An International Monetary Fund (IMF) report on global imbalances, out tonight, makes no bones about the approach of US president Donald Trump of imposing stiff tariffs to overcome trade deficits: It’s a loser.
However, as Mr Trump is always right, it may be hard for him to abandon his tariffs policy, especially in the war he’s launched against China.
IMF managing director Christine Lagarde backed up the paper in her statement at the conclusion of the Group of 20 meeting of finance ministers & central bank governors in Fukuoka, Japan:
“The principal threat stems from continuing trade tensions. The IMF estimates that US-China tariffs, including those implemented last year, could reduce the level of global gdp by 0.5% in 2020, or about $US455 billion, which could make a significant dent in the projected pickup in economic activity.
“A second risk is that, with interest rates very low, debt levels are rising in many advanced economies and emerging markets remain vulnerable to a sudden shift in financial conditions. And all this at a moment when monetary & fiscal policy space is more limited than in the past.
“To mitigate these risks, I emphasised that the first priority should be to resolve the current trade tensions – including eliminating existing tariffs and avoiding new ones – while we need to continue to work toward the modernisation of the international trade system.
“This would be the best way for policymakers to give more certainty & confidence to their economies and to help, not hinder, global growth.”
Paper provides numerous comparisons
The 21-page Group of 20 paper, Global imbalances, prepared by IMF staff, makes global assessments, compares deficit-running & credit-balance performances, assesses risks from persistent imbalances and proposes policies to reduce external imbalances.
One issue the paper steers away from is the role of reserve currency status in setting prices of goods & currency, although it cracks an oblique mention: “At 40% of world gdp, the sum of net creditor & net debtor positions is now at a historical peak and 4 times larger than in the early 1990s.
“The continued increase of net asset & liability positions took place against the backdrop of persistent (even if narrowing) current account imbalances, with valuation effects in the form of exchange rate & asset price movements playing a mitigating role in most cases, with the US being an important exception.”
When it came to protectionism, tariffs & trade wars, the IMF report said:
“Protectionist & trade policies that target bilateral trade balances are likely to be ineffective and impose substantial efficiency costs. Countries should avoid using tariffs to target bilateral trade balances as these are unlikely to affect aggregate imbalances and are costly in terms of domestic growth & employment, with negative global spillovers.
“Instead, focus should also be given to reviving liberalisation efforts and strengthening the multilateral rules-based trading system, including promoting trade in services, where gains from trade are substantial but barriers remain high.”
The IMF report said internal factors were the root of any imbalances:
“Macroeconomic forces, not tariffs, drove bilateral trade balances. A decomposition exercise using a standard trade model shows that over the past 2 decades, most of the changes in bilateral trade balances were explained by changes in macroeconomic factors of both trading partners. These factors include fiscal policies & credit cycles, and in some cases also foreign exchange intervention & supply-side policies (eg, subsidies to exports or production that affect similarly trade with all partners).
“In contrast, bilateral tariffs played only a small direct role, reflecting their already low levels in most countries in the mid-1990s and the fact that reciprocal tariff reductions had offsetting effects on bilateral trade balances.
“Analysis of episodes of overall trade balance reversals suggests that targeting a particular bilateral trade balance is of little consequence. Adjustments in specific bilateral trade balances do not necessarily lead to adjustments in the overall trade balances, but changes in the overall trade balance tend to be matched by proportional changes across trading partners. This suggests that, absent changes in macroeconomic conditions, changes in a country’s bilateral balances simply result in compensating adjustments in other bilateral balances.
“But tariffs are costly for macroeconomic outcomes. While the impact of tariffs on trade balances was modest over the period of analysis, large & permanent changes in tariffs shaped the international organisation of production.
“And indeed, since the mid-1990s the significant decline in both tariffs & other trade costs (for example, transport costs) has gone together with an increase in the extent & complexity of global value chains. This increased integration of production has not only led to specialisation & productivity improvements, but also to greater risk of international spillovers from trade policy.”
Attribution: IMF release, report