IMF sounds warning on tariff damage

A worker dismantling steel bars from concrete in Beijing. The US has put in place duties on US$34 billion in Chinese goods, as well as on imports of steel and aluminium.
A worker dismantling steel bars from concrete in Beijing. The US has put in place duties on US$34 billion in Chinese goods, as well as on imports of steel and aluminium. PHOTO: AGENCE FRANCE-PRESSE

Trade war could set off shock to business confidence, hitting global output badly, it says

WASHINGTON • United States President Donald Trump’s campaign to slap tariffs on everything from Chinese steel to German cars could set off a shock to business confidence that takes a significant bite out of global output, according to an analysis by the International Monetary Fund (IMF).

World economic output would be 0.5 per cent less in two years if the US follows through on all its tariff threats, other countries retaliate, and tightening financial conditions lower business investment, the IMF predicts in an analysis released on Wednesday.

The report serves as a warning to the Group of 20 economies before a meeting of finance chiefs this weekend in Argentina.

The US would be hardest hit in a trade war, with output in the world’s biggest economy 0.8 per cent lower a year into the conflict, according to the Washingtonbased fund. Emerging markets in Asia would take the next biggest hit, with gross domestic product slipping by 0.7 per cent in year two.

“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,” IMF managing director Christine Lagarde said in a blog post accompanying the analysis.

Investors are trying to gauge the economic risks from Mr Trump’s mission to reduce the US$552 billion (S$758 billion) US trade deficit by imposing tariffs on foreign goods. The US has already put in place duties on US$34 billion in Chinese goods, as well as on imports of steel and aluminium.

Last week, the US released a list of an additional US$200 billion in Chinese imports to be targeted for duties.

The IMF analysis shows that potential US duties on foreign cars represent a greater risk to the global economy than the tariffs the Trump administration is considering on Chinese imports.

If the US imposes duties of 25 per cent on foreign cars, and other nations retaliate, the negative impact would be more than double the effect of the administration’s other planned trade measures, the IMF found.

The US Commerce Department is investigating whether imports of passenger vehicles, including SUVs, vans and light trucks, imperil US national security.

Mr Trump used the same provision to impose steel and aluminium tariffs earlier this year.

The fund warned earlier this week that escalating trade tensions are threatening to derail a global upswing that is already losing momentum amid weaker-than-expected growth in Europe and Japan.

While the IMF projects solid growth in the US this year and next, the fund predicts the nation’s current- account deficit will deepen as tax cuts and increased public spending stoke demand for imports.

In its note to the G-20, IMF recommended that nations tailor their policies to the maturing economic cycle. Governments should take advantage of the economic upswing to build buffers against future risks and renew their commitment to international cooperation, while central banks should raise rates in a gradual, well-communicated way, the IMF said.

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A version of this article appeared in the print edition of The Straits Times on July 20, 2018, with the headline 'IMF sounds warning on tariff damage'. Print Edition | Subscribe