The International Monetary Fund said more work is needed to further reduce global trade imbalances amid increasing tensions, while issuing a fresh warning that such conflicts are weighing on the global economy.
“It is imperative that all countries avoid policies that distort trade,” the IMF said in its annual External Sector Report released Wednesday in Washington. “Against a backdrop of escalating trade tensions, greater urgency is needed in tackling persistent excess imbalances.”
The report comes as the Washington-based fund confronts a surge in protectionism around the world that’s seen dragging on global growth, with output slowing in major economies from China to Europe and Mexico. IMF leadership also is in flux with Managing Director Christine Lagarde set to succeed Mario Draghi as president of the European Central Bank.
While the U.S. trade war with China has cooled with a recent truce and renewed talks, the world’s second-largest economy has slowed amid President Donald Trump’s tariffs. China’s government said this week that the economy eased to the weakest pace since quarterly data began in 1992, highlighting effects of the ongoing trade dispute with the U.S.
“With prolonged trade uncertainty, it’s weighing on business sentiment everywhere in the world, which then has implications for global demand,” IMF Chief Economist Gita Gopinath said at a press conference Wednesday. “We welcome the trade truce between the U.S. and China that came toward the end of June at the G-20 meetings, and we would hope that the world would continue to work cooperatively to not only not trigger these trade tensions but also to address the issues with the multilateral trading system.”
The report urged countries to refrain from using tariffs to target bilateral trade balances as such actions “are costly for global trade, investment, and growth, and are generally not effective in reducing external imbalances.”
World Imbalances
Overall current account balances declined marginally from the prior year to 3% of global gross domestic product in 2018, according to the report. Net creditor positions have further increased to about 20% of global output, which the fund called a historical peak that’s four times higher than early-1990s levels.
Higher-than-warranted balances are centered in the euro area, driven by Germany and the Netherlands, as well as other advanced economies such as South Korea and Singapore, according to the IMF. It said balances that are lower-than-warranted are still concentrated in the U.S. and U.K., along with some emerging economies such as Argentina and Indonesia.
China’s balance is in line with fundamentals as its current account surplus has narrowed further, the IMF said, while adding that a lasting external rebalancing requires further reforms and reining in expansionary economic policies.
Stimulus Ready
David Lipton, the IMF’s acting managing director, on Tuesday urged central banks and other policy makers to be ready with more stimulus if a global economy that’s already slowed by a trade war deteriorates. “All need to be ready in case there is a significant slowdown to respond much more forcefully,” Lipton said in a Bloomberg TV interview.
The fund’s report Wednesday called for “reviving liberalization efforts and modernizing the multilateral rules-based trading system” to better capture e-commerce and trade in services, plus more enforceable World Trade Organization commitments “through a well-functioning WTO dispute settlement system.”
The IMF in April cut its outlook for global growth to the lowest since the financial crisis amid a bleaker outlook in most major advanced economies and signs that higher tariffs are weighing on trade. The IMF forecast the world economy will grow 3.3% this year, less than the 3.5% it had estimated in January. It was third downgrade to the outlook in six months.
Reports from major economies show trade tensions weighing on global manufacturing. U.K. factory output is shrinking for the first time in almost three years while gauges for China and South Korea remain below the key 50 level. The JPMorgan Global Manufacturing PMI fell to 49.4 in June, the weakest reading in data since mid-2016.
Asked to address the fund’s view on Facebook Inc.’s proposed digital currency Libra, Gopinath said that it could have a role in promoting greater financial inclusion, but there are also risks and concerns associated with such technologies, such as money laundering. She said regulatory agencies around the world must pay close attention to these developments and make sure there are enough checks and balances before it’s too late.
“There are questions about consumer protection, there are concerns about how the data will be used, there are important questions to be asked about how this would affect monetary policy transmission,” she said. “And if you look at particularly countries that are not reserve-currency countries, would this lead to back-door dollarization?”
– BLOOMBERG
by Jeff Kearns, Bloomberg
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