The US economy is "especially vulnerable" to damage from the burgeoning global trade war, which could shave hundreds of billions of dollars off global GDP, International Monetary Fund (IMF) chief Christine Lagarde said Wednesday.
In remarks ahead of this weekend's meeting of G20 finance ministers in Argentina, Lagarde said there were signs global growth could begin to decline and called on policymakers to prepare.
The International Monetary Fund on Monday called the increasing trade restrictions "the greatest near-term threat" to the world economy.
Through 2019, the IMF estimated the world economy should grow by 3.9 percent but "this may be the high-water mark," Lagarde said in a blog post.
"Already growth is beginning to slow in the Euro Area, Japan, and the United Kingdom," she said, adding that recent US fiscal stimulus would soon wane.
IMF economists prepared a report for the G20 ministers with simulations showing the worst-case scenario, where all the tariffs threats and retaliation are implemented, and business confidence erodes, could cut a half point or US$430 billion off global GDP in 2020.
"While all countries will ultimately be worse off in a trade conflict, the US economy is especially vulnerable because so much of its global trade will be subject to retaliatory measures," said Lagarde.
Because US President Donald Trump launched the current trade war, retaliation and negative impact will be focused on the US economy, leaving other regions to continue trading amongst themselves.
Trump, who said trade wars were "good and easy to win," imposed steep tariffs on all steel and aluminum imports, angering key allies and prompting swift retaliation.
He also hit China with 25 percent duties on US$34 billion in goods, with another US$16 billion on the way. And US$200 billion more could be targeted as soon as September.
A range of bad outcomes
The IMF report to the G20 presents a range of scenarios showing the subtraction from global GDP is likely to be minor unless Trump imposes blanket tariffs on the US auto sector.
Blanket tariffs on the hundreds of billions of dollars in foreign autos Americans buy annually would reduce US GDP by 0.6 points in the first year, while Japan would lose 0.2 percentage points, the report showed.
If he follows through on threats to impose 10 percent duties on an additional US$200 billion in Chinese imports, this could shave 0.2 points off US growth in the first year, according to the IMF.
Lagarde also cited other problems on the horizon, including stuttering emerging market economies, as investors have taken US$14 billion out of the markets between May and June, causing some central banks to raise interest rates.
The capital flight could worsen as the US Federal Reserve continues to raise interest rates, making investment in the US more attractive.
She once again urged emerging market authorities to maintain flexible exchange rates, tamp down credit growth and reduce debt levels to prepare themselves.
Furthermore, IMF member countries may not fully appreciate how technology is changing the composition of their labor forces, and how it could worsen inequality.
She said countries should take "bold" steps to modernise their social safety nets, increase education and improve digital infrastructure.
Mnuchin to respond to concerns over trade policy at G20 summit
US Treasury Secretary Steven Mnuchin will have the opportunity to address concerns about Washington's trade policies during the G20 summit this weekend, a senior US Treasury official said Tuesday.
However, the official said Mnuchin has no plans for a separate meeting with Chinese officials to try to resolve the trade conflict that has led to an exchange of tariffs on tens of billions of dollars in trade between the two countries.
Finance ministers and central bankers are due to meet in Buenos Aires this Saturday and Sunday, where Mnuchin "will respond to concerns on US trade policies," the official told reporters in a conference call.
G7 officials on hand for the broader meeting will also hold a one-hour session during which they will again discuss "concrete action with regard to China and its economic aggression," the Treasury official said.
That includes subsidies China used to create excess steel production capacity "burdening workers around the world," as well as heavy reliance on state-owned enterprises and export credits, the official said.
Trump has taken an confrontational stance on trade policy, imposing steep tariffs on steel and aluminium, which angered allies and prompted swift retaliation, as well as 25 percent duties on tens of billions of Chinese goods, with more on the way.
Although Mnuchin recently testified to Congress that the administration is willing to reengage with Beijing to try to resolve the dispute, the Treasury official said no meeting was scheduled with his Chinese counterparts.
"The secretary has had substantial contact with Chinese officials so there's not the imperative at this meeting to have a formal bilateral," the official said.
The trade tensions are caused by China's policies that "have moved in a non-market direction over the years and creates problems for many countries," the official said.
The International Monetary Fund said this week the growing trade confrontation is the "greatest near-term threat to global growth" and in the worst case could cut a half point off world GDP.
Mnuchin will hold separate bilateral meetings with officials from France, Canada, Germany and Mexico, among others, while at the G20.
He also will stop in Brazil on his way to Argentina for meetings there.