The International Monetary Fund has issued a warning about the threat trade wars pose to the global economy as rumblings grow louder about the economic and financial-market risks of a rising tide of protectionism.
In the quarterly update of its World Economic Outlook, the IMF warned that even though it continues to forecast relatively strong global growth of 3.9 per cent for this year and next, “downside risks … have become more salient, most notably the possibilities of escalating and sustained trade actions.”
The global financial institution said recent U.S. tariff increases and retaliations from its major trading partners have heightened the danger that rising trade discord could derail the global economic recovery and depress medium-term growth prospects.
“An escalation of trade tensions could undermine business and financial market sentiment, denting investment and trade,” the report said.
“Beyond its immediate toll on market sentiment, the proliferation of trade measures could increase the uncertainty about the potential breadth of trade actions, thus hindering investment,” the IMF said. It added that “higher trade barriers would make tradable goods less affordable, disrupt global supply chains, and slow the spread of new technologies, thus lowering productivity. …
“Avoiding protectionist measures, and finding a co-operative solution that promotes continued growth in goods and services trade, remain essential to preserve the global expansion,” the IMF concluded.
The warnings come after a week in which central bankers in Canada and the United States cautioned that protracted tariff battles could undermine otherwise healthy economic growth prospects.
Last week, the Bank of Canada left its growth projections largely unchanged, at 2 per cent for 2018 and 2.2 per cent for 2019, despite rising trade threats from the United States and the recent imposition of tit-for-tat tariffs by the United States and Canada. (The IMF essentially echoed that outlook on Monday, forecasting Canadian growth at 2.1 per cent this year and 2 per cent next year.)
But the bank placed trade worries at the top of its list of risks to Canada’s economic outlook, adding that those risks “have broadened and intensified.” In a news conference, BoC Governor Stephen Poloz said a further serious escalation of trade tensions – specifically, the United States following through on its threats to impose tariffs on Canada’s automotive sector – would likely extend far beyond the relatively narrow direct effects.
“The auto sector is like motherhood and apple pie to the Canadian and U.S. economies,” he said. “If you’re willing to do something to disrupt all of that, I think people would naturally feel much more vulnerable … there would be a major confidence effect.”
South of the border, U.S. Federal Reserve chair Jerome Powell noted that Washington’s trade policy is becoming a growing source of worry for U.S. business leaders.
“We are hearing a rising level of concern about the effects of changes in trade policy,” Mr. Powell said in an interview last week with American Public Media’s Marketplace program.
“The [Trump] administration says that what it’s trying to achieve is lower tariffs. So if it works out that way, then that’ll be a good thing for our economy. If it works out other ways, so that we wind up having high tariffs on a lot of products and a lot of traded goods and services, let’s say, and that they become sustained for a long period of time, then yes, that could be a negative for our economy.”
So far, those worries have not been reflected in the U.S. stock market. The S&P 500 stock index is up nearly 5 per cent for the year to date, while most major stock indexes outside the United States have declined.
But market experts are concerned that U.S. investors have failed to grasp that their economy, too, is at risk in a trade war, which would weigh on business confidence and effectively impose a tax on consumers.
“Investors are too complacent about the risks of a trade war,” BCA Research chief global strategist Peter Berezin said in a research paper last week. “As bad as a trade war would be for Main Street, it would be even worse for Wall Street. The mega-cap companies that comprise the S&P 500 have a lot more exposure to foreign markets and global supply chains than the broader U.S. economy.”
Larry Fink, chief executive officer of investing firm Blackrock Inc., said in an interview on Monday on Bloomberg Television that the stock market could fall “10 to 15 per cent” in the next year if U.S. trade disputes, especially with China, escalate into an all-out tariff war.
“The market’s having a hard time digesting the whole change in globalization and trade,” Mr. Fink said. “The foundations of international trade are being raised and being questioned.”