IMF’s Lagarde warns Governments over trade protectionism

Christine Lagarde, the head of the International Monetary Fund, has warned that the return of protectionism risks tearing up the current rulebook for global trade.

Her remarks in Hong Kong Wednesday come after a tit-for-tat outbreak of trade hostilities between the U.S. and China, raising fears of what a trade war between the world’s two biggest economies would mean for industries.

“The multilateral trade system has transformed our world over the past generation. But that system of rules and shared responsibility is now in danger of being torn apart. This would be an inexcusable, collective policy failure,” Lagarde said, according to media reports.

The IMF’s managing director also warned of “darker clouds looming” for the global economy, saying while her organization is still optimistic about prospects through the end of 2019, growth momentum would eventually slow.

A raising of trade barriers could weigh on the global economy, as they “hurt everyone, especially poorer consumers,” Lagarde argued. Higher tariffs lead to more expensive products and more limited choices, she said, and at the same time they prevent trade from spurring productivity and disseminating new technologies.

Because of those risks, governments should ”steer clear of protectionism,” Largarde urged.

Her comments come after Donald Trump threatened $150bn (£106bn) of import tariffs on Chinese goods arriving in America, in response to what he said were “unfair” trading practices used by the communist nation. The US has a trade deficit worth $375bn with China.

Beijing threatened to retaliate with its own tariffs on US imports, although both Trump and the Chinese president Xi Jinping have since moved to diffuse tensions. Wall Street rallied on Tuesday after Xi said he would continue opening the Chinese economy and lower some import tariffs.

However, the standoff is still likely to dominate the agenda at the IMF’s spring meeting in Washington next week, when world leaders and central bankers are due to gather to discuss the state of the world economy.

Using language that could be interpreted as a veiled attack on Trump in the speech ahead of the meeting, Lagarde said nations could make domestic policy changes to address trade imbalances and use international forums to settle disputes. “We can all do more – but we cannot do it alone,” she said.

“Unfair trade practices have little impact on a country’s overall trade deficit with the rest of the world. That imbalance is driven by the fact that a country spends above its income.”

Identifying the US as an example of a nation that could benefit from reforms, she said Washington could help tackle its trade imbalances by gradually curbing public spending and by increasing revenue, which she said would help reduce future fiscal deficits.