(Bloomberg) -- The world economy must avoid being sucked into a protectionist spiral that undermines the momentum of global growth, International Monetary Fund Managing Director Christine Lagarde said.
The IMF remains optimistic about global growth prospects, Lagarde said Wednesday in a speech in Hong Kong ahead of next week’s annual spring meetings of the fund’s 189 member nations in Washington. The world economy is benefiting from surging investment, rebounding trade and favorable financial conditions, all of which are encouraging companies and households to step up spending, Lagarde said.
The IMF will update its global forecast April 17. The fund said in January it expects the global economy to grow 3.9 percent this year and next.
Still, Lagarde warned that threats loom, most notably a surge in protectionism. “Yes, the current global picture is bright. But we can see darker clouds looming.”
Lagarde said the rise of the global trading system reduced extreme poverty, cut living costs and created millions of high-paying jobs. “But that system of rules and shared responsibility is now in danger of being torn apart,” she said. “This would be an inexcusable, collective policy failure.”
War of Words
The IMF’s warning comes as the U.S. and China engage in a war of words over trade that has unsettled financial markets and raised doubts about the broadest global growth surge in years. President Donald Trump has threatened to impose tariffs on $150 billion in Chinese imports to punish Beijing for what the U.S. sees as abuse of its intellectual-property rights. China has responded by threatening to slap tariffs on everything from American soybeans to planes.
Fears of a trade war between the world’s two biggest economies will loom large next week as finance ministers and central bankers from IMF member countries meet in Washington. The fund was conceived during the Second World War to promote open markets and discourage the “beggar-thy-neighbor” policies that took root during the Great Depression.
Without referring directly to the U.S. or China, Lagarde warned that import restrictions hurt everyone, especially poor consumers. Such barriers prevent trade from playing its “essential” role in boosting productivity and diffusing new technologies, she said.
Responding to questions after her speech, the IMF chief said the biggest risk from the trade spat is less the impact on nominal growth and more the undermining of confidence which would dampen investment.
“We need to be a little bit sensible about this talk about a trade war,” she said. “There are threats and there are counter threats, there is an attempt to open a dialogue and I think we should support that dialogue attempt as much as we can, that is the way to progress the situation, not to let it snowball into something that would then lead to significant consequences.”
Speaking later in a Bloomberg Television interview, Lagarde said U.S. issues with China’s treatment of intellectual property should be addressed within a multilateral system.
“Increasing trade, removing barriers, encouraging this level playing field to which everybody should contribute has to be done collectively,” she said. “It can’t be by exceptional measures. It can’t be by unilateral threat.”
China opening its financial sector “has to happen in due course, and without jeopardizing stability,” she said, citing President Xi Jinping’s renewed pledges this week to lower barriers in banking and insurance. “Those are significant advances that we need to see delivered in the coming months, and those are clearly an improvement to a situation that has evolved over time,” she said.
Lagarde said in her speech that unfair trading practices have little effect on a country’s overall trade deficit. “That imbalance is driven by the fact a country spends above its income.”
The best way to address imbalances is not to impose tariffs, but to use policies that affect individual economies as a whole, such as fiscal tools or structural reforms. The U.S. could help reduce global imbalances by narrowing its fiscal deficit, while Germany could contribute by spending more, Lagarde said.
She also encouraged countries to guard against fiscal and financial risks, noting that global public and private debt has climbed to a record $164 trillion. Governments should also do more to foster more “inclusive” growth by reducing inequality, Lagarde said.
“The window of opportunity is open,” she said. “Yet there is new urgency because uncertainties have significantly increased — from trade tensions, to rising financial and fiscal risks, to more uncertain geopolitics.”
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