Trump is Mistaken

The International Monetary Fund has released a report which seems to undermine the policy framework of the US President

The International Monetary Fund has published a report detailing possible scenarios of trade war. The report was written in preparation for the upcoming G20 Buenos Aires summit, due to take place in November. Yet, the report’s conclusions are so curious that the IMF has decided to publish them now.

The main contention of the IMF’s experts is that tangible negative consequences for the world economy are virtually inevitable and have little to do with the size and nature of newly-imposed import duties.

The most significant damage to the global economy will result not from the duties themselves, but rather from the destruction of global logistical chains and growing mistrust between participants of global trade. The global economy’s losses from such developments will exceed the losses from import duties by four or five times.

This appears to undermine the cornerstone of President Donald Trump’s policy aims which, in the view of some experts, constitutes bluffing: appearing ready to fight to the death without exposing your country to actual risk.

The experts’ calculations are based on a macroeconomic model which includes six economies – the US, Japan, the eurozone, emerging Asia (including China), Latin America and the rest of the world.

In total, the IMF has envisaged four scenarios.

The first scenario takes into account only those tariff restrictions that have already been introduced. These are levies of 25 percent and 10 percent on steel and aluminium imports respectively, introduced by the United States, as well as the 25 percent tariff on imports from China worth $50 billion. The scenario allows for retaliatory measures from affected countries.

The IMF estimates that economic growth in the US will slow by approximately 0.1 percent, while Japan and the eurozone might even grow by 0.1 percent.

The second scenario envisages the introduction of a 10 percent tariff by the US on $200 billion worth of imports from China, as announced by US President Donald Trump, as well as a Chinese response.
Such restrictions can slow the economic growth of emerging Asia by 0.3 percent, and by 0.2 percent in the USA. In the aftermath of such measures, other regions can accelerate economic growth by replacing American and Chinese goods: the eurozone countries and Latin America are likely to grow by 0.1 percent of their GDP and Japan by 0.2 percent.

IMF experts note, however, that this scenario disregards the elasticity of substitution of goods from the US and China. Upon consideration of this factor, we can see the deterioration of macroeconomic dynamics for all regions.

The third scenario is essentially the second scenario with the addition of a 25 percent US import duty on car imports and retaliatory measures from the affected parties. In this case, economic growth may fall by 0.6 percent in the US and by 0.1-0.2 percent in Latin America within the first year. Other economies will experience an insignificant boost, but in the long run all will lose.

The final scenario is a temporary global crisis of confidence between international trade actors. In this case, the IMF expects a sharp increase in the risk premium and a decline in investment, consumption and production. World GDP will slow by 0.4 percent in the first year and by 0.5 percent thereafter. The largest losses (0.9 percent), according to the IMF, will be borne by the US. Latin America, Japan and emerging Asia will lose 0.6-0.7 percent of economic growth.

IMF experts consider this scenario to be optimistic since it takes no account of the actions of national banks.

Ultimately, the IMF specialists write, all countries will suffer from the trade conflict. First of all, this will affect the United States.

Accordingly, governments should forget about the "doomed" duties and retaliatory measures, and try to find an agreement concerning intellectual property rights, electronic commerce and digital services.

Published: July 21, 2018