Trade war damage would deepen under confidence shock, IMF says

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.
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. PHOTO: REUTERS

WASHINGTON (BLOOMBERG) - 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.

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 Wednesday.

The report serves as a warning to 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 Washington-based 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.

US Deficits

Investors are trying to gauge the economic risks from Trump's mission to reduce the US$552-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 aluminum.

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, imperils US national security. Commerce is conducting the probe under Section 232 of the 1962 Trade Expansion Act, which gives the president the power to impose tariffs on imports that threaten security.

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

The fund warned earlier this week that escalating trade tensions are threatening to derail a global upswing that's 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.