IMF warns Trump trade war could cost global economy US$430 billion

All economies would suffer from further escalation, but the US would find itself ‘as the focus of global retaliation’, the International Monetary Fund said

PUBLISHED : Tuesday, 17 July, 2018, 12:51am
UPDATED : Tuesday, 17 July, 2018, 1:34am

Rising trade tensions between the United States and the rest of the world could cost the global economy US$430 billion, with America “especially vulnerable” to an escalating tariff war, the International Monetary Fund has warned.

Delivering a sharp rebuke for US President Donald Trump, the Washington-based organisation said that the current threats made by the US and its trading partners risked lowering global growth by as much as 0.5 per cent by 2020, or about US$430 billion in lost GDP worldwide.

Although all economies would suffer from further escalation, the US would find itself “as the focus of global retaliation” with a relatively higher share of its exports taxed in global markets. “It is therefore especially vulnerable,” the fund said.

Trump raised the stakes in his mounting trade dispute with China last week by proposing 10 per cent tariffs on US$200 billion of Chinese goods entering the country. Beijing was quick to warn of retaliation.

Trump also rattled European leaders by labelling the EU one of the greatest “foes” of the US over trade, while leaving behind a trail of political chaos in Britain from his visit last week.

Issuing its latest World Economic Outlook report on Monday amid the rising tensions, the IMF said that greater risks were emerging for the global economy since its last assessment in the spring.

While world growth remains strong, the expansion is “becoming less even, and risks to the outlook are mounting”, it said.

Warning that the broad expansion for the world economy that began about two years ago has plateaued, Maurice Obstfeld, the IMF’s chief economist, said: “Countries must resist inward-looking thinking and remember that on a range of problems of common interest, multilateral cooperation is vital.”

Beyond the immediate threat from weaker levels of international trade, the IMF said that greater use of protectionist measures could hinder business investment, disrupt global supply chains, slow the spread of productivity-boosting technologies and raise the price of consumer goods.

Despite highlighting greater risks for the world economy, the fund left its global growth forecast of 3.9 per cent for both this year and next unchanged. However, it forecast sharp slowdowns for the EU, UK and Japan amid weaker growth and increasing political tension.

Growth in the UK this year is anticipated to slow to 1.4 per cent, compared with an estimate of 1.6 per cent made in April, as a consequence of weaker economic growth in the first quarter of 2018. The British economy ground to a halt in March amid freezing weather and heavy snowfall, though it has since staged a modest rebound.

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The fund also highlighted the risk attached to Westminster and Brussels failing to make further progress on the terms of Brexit, despite several months of negotiations between the two sides.

Germany, France and Italy were among European nations receiving the sharpest downgrades for growth this year, of as much as 0.3 per cent compared with forecasts made in April, amid rising political risks in the euro zone triggered by the Italian election earlier this year. Growth across the zone this year is forecast to slow to 2.2 per cent, compared with an earlier forecast for an expansion of 2.4 per cent.

The IMF said that China would continue to grow at the slower rates it expected in April, of about 6.6 per cent this year. While the US faces greater risks from trade, the fund said that Trump’s tax cuts would also mean the American economy would continue to grow in line with its previous estimates of around 2.4 per cent this year.

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The Japanese economy is forecast to cool to 1 per cent, marking the slowest growth rate among advanced nations – a downgrade of 0.2 per cent – following weak private consumption and investment in the first quarter of the year.

The IMF also warned of risks as the US Federal Reserve prepares to raise interest rates. Alongside the threat of greater trade disputes, Obstfeld said: “Financial markets seem broadly complacent in the face of these contingencies.”