtors and lenders exposed. Solving this issue was “of the essence”.
Globally, debt levels of sovereigns, companies, and households are at an all-time highChristine Lagarde, IMF
Ms Lagarde said: “Government debt levels in advanced G20 economies have on average reached 114pc. Globally, debt levels of sovereigns, companies, and households are at an all-time high. This creates financial vulnerabilities.
“Consider a scenario that includes an unexpected surge in inflation and a sudden tightening of global financial conditions. These changes could prompt financial market corrections, worries over debt sustainability, and capital flow reversals in emerging markets,” she said.
The IMF also called Brexit a protectionist move, adding that both it and Nafta renegotiations could hurt growth and herald the return of unilateral trade restrictions.
The body maintained its forecast for UK GDP growth at 1.5pc for 2018, but lowered it to the same level for 2019. This forecast is 0.1 percentage points lower than its October prediction.
