IMF chief warns of global economic risk from US-China trade war

The managing director of the International Monetary Fund (IMF) warned Thursday that tensions sparked by a U.S.-China trade war could damage the driving forces behind global economic growth.

IMF chief Christine Lagarde said that billions of dollars in planned U.S. and Chinese tariffs would have a “not very substantial” direct impact on the global economy, but they could do serious damage in the long run by dampening investor confidence.

{mosads}”When investors do not know under what terms they will be trading, when they don’t know how to organize their supply chain, they will be reluctant on investing,” Lagarde said at the IMF spring meeting in Washington, D.C. “Growth is being driven by more investment than the previous years, and more trade. So why damage those two engines that are effectively working for growth?”

The IMF has projected the global economy to grow 3.9 percent of gross domestic product in 2018, a 0.2-point increase from its October prediction. But Lagarde said the IMF is “seeing more clouds on the horizon” and urged nations to steer away from protectionism.

Lagarde’s warning comes as President Trump mulls imposing up to $150 billion in tariffs on Chinese imports and billions more on steel and aluminum imports. Beijing has promised to retaliate with reciprocal tariffs, while U.S. trading partners and foreign companies have been lobbying Trump for waivers from the levies.

Hours after Lagarde’s remarks, Trump and Japanese Prime Minister Shinzo Abe announced they had failed to reach a deal to exempt Japan from the steel and aluminum tariffs, according the Associated Press.

Trump and Abe said that they instead begun talks to secure a “free, fair and reciprocal” trade agreement.  

Lagarde’s concerns are held widely among U.S. economists and investors. Most traders and analysts see little immediate harm from the tariffs, but fear they could trigger a global trade war that stifles international investment.

U.S. stock markets have been fraught with volatility and drastic sell-offs throughout 2018, partly in response to the trade tensions. Even so, consistent growth, record levels of low unemployment, strong corporate earnings and rising inflation have limited the damage on Wall Street.

Trump and top administration officials have insisted that the U.S. economy will emerge stronger in the long run because the tariffs convince China to cease harmful unfair trade practices and the theft of American intellectual property.

Other factors beyond trade tensions have hindered the U.S.-China economic relationship over Trump’s first term. Foreign direct investment between the U.S. and China fell by 28 percent in 2017, according to a report released earlier this month.

The National Committee on U.S.-China relations, the American nonprofit supporting closer economic ties between the countries behind the report, attributes the 2017 decline to Beijing tightening controls over investments abroad, delaying efforts to open its capital markets to foreigners and a series of Chinese acquisitions of U.S. companies blocked by the Treasury Department.