1 US-China Trade War Could Cut US$455bn Off Global GDP, Lagarde Warns – Invest Data
US-China Trade War Could Cut US$455bn Off Global GDP, Lagarde Warns

US-China Trade War Could Cut US$455bn Off Global GDP, Lagarde Warns

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Post Views: 3,760 In what may setting an agenda for this week’s G-20 finance ministers and central bank governors meeting in Fukuoka, Japan, Christine...

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In what may setting an agenda for this week’s G-20 finance ministers and central bank governors meeting in Fukuoka, Japan, Christine Lagarde, Managing Director of the International Monetary Fund (IMF), on Wednesday, expressed growing concern over the impact of the ongoing trade tensions between the United States and China, the two largest economies in the world.
Writing in IMFBlog, a forum for the views of the fund’s staff and officials on pressing economic and policy issues of the day, Ms. Lagarde warned that recent US-China tariffs could further reduce investment, productivity, and growth.
While express concerns on the proposed US tariffs on Mexico also, she noted the IMF estimate overall “that US-China tariffs—including those implemented last year—could reduce global GDP by 0.5 percent in 2020 (see chart, bottom panel). This amounts to a loss of about US$455bn, larger than the size of South Africa’s economy.”
IMF research, she continued, “shows that liberalizing trade in services could add about US$350 billion to global GDP in the long run. These types of gains are critical if trade is to play its role in lifting living standards and creating new jobs with higher wages.”
There is strong evidence, she added, that besides the U.S and China, the world economy stands to lose from the current trade tensions.
Describing the tension as self-inflicted wounds that must be avoided by removing the recently implemented trade barriers and avoiding further barriers in whatever form, the IMF also believes that “the recently announced and envisaged US-China tariffs could subtract about 0.3 percent from global GDP in 2020, with more than half of the impact stemming from business confidence effects and negative financial market sentiment.”
The protectionist measures, she continued, are hurting growth and jobs, while also making tradable consumer goods less affordable—and disproportionately harming low-income households.
She urged the G-20 finance ministers and central bank governors to take inspiration from the host city, Japan’s “startup city,” which has flourished in recent decades by embracing trade, innovation, and openness, so as to reduce trade tensions and clear other stumbling blocks on the way back to higher and more sustainable growth.
“The goal must be to help, not stand in the way of global growth.”
Continuing, Lagarde recalled: “In April, I described the global economy as being at a “delicate moment.” The IMF cut its global growth forecast to 3.3 percent in 2019, largely because of temporary, country-specific factors and the tangible effects of trade tensions. At the same time, we projected a pickup in growth in the second half of this year and a further acceleration to 3.6 percent in 2020, the same growth rate as in 2018.
“Our expectation was that global economic activity would also benefit from the more patient pace of monetary normalization by the US Fed and the European Central Bank, and from increased fiscal stimulus in China. And indeed, these policy responses have provided vital support over the past few months, including by easing financial conditions and increasing capital flows to emerging markets.
“In fact, the most recent economic data indicate that global growth may be stabilizing—broadly as we had forecast. For example, while first-quarter economic activity disappointed in parts of emerging Asia and Latin America, growth was stronger than expected in the United States, the euro area, and Japan.”
She highlighted significant stumbling blocks that could stand in the way of a rebound in growth to include “question marks over the expected uptick in growth. Will the first-quarter momentum in advanced economies hold up, and will the previously projected improvements in some stressed economies materialize or take longer than expected? How would a no-deal Brexit affect confidence? And will the recent increase in oil prices further depress economic activity?
“Another stumbling block is the underlying vulnerability of the global economy. Corporate debt levels, for example, have increased to a point where a sudden shift in financial conditions could trigger disruptive capital outflows from emerging markets.
“We also know that many economies are facing disappointing medium-term growth prospects, not just because of population aging and slow productivity, but also because of the corrosive effects of excessive economic inequality.”
To help clear these stumbling blocks and support a rebound in growth, she urged G-20 policymakers to set as immediate priority resolution of the current trade tensions, while stepping up the modernization of the international trade system.
“This includes building consensus across countries on how to strengthen WTO rules, especially on subsidies, intellectual property, and trade in services. The goal is to create a more open, more stable, and more transparent trade system—one that is well-equipped to serve the needs of 21st-century economies.”
The IMF boss urged nations fixing the trade system to partner in the reform of international corporate taxation, in addition to strengthening the global financial safety net, while tackling the existential threat of climate change.
“At the same time, we have to recognize that high public debt and low-interest rates have left many countries with limited policy room for maneuver. Managing this challenge will require carefully calibrated fiscal policies that strike the right balance between growth, debt sustainability, and social objectives.
“We also need to address dislocations caused by trade and technological innovation, while doing more to support those left behind,” she stressed, seeking further structural reforms from lowering barriers to entry in retail and professional services, to encouraging greater participation of women in the workforce.
“Of course, each country will customize reforms to meet its needs—but we estimate that these types of measures if jointly implemented, could boost G-20 GDP by 4 percent in the long term.
Ahead of the next downturn which is inevitable, the IMF MD charged policymakers to use policy tools to maximize their combined effect, by “supporting demand through decisive monetary easing and fiscal stimulus wherever possible. It also means using these supportive policies to boost the impact of structural reforms where demand is weak.”
Policy coordination, she warned further, should not stop at the border, adding that “if all countries act decisively to stimulate their own growth, the positive spillovers reinforce each other. And if everyone is working to expand growth, everyone benefits from the efforts of others to a much greater effect overall.”
On the international scene, the IMF boss said cooperation is not just required in a potential downturn but remains “critical right now because all countries continue to face a delicate moment.
She urged all to take a cue from the Japanese proverb: “Cross a shallow river as if it were deep.”
“For the G-20 nations, crossing the river means working in partnership to help, not hinder the expected pickup in growth.
“By harnessing the “Fukuoka spirit” of openness, policymakers can help remove the stumbling blocks and set the global economy on a more durable and inclusive path,” she added.

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