World trade system in danger of being torn apart, warns IMF

The postwar global trading system risks being torn apart, the International Monetary Fund has warned, amid concern over the tariff showdown between the US and China.

In a sign of its growing concern that protectionism is being stimulated by voter scepticism, the IMF used its half-yearly health check for the world economy to tell policymakers they needed to address the public’s concerns before a better-than-expected period of growth came to an end.

Maurice Obstfeld, the IMF’s economic counsellor, said: “The first shots in a potential trade war have now been fired.”

He said Donald Trump’s tax cuts would suck imports into the US and increase the size of the trade deficit 2019 by $150bn – a trend that could exacerbate trade tensions.

“The multilateral rules-based trade system that evolved after world war two and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart.”

Obstfeld said there was more of a “phoney war” between the US and China than a return to the widespread use of tariffs in the Great Depression, but that there were signs that even the threat of protectionism was already harming growth.

“That major economies are flirting with trade war at a time of widespread economic expansion may seem paradoxical – especially when the expansion is so reliant on investment and trade,” Obstfeld added.

But public optimism about the benefits of globalisation had been eroded because of the growing gap between rich and poor and the fact that many households in the west had seen little or no benefit from growth, he said.

“If policymakers are complacent and do not tackle the challenge of strengthening long-term growth, political risks could intensify, possibly reversing some of the progress that economic reforms and integration have achieved to date.”

His warning came as the IMF’s World Economic Outlook predicted the growth in 2018 and 2019 would be the strongest and broadest-based since 2010, when there was an initial sharp bounce back from the global recession of 2008-09. The fund said it expected expansion of 3.9% this year and next – up by 0.2 points in each year from the October WEO.

The WEO said its biggest growth upgrade since October had been for the US, which is expected to expand by 2.9% in 2018 and 2.7% in 2019 – up from the 2.3% and 1.9% forecast in October. The eurozone is also expected to outperform previous forecasts, with growth of 2.4% in 2018 and 2.0% in 2019, up by 0.5 and 0.3 points, respectively.

The IMF made only modest changes to its forecasts for the UK. It said growth was on course to be 0.1 point higher in 2018, at 1.6%, but 0.1 point lower in 2019, at 1.5%.

By 2023, the IMF expects UK growth to be 1.6%, slightly higher than the 1.4% pencilled in for the eurozone. Obstfeld said this forecast was a best-case assumption based on a Brexit deal that involved zero tariffs and favourable access to the EU for the City. Growth would still be lower than it would have been had the UK remained a member of the EU.

Despite the UK’s muted growth prospects, the IMF gave its blessing to interest rate increases from the Bank of England, noting that unemployment was close to record lows and further falls could add to wage pressures at a time when inflation was already above the government’s 2% target.

The fund said strong growth would help dispel some of the remaining legacies of the financial crisis of a decade ago, by accelerating the end to unconventional monetary policies such as quantitative easing, boosting investment and healing labour market scars.

“Other after-effects of the crisis seem more durable, however, including higher debt levels worldwide and widespread public scepticism about policymakers’ capacity and willingness to generate robust and inclusive growth,” Obstfeld added.