Time to tame global trade tensions

The slashing of the global economic growth forecasts for 2019 by the International Monetary Fund (IMF) and the warning that growth could slow further due to trade tensions and a potentially disorderly British exit from the European Union (EU) should serve as a wakeup call for world leaders to take corrective measures through coordinated actions.

IMF chief economist Gita Gopinath has cited the escalation of US–China trade tensions, needed credit tightening in China, macroeconomic stress in Argentina and Turkey, disruptions to the auto sector in Germany, and financial tightening alongside the normalisation of monetary policy in the larger advanced economies as reasons that have contributed to a significantly weakened global expansion, especially in the second half of 2018.

This is definitely a delicate moment for the global economy as in its third downgrade since October, the IMF has stated the global economy will likely grow 3.3 per cent this year, the slowest expansion since 2016.

It should be noted that more than two-thirds of the expected slowdown in 2019 owes to trouble in rich nations.

Protectionist and unilateral approaches on trade are not the best way forward and only tend to fuel uncertainty and fear among investors.

Leaders should realise that decline in economic growth could, in turn, lead to social challenges too.

Unfortunately, lessons are not being learnt and there seems to be no ceasefire as yet on the trade war front.

US President Donald Trump has now threatened to impose $11.2 billion of tariffs on European products, including cheese and helicopters.

The latest tariff threat would punish the European Union for subsidising plane maker Airbus, which competes with US-based Boeing. The EU, too, is bound to retaliate if Washington acts as planned.

The tit-for-tat moves could escalate the global trade war at the same time the US is trying to resolve a trade dispute with China.

The threat from Trump could also make investors even more concerned about trade disputes hurting an already slowing global economy.

The spat between the US and China has already made a list of goods more expensive for consumers and is weighing on an already slowing Chinese economy.

In a World Economic Outlook chapter released last week, the IMF had clearly stated that an escalation of the US-China trade war would drive manufacturing away from both countries and cause job losses, but would do little to change their total trade balances.

If 25 per cent tariffs were imposed on all trade between the world’s two largest economies, US GDP would fall by up to 0.6 per cent and China’s would fall by up to 1.5 per cent, as per IMF officials.

There is no dispute that cannot be sorted out through sincere negotiations. Co-ordination is anytime better than confrontation.

The IMF’s projection of a slowdown in growth in 2019 for 70 per cent of the world economy should not be taken lightly. If trade tensions worsen, it could trigger large disruptions in global supply chains.

As the top IMF official suggests, policymakers need to work cooperatively to help ensure that policy uncertainty doesn’t weaken investment. Fiscal policy will need to manage trade-offs between supporting demand, protecting social spending, and ensuring that public debt remains on a sustainable path, with the optimal mix depending on country-specific circumstances.