“If you have the world’s two largest economies at odds, that’s a situation in which everyone is going to suffer,” said Maurice Obstfeld, chief economist at the IMF.
The IMF repeatedly singled out Trump’s trade actions as disruptive to global growth and prosperity, especially the imposition of tariffs on roughly half of the goods that the United States imports from China. The IMF also reduced its growth forecast for China next year to 6.2 percent because of the trade war, down from 6.4 percent in April.
The escalating trade wars could “dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade,” the IMF wrote in its report. “Higher trade barriers would disrupt global supply chains and slow the spread of new technologies, ultimately lowering global productivity and welfare. More import restrictions would also make tradable consumer goods less affordable, harming low-income households disproportionately.”
“Without multilateralism, the world will be a poorer and more dangerous place,” wrote Obstfeld in the report.
The report was written before the United States, Canada and Mexico finalized an updated trade deal. Many business leaders welcomed the agreement as an encouraging sign that the Trump administration doesn’t entirely want to blow up the global trading system that has come together in the past three decades.
The Trump administration has argued that it supports “free and fair trade” and ultimately wants to see trade barriers reduced around the world, but it says it doesn’t believe that will happen without added pressure.
Although the IMF is trying to dissuade Trump from putting even more tariffs on China and other nations by pointing out it could hinder growth a bit, it noted in its report that the U.S. economy is likely to grow “above potential” until 2020. Trump’s tax cuts and additional spending on the military and domestic programs are bumping up the economy at a time when it was already on the rebound.
But the IMF warned that there is a cost to what Trump is doing. The federal debt is also rising in the United States. That means there will be less money to spend in a downturn, and pumping the economy up runs the risk of overheating, which could lead to a downturn. More than half of the 51 economists surveyed recently by the National Association for Business Economics predict the next recession is likely to hit in 2020.
The IMF is urging Trump and Congress to focus on getting U.S. debt under control and to stop pumping extra stimulus into the economy.
“U.S. growth will decline as fiscal stimulus begins to unwind in 2020, at a time when the monetary tightening cycle is expected to be at its peak,” the IMF said.
The global economy has recorded a robust two years of synchronized growth, with nearly every nation enjoying an upswing, the IMF said. But it predicted that is coming to an end. The IMF downgraded its forecast for global growth this year and next to 3.7 percent (down from 3.9 percent in April). On top of trade concerns, the IMF also warned that investment in emerging markets has plummeted and that there are great political risks in many nations.
"Six months ago, we saw a very balanced expansion, said Obstfeld. “Now growth is much more uneven.”