Washington”•President Donald Trump’s aggressive trade policies, and expansive tax cut at a time when the US economy is growing, are creating risks that could damage the domestic and global economies, the International Monetary Fund warned Thursday.
The tax cuts will generate a near-term boost to growth but also “will elevate the risks to the US and global economy,” and increase the size of those risks, the IMF said in its annual review of the US economy.
Meanwhile, the punitive import duties the US has imposed and threatened could harm the world economic recovery by “catalyzing a cycle of retaliatory responses” and interrupting global supply chains, the report said.
On the eve of an expected White House announcement of the list of perhaps $50 billion in Chinese goods that will be hit with 25 percent tariffs, IMF Managing Director Christine Lagarde said trade wars had no winners.
If there is tit-for-tat retaliation from US trading partners, which they have threatened, there will be “losers on both sides,” Lagarde told reporters.
And that outcome would have a “serious” economic impact on the US and global economies, she said, including by causing inflation to accelerate.
While the direct economic impact is hard to calculate since it will depend on the size and timing of the responses, trade conflict could undermine confidence and cause businesses to hold off on investments, of which there already were signs in Europe, she said.
“Unilateral trade actions can be disruptive and may even prove counterproductive,” she said in her critique of the fund’s largest shareholder.
And the administration’s use of a rarely-applied national security justification for the tariffs”•on steel, aluminum, and potentially autos”•opened the door for other countries to follow suit and use that excuse to impose broad import restrictions that would “undermine the rules-based global trading system.”
“We, therefore, encourage the US to work constructively with its trading partners to resolve trade and investment disagreements without resorting to the imposition of tariff and non-tariff barriers,” Lagarde said.
The fund’s economists indicated Trump’s focus on reducing trade deficits with specific countries was misplaced. Instead, trading partners should work on “securing more ambitious bilateral and plurilateral agreements on trade and investment.”
Still, Washington should not ignore the US workers harmed by globalization but “should focus on mitigating the downsides through training, temporary income support, and job search assistance.”
Trump came to power in part on a wave of anger over immigration and international trade perceived as undermining workers’ wages and American living standards.
And while Trump has crowed repeatedly about the strong US economy and the beneficial impact of the massive income tax cuts passed in December, the reforms have a high budgetary cost and could fuel faster inflation, the IMF said.
That, in turn, would prompt the Federal Reserve to raise interest rates more aggressively, setting off a chain of spillover effects on the global economy, and financial markets, especially emerging markets, the IMF cautioned.