Trump's trade war could put dent in global economy: IMF

Published Wed, Oct 9, 2019 · 09:50 PM
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THE new head of the International Monetary Fund warned on Tuesday that America's trade war with China could cost the global economy around US$700 billion by 2020 - a loss equivalent to the size of Switzerland's entire economy.

In her first speech as managing director, Kristalina Georgieva said the global economy had shifted from a synchronised upswing two years ago to a synchronised slowdown, weighed down in part by the pain of President Donald Trump's trade war. The fund will be downgrading its projections for global growth in 2019 and 2020 next week, when it releases new projections of the economic losses related to the trade war between the United States and China.

"We have spoken in the past about the dangers of trade disputes," Ms Georgieva said. "Now, we see that they are actually taking a toll." The warning comes at a potential turning point in the trade conflict between the world's two largest economies. US and Chinese negotiators are meeting in Washington this week to try to resolve a trade war that has begun to inflict economic pain in both countries. Negotiators are hoping to reach an agreement that would improve some of the Chinese economic practices the Trump administration has complained about and potentially roll back some of the tariffs Trump has placed on more than US$360 billion of Chinese goods.

The stakes for some type of resolution are high. The United States is poised to raise tariffs on $250 billion of Chinese goods to 30 per cent from 25 per cent next Tuesday and plans to tax more consumer goods, including laptops, smartphones and apparel, in December. Barring an agreement, the Trump administration will tax nearly every product that the country imports from China by the year's end.

Economists have debated how much of the global economic slowdown is a result of trade tensions and how much stems from other factors, including sluggish growth in Europe and a credit slowdown in China.

But as the trade conflict has dragged on and the United States and China have steadily expanded the lists of goods that are subject to tariffs, the costs of the trade war are becoming more evident. Major measures of consumer sentiment have dipped, with many consumers citing tariffs as a reason for their pessimism.

Last week, a closely watched gauge of American manufacturing revealed that factories had slowed for the second straight month in September, while new export orders plummeted.

Other countries have also suffered. German factory orders have plunged, in part because Chinese companies that have been hurt by the trade war have less money to spend on German machinery. That threatens to clamp down on German spending, which would spill over to affect other parts of the eurozone.

Major international institutions have also slashed their expectations for global growth. In a report last week, the World Trade Organization halved its forecast for growth in the global trade of goods to only 1.2 per cent during 2019, in what would be the weakest year since 2009.

In June, the World Bank said that it expected the global economy to grow by 2.6 per cent in 2019, the slowest pace in three years. But growth this year has slowed further as a result of Britain's potential exit from the European Union, a recession in Europe and global trade uncertainty, said David Malpass, the president of the World Bank,.

In her address, Mr Georgieva warned that global trade growth has come to a near standstill, weighing on global manufacturing and investment. The slowdown threatens to spill over to the service sector and consumer behaviour, as well, she said.

She added that, even if growth picked up in 2020, trade tensions were leading to changes that might last a generation. Supply chains have been broken as companies that once manufactured products in China have tried to find alternatives in order to avoid the tariffs.

And a broader fight between the United States and China over which country will dominate technologies like 5G is creating "a 'digital Berlin Wall' that forces countries to choose between technological systems," she said.

That US$700 billion loss because of the trade war with China translates to roughly 0.8 per cent of global gross domestic product, she said, and includes more than US$200 billion of direct losses to businesses and consumers. Much larger secondary effects from a loss of confidence and disruption to markets will also occur.

"In this scenario, the whole economy of Switzerland disappears," Ms Georgieva said.

Until recently, much of the US economy had been insulated from the pain of the trade war. That is because the bulk of the economy is powered by consumption and services, unlike some smaller countries that are more exposed to shifting global winds of trade. Trade accounts for just 27 per cent of the US economy, according to World Bank figures, less than China at 38 per cent and Germany at 87 per cent .

The Trump administration has argued that the tariffs it began imposing more than a year ago are having only a limited impact on the US economy. Officials have blamed any signs of slowdown on weakness overseas, a strong US dollar dragging on exports and the actions of the Federal Reserve, which has maintained tighter monetary conditions than many global central banks. NYTIMES

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