IMF Must Seize the Moment to be Peacemaker as Trade War Fears Rise

In a world where the United Nations appears unable to play a meaningful role in the growing military tensions over Syria, one should perhaps have little hope that its multilateral economic sister, the International Monetary Fund, will do any better when it comes to trade wars.

But as ministers and central bankers start flying into Washington DC this week for its Spring Meetings, the IMF could find itself in the right place and right time to broker a de-escalation of tensions between China and the United States.

US President Donald Trump and his Chinese counterpart have been playing long distance chess for some week — with Trump announcing his moves on Twitter. The White House has imposed $50 billion of tariffs and Beijing has responded with a similar value of sanctions carefully targeted at marginal constituencies.

So far, so bad. But then Xi showed a deft touch for deal making that Trump could perhaps absorb into the next edition of his book The Art of the Deal. The Chinese premier adopted conciliatory language, pledging to further open up his country’s financial services sector, lower tariffs on car imports, encourage other imports and better protect intellectual property.

Although there was nothing concrete, it was enough for the US president say after Xi’s speech that he was “very thankful” for the Chinese leader’s pledges on tariffs and the car industry. “We will make great progress together!” he tweeted.

Of course, the leader of the free world is entirely unpredictable and it is highly likely he will issue another 3am tweet reversing course. However so far, he seems emollient. It was an even greater surprise when Trump suggested that there may not, in fact, be any new tariffs imposed in the Sino-US trade dispute, and that the US might apply to join the Trans Pacific Partnership, a trade agreement being negotiated by 11 countries. It was one of Trump’s firsts as president to pull the US out of the TPP talks.

Ironically, he may have realised that joining the TPP could be an anti-China move. As the TPP is a preferential trade deal, anyone who is outside it will have a competitive disadvantage to the members.

Financial markets have so far broadly shrugged off the potential impact of a trade war

The clue to this is that the White House determined to reach a point that would allow it to hoist a “We Won” banner in the so-far phoney trade war. Whether Beijing will comply with that top spin is yet to be seen.

But now it has created an unexpected calm patched on the tossed seas of international diplomacy. Christine Lagarde, the head of the IMF, stepped in with a well-timed and well-aimed speech warning of a risk of the global trading system being “torn apart”, adding: “"This would be an inexcusable, collective policy failure."

Lagarde, who is half way through her second five-year term as managing director that ends in June 2021, is probably looking for a legacy. For now, she is best known for allowing the IMF to be drawn into the European bail-out of Greece, which has seen steep recessions and rocketing unemployment. The fund broke its long-established and strict rule never to refinance a country’s debt if that debt was unsustainable. Her halo remains tarnished.

She has an opportunity to use these meetings to bring wise heads together both from China and the US and well as economies caught in the middle such as the European Union. It is not inconceivable — but not very likely — that some statement could emerge at the close of the meetings on Saturday.

Financial markets have so far broadly shrugged off the potential impact of a trade war on the basis that it is unlikely to come to that and because global economic growth is strong.

The IMF will almost certainly use its latest economic forecasts to warn that the economy is about to embark on a slowdown as the recent upturn runs out of steam and central banks start to raise interest rates. It may some veiled warnings about the negative impact if more countries erect greater barriers to international trade, capital flows and migration.

It will be very reluctant to put a number on it as both the US and China are major shareholders but Oxford Economics, a consultancy, helpfully estimated that an all-out trade war would lead to a “pronounced” slowdown for the world economy, knocking 0.5% off global growth.

It would be foolhardy to put much too much hope in these week’s IMF meetings leading to anything significant. Given the fact that it has 189 members it is more a neighbourhood watch patrol than an economic police force. But if standing in the road and making a big noise about a potential intruder gets the others in the street to turn on their lights and check out the fuss, then they can at least say they lived to their nickname of the world’s financial watchdog.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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