The International Monetary Fund warned starkly that a broad-based trade war among major economies could shave nearly 7% off the world economy—equivalent to the combined GDP of France and Germany. That dire forecast comes amid increasing tensions related to the possibility of Donald Trump’s re-election and his proposals for new tariffs on imports.
Trump signaled intentions to introduce a blanket tax or tariff of as much as 20% on all imports into the United States. In retort, the European Union is said to be preparing retaliatory actions should these tariffs be imposed. Last week, Trump called tariffs “the most beautiful word in the dictionary,” raising further apprehensions among global markets and financial officers of the soundness of his trade proposals.
IMF Deputy Manager Gita Gopinath said that, while the Fund cannot at this point assess the details of Trump’s trade policies, consequences of deep decoupling and extensive use of tariffs would be a staggering loss in global GDP. She defined this scenario as a major economic setback equivalent to losing the economies of France and Germany together.
Actually, she noted that the current tariff talks and the trade environment of the past twenty or thirty years are different because already beginning at hundreds of billions of dollars. She also touched on the rising global government debt level, especially encouraging nations to strengthen their fiscal buffers during this period of steady economic growth, but future crises are inevitable.
Despite all this, Gopinath noted that the world economy showed a resiliency after the recent shocks and that this time it actually achieved a “soft landing” with reduced inflation without severe rises in unemployment. She called it an important achievement for central banks across the world. Still, she underlined the need to rebuild economic resilience with a view towards future shocks.
Thus, in summary, all warnings from the IMF are very apt reminders of how connected global economies lead to harsh fallout from aggressive trade policies, and so attention will be drawn to the developments in international trade.
