President Donald Trump’s administration is confronting an inescapable economic paradox and it was on full display at the past week’s gathering of international finance chiefs in Washington.
Even as it urges the rest of the world to do more to boost global growth, the US is doubling down on the “America First’’ trade policies that have become a major drag on demand. For many at the International Monetary Fund spring meetings, those opposing forces highlight Trump’s disruptive presence in the world economy, his desire to blame others for forces he unleashes, and how his propensity for shaking things up gets in the way of some of his own priorities.
The paradox was laid out in Saturday’s communiqué from the IMF’s governing body with shareholders nominating “trade tensions” as the top risk for the global economy. While the finance ministers and central bank governors from around the world who make up the body declared they would step in as needed to address any turn for the worse in the global economy they also endorsed “free, fair, and mutually beneficial goods and services trade and investment” as “key engines for growth and job creation.”
“To this end, we recognise the need to resolve trade tensions,” they said.
Those tensions have had a primary source over the past year: Tariffs introduced by the US that have yielded a tit-for-tat response from trading partners from China to the EU.
Steven Mnuchin, Trump’s Treasury secretary, used his statement to the IMF’s council to call on major economies now slowing in Europe and China to do more to bolster growth.
The US, he went on, was doing its part via “its efforts to address restrictive trade practices around the world that are impeding stronger and more balanced US and global growth.’’
Mnuchin, however, may have been the only policy maker attending last week’s meetings who believes the US’s approach to trade is doing anything to help growth, or that Trump’s tariffs are a tool of trade liberalisation.
The growing uncertainty and slowdowns in investment and global trade that have resulted from Trump’s trade wars were major reasons behind the IMF’s decision to predict the world economy will grow this year at its slowest rate since the global financial crisis a decade ago.
To Maurice Obstfeld, who retired as the IMF’s chief economist last year, the link between a softer global expansion and Trump’s trade policies has been clear.
“If you look at the global weakness that we are seeing it is very much centred in manufacturing, industrial output weakness, investment weakness. And if you contrast that with fairly strong labour markets around the world and much better performance in services it’s hard not to believe that the trade tensions are playing a role in all that,’’ Obstfeld said in an interview.
That Trump in recent days has continued “stirring the pot’’ by threatening new tariffs on the European Union and Mexico has only served as a reminder that even if the administration reaches a deal with China in the weeks to come the president’s trade wars are far from over, Obstfeld said.
The administration’s finger pointing at other major economies is also a hint that going into the 2020 election Trump is lining up scapegoats – from abroad or at the US Federal Reserve – in case the US economy comes down hard from last year’s fiscal sugar rush.
What happens elsewhere in the world economy may matter more for the US than ever before. A February study by economists at Goldman Sachs Group Inc estimated a one percentage point decline in growth outside of the US reduces America’s expansion by an average of 0.5 point.
Economic policy makers from outside the US were not afraid to call out the Trump administration and its trade policies over the past week. “Protectionist moves don’t help either the US or China,’’ Haruhiko Kuroda, governor of the Bank of Japan, told reporters.
At an event on the sidelines of the IMF meeting on Thursday, Mark Carney, the governor of the Bank of England, bemoaned the fact that a global economy that just a year ago was in the midst of an upswing driven by robust trade and investment now appeared uncomfortably reliant on consumer spending as a result of the trade tensions.
“And normally when an expansion is reliant on the consumer you start watching the clock in terms of how much longer it will last,’’ he said.
While Mnuchin prods other countries do more to boost growth, the reality is that in places like the EU – which Trump last week threatened to hit with new tariffs and called a “brutal trading partner’’ – the easiest way to boost growth may be to simply remove the uncertainty caused by Trump’s trade bombast.
The threat alone of increased trade barriers whether it be within Europe due to Brexit or across the Atlantic, was a significant drag on the euro-area economy, said Francois Villeroy de Galhau, a member of the European Central Bank’s governing council.
“It’s up to political leaders to lift now these geopolitical uncertainties introduced by trade tensions,’’ he said.
There were some optimists in Washington last week.
The world is confronting a manageable “moderation’’ in growth, even in Europe, said Angel Ubide, head of economic research for global fixed income at Citadel. “The conditions are in place for growth to continue at a decent pace,’’ he said.
The “mood of worry’’ in the air as the IMF downgraded its growth forecasts also seemed overblown, Robin Brooks, chief economist of the Institute of International Finance, told an event organised by the group.
A newly dovish Fed and signs the US and China might soon reach a trade deal should be reasons for hope. “I’m kind of surprised how bearish people are,’’ Brooks said.
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