US-China trade war to cost $455bn in lost output, says IMF

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The International Monetary Fund has called for a speedy end to the deepening trade war between the United States and China after calculating that the tit-for-tat tariffs will cost $455bn (£357.5bn) in lost output next year – more than the size of South Africa’s economy.

Christine Lagarde, the IMF’s managing director, underlined her organisation’s growing concern at the most serious outbreak of trade tension since the 1930s and said “self-inflicted wounds” had to be avoided.

In a paper prepared for the meeting of G20 finance ministers and central bank governors in Japan this weekend, the IMF calculated that the recently announced intensification of protectionism would cut global gross domestic product by 0.3% in 2020.

The Washington-based IMF said that taken together with the tariffs announced last year the total impact would be a 0.5% hit to activity next year.

“This amounts to a loss of about $455bn, larger than the size of South Africa’s economy,” Lagarde said, noting that there was strong evidence that the US, China and the global economy were the losers from the conflict.

Donald Trump has so far ignored warnings from the IMF and other international organisations about the impact of his trade measures and in the past week has threatened action against Mexico unless its government halts the flow of people into the US. Washington said a 5% tariff on all Mexican goods would be imposed as early as next week and rise to 25% by October.

The Federal Reserve – the US central bank – has signalled that it is prepared to cut interest rates to boost growth amid signs that the world’s biggest economy is weakening. Private sector job hires – as measured by the ADP national employment report on Wednesday – stood at just 27,000 – the weakest for nearly a decade.

Lagarde said while there was some evidence that the global economy might be stabilising there were “stumbling blocks” that could prevent a rebound.

“Most importantly, there are growing concerns over the impact of the current trade tensions. The risk is that the most recent US-China tariffs could further reduce investment, productivity and growth. The just-proposed US tariffs on Mexico are also of concern,” she added in a blog post to accompany the IMF’s surveillance report on the state of the global economy.

“These are self-inflicted wounds that must be avoided. How? By removing the recently implemented trade barriers and by avoiding further barriers in whatever form.”

Trump has said US tariffs are designed to protect workers in America’s industrial heartlands from unfair Chinese competition, but Lagarde said the result was higher prices.

“The fact is that protectionist measures are not only hurting growth and jobs, but they are also making tradable consumer goods less affordable – and disproportionately harming low-income households.”

Lagarde’s intervention followed the latest half-yearly health check on the global economy from the World Bank, which said Trump’s trade wars with China, Mexico and Europe had sent global investment tumbling.

The IMF’s sister organisation predicted that the upshot of increased political uncertainty would push down world growth to 2.6% this year – its weakest since 2016.

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