US-China trade war escalation could jeopardise global growth in 2019: IMF

The escalation of trade tension between the US and China has the potential to disrupt the global supply chains and jeopardise the projected recovery in growth in 2019, the IMF warned Thursday, over 10 days after President Donald Trump imposed 25 per cent tariff on $200 billion worth of Chinese imports.

The world's two largest economies are locked in a trade war since Trump imposed heavy tariffs on imported steel and aluminium items from China in March last year, a move that sparked fears of a global trade war. In response, China imposed tit-for-tat tariffs on billions of dollars worth of American imports.

The trade war escalated after Trump on May 10 increased the import duty on Chinese products worth $200 billion from 10 per cent to 25 per cent.

The International Monetary Fund (IMF), in a blog authored by Eugenio Cerutti, Gita Gopinath and Adil Mohommad said that consumers in the US and China are unequivocally the losers from the trade tension.

Cerutti is currently the Assistant to the Director at the Research Department of the IMF, Mohommad is an Economist in the Research Department of the IMF and Indian-origin Gopinath is the Chief IMF Economist.

At the global level, the additional impact of the recently announced and envisaged new US-China tariffs, expected to extend to all trade between the two countries, will subtract about one-third of a percentage point of global GDP in the short term, with half stemming from business and market confidence effects, the IMF said.

Failure to resolve trade differences and further escalation in other areas, such as the auto industry which would cover several countries, could further dent business and financial market sentiment, negatively impact emerging market bond spreads and currencies, and slow investment and trade, it said.

"In addition, higher trade barriers would disrupt global supply chains and slow the spread of new technologies, ultimately lowering global productivity and welfare. More import restrictions would also make tradable consumer goods less affordable, harming low-income households disproportionately," the IMF said.

Noting that the US-China trade tensions have negatively affected consumers as well as many producers in both the countries, the IMF said the tariffs have reduced trade between the US and China, but the bilateral trade deficit remains broadly unchanged.

"While the impact on global growth is relatively modest at this time, the latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains, and jeopardise the projected recovery in global growth in 2019," it said.

The research, using price data from the Bureau of Labor Statistics on imports from China, found that tariff revenue collected has been borne almost entirely by the US importers.

There was almost no change in the (ex-tariff) border prices of imports from China, and a sharp jump in the post-tariff import prices matching the magnitude of the tariff, it said.

Some of these tariffs have been passed on to the US consumers, like those on washing machines, while others have been absorbed by importing firms through lower profit margins.

"A further increase in tariffs will likely be similarly passed through to consumers. While the direct effect on inflation may be small, it could lead to broader effects through an increase in the prices of domestic competitors," it said.

The impact on US producers with significant exposure to Chinese markets was also captured in stock market valuations. For instance, the equity price performance of US companies with high sales to China underperformed relative to the US businesses exposed to other international markets, after tariffs linked to the $34 billion retaliation list by China were implemented, the IMF said.

According to the IMF blog, the gap narrowed at the beginning of 2019 with the trade truce but it reopened again after the US tariff increase to 25 per cent on the $200 billion.

Trump has been demanding that China reduce the massive trade deficit which last year climbed to over $539 billion. He is also pressing for verifiable measures for protection of Intellectual Property Rights (IPR), technology transfer and more access to American goods to Chinese markets.