Although Trump’s trade tariffs have been suspended with the exception of China, all countries will pay in the end.
All countries will be caught in the crossfire of the trade war started with US president Donald Trump’s export tariffs, the International Monetary Fund (IMF) has warned.
However, a better balanced, more resilient world economy is within reach if countries act to secure it.
Kristalina Georgieva, IMF’s managing director, said in her opening speech at the spring meetings of the IMF and the World Bank on Thursday that trade tensions are like a pot bubbling for a long time and are now boiling over.
“To a large extent, what we see is the result of an erosion of trust in the international system and trust between countries.
“Global economic integration has lifted vast numbers of people out of poverty and made the world as a whole better off. But not everyone benefitted. Communities were hollowed out by jobs going overseas,” Georgieva said.
“Wages were repressed by the growing availability of low-cost labour. Prices went up when global supply chains were interrupted. Many blame the international economic system for the perceived unfairness in their lives.”
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National security requires strategic goods to be made at home in trade war
Turning to national security, Georgieva pointed out that in a multi-polar world, where things are made may matter more than how much they cost, the logic of national security says that a broad range of strategic goods, from computer chips to steel, must be made at home and that this is worth paying for.
“Self-reliance is staging a comeback.
“All these concerns, taken together, have now bubbled over, leaving us in a world where industry gets more attention than the service sector, where national interests tower over global concerns and where assertive actions trigger assertive reactions.”
Georgieva said the impacts of these tensions are costly, while rising trade barriers hit growth upfront and protectionism erodes productivity in the long run, especially in smaller economies.
“Uncertainty is costly. The complexity of modern supply chains means imported inputs feed into a broad range of domestic products.
“The cost of one item can be affected by tariffs in dozens of countries. In a world of bilateral tariff rates, each of which may be moving up or down, planning becomes difficult.
“The result? Ships at sea not knowing which port to sail to, investment decisions postponed, financial markets volatile and precautionary savings up. The longer uncertainty persists, the larger the cost.”
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Rising trade barriers in trade war hit growth upfront
She emphasised that rising trade barriers hit growth upfront.
“Tariffs, like all taxes, raise revenue at the expense of reducing and shifting activity and evidence from past episodes suggests higher tariff rates are not paid by trading partners alone.
“Importers pay some part through lower profits and consumers pay some part through higher prices. By raising the cost of imported inputs, tariffs act upfront.”
“Of course, if domestic markets are large, they also create incentives for foreign firms to respond with inward investment, bringing in new activity and new jobs. This, however, takes time,” Georgieva remarked.
Georgieva also pointed out that protectionism erodes productivity over the long run, especially in smaller economies.
“Shielding industries from competition reduces incentives for efficient resource allocation. Past productivity and competitiveness gains from trade erode.
“Entrepreneurship gives way to special pleadings for exemptions, protection and state support. This hurts innovation.
“But again, if domestic markets are large and domestic competition is vibrant, negative effects can be mitigated.
“Ultimately, trade is like water: when countries put up obstacles in the form of tariff and nontariff barriers, the flow diverts.
“Some sectors in some countries may be flooded by cheap imports; others may see shortages. Trade goes on, but disruptions incur costs.”
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What can other countries do about trade war?
What can countries do?
Georgieva says firstly, all countries must redouble efforts to put their own houses in order.
“In a world of higher uncertainty and frequent shocks, there is no room for delay in reforms to enhance economic and financial stability and improve growth potential.”
Secondly, she says, countries should renew their focus on internal and external macroeconomic imbalances.
“Internal balances between savings and investment are fundamental and can tilt too far one way or another.
“Drivers of imbalances include national saving habits, policy-induced distortions, capital market openness, exchange rate regimes and demographics.
“Fiscal, monetary, exchange rate and structural policies provide key levers. Wherever rebalancing is needed, the work starts at home.
“All countries can pursue policies for better internal and external balance, supporting collective resilience and wellbeing.”
Georgieva emphasised that reforms and rebalancing are for everyone, from the Association of Southeast Asian Nations to the Gulf Cooperation Council, across the African continent and elsewhere.
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Combatting trade war by ensuring cooperation in multi-polar world
She said the third major priority and the most pressing one by far is to ensure that there can be cooperation in a multi-polar world.
“In trade policy, the goal must be to secure a settlement among the largest players that preserves openness and delivers a more-level playing field to restart a global trend toward lower tariff rates while also reducing nontariff barriers and distortions.
“We need a more resilient world economy, not a drift to division. And, to facilitate the transition, policies must allow private economic agents time to adjust and deliver.
“Critically, resilience requires that attention be paid to policies to cushion the blows on those who lose out. Distributional policies form a fundamental bridge between good economics and good politics.”
Georgieva pointed out that in challenge there is opportunity.
“Pushed hard enough, things that were not possible become possible, mountains that could not be climbed are climbed, vested interests that would not retreat are overcome.
“With cool heads, clear vision and strong will, times of change can be times of renewal.
“The secret to seizing the moment is to focus all energy not on preserving the old, but on building the new: a better balanced and more resilient world economy.”
