The Strategist

IMF: Lack of trust is more harmful than trade wars

07/23/2018 - 15:16

The crisis of trust between the world trade participants can have a more negative impact on the world economy than the direct introduction of duties, experts of the International Monetary Fund (IMF) estimated in an analytical report prepared for the meeting of finance ministers and heads of central banks of G20 member countries in Buenos Aires. The maximum losses in this case will reach 0.4-0.5% of world GDP per year, while even a sharp expansion of the duties will lead to a 0.1% growth slowdown.

Craig Franklin
Craig Franklin
The experts' calculations are based on the IMF macroeconomic dynamic model, which covers six economies and groups of countries - the US, Japan, the euro area, developing countries, Latin America and the rest of the world. The first scenario takes into account only those restrictions that have already been imposed. Recall that the US imposed import duties on steel and aluminum in the amount of 25% and 10%, respectively, and introduced a tariff of 25% on shipments from China worth $ 50 billion or more. The forecast presumes reciprocal equivalent measures of all affected parties with respect to US exports. According to the IMF calculations, in this case, a statistically significant slowdown in GDP growth (by about 0.1 percentage points) will occur in the US and developing countries, while Japan and the euro area may even add the same 0.1 pp in the growth rate.

The second scenario envisages introduction of additional tariffs of 10% on supplies from China to the US worth $ 200 billion and more (this was announced by US President Donald Trump) and the Chinese side's response. These restrictions may slow the GDP growth of developing countries by 0.3 percentage points, while the growth in the US may be lower by 0.2 pp. However, other regions can accelerate economic growth thanks to substitution American and Chinese goods in the first years after the introduction of such measures. Thus, the countries of the euro area and Latin America can get an increase to 0.1 percentage points of GDP, Japan - up 0.2 pp. Yet, the scenario does not take into account the elasticity of substitution of goods from the US and China. A more complex model may record deterioration in macroeconomic dynamics for all regions, the IMF notes.

The third scenario complements the second with 25 percent tariffs for car supplies to the United States and the response of all affected parties. In this case, in the first year, the growth in the US may be lower by almost 0.6 percentage points, and in Latin America - by 0.1-0.2 percentage points. Other countries will slightly increase in growth, but it will still give way to a slowdown in the long-term.

Finally, the fourth scenario is a temporary global crisis of confidence between participants in international trade; at that, the IMF expects a sharp increase in the risk premium and the subsequent decline in investment, consumption and production. In this case, the global GDP will slow down by 0.4 pp in the first year and 0.5 percentage points in the following. The IMF predicts the largest loss of growth in the US - 0.9 pp; Latin America, Japan and developing countries may be missing 0.6-0.7 percentage points of growth in the economies. IMF experts note that the scenario can underestimate the potential effect of such a development of events, since it does not take into account the possible reaction of central banks.

Although in the end all countries will suffer from the trade conflict, the US economy is especially vulnerable in the current situation, the IMF concludes. The fund recommends "to leave tariffs and mirror responses in the past", and instead think about the need to address the problem of intellectual property rights and the conclusion of innovative agreements on electronic commerce and digital services.