IMF: Countries must avoid protectionism 'at all costs'

The International Monetary Fund warned world leaders today to avoid resorting to protectionist measures "at all costs" due to the damage it would cause to their own and the global economy.

At a time when President Donald Trump has repeatedly blamed trade for US economic woes, and threatened to impose barriers to imports, the IMF said such policies would not work.

In its sixth edition of an annual report analyzing imbalances in the global economy, the Washington-based fund said while total trade and investment imbalances have narrowed since the crisis, there has been an increased buildup of excess surpluses and deficits in advanced economies.
 

About a third of the total are considered undesirably large imbalances, and countries should put in place policies to reduce these, whether they are surpluses or deficits, the External Sector Report urged.

But it is the deficit countries most at risk of a "backlash" that could lead to anti-trade policies, IMF research chief Luis Cubeddu told reporters.

"A key point of the report is that protectionist policies should be avoided at all costs," he said.

Such policies are "unlikely to meaningfully address external imbalances and they would be extremely harmful for domestic growth and global growth," Cubeddu added.

Even if there is a short-term impact on a country's trade deficit when a barrier is erected to imports, IMF research shows "global GDP losses increase with the duration of protectionist policies, while the impact on global imbalances lessens" and currencies adjust to compensate.

The IMF in recent weeks has issued annual reports scrutinizing key economies including the United States and Germany, in which it recommended increased focus on reducing the imbalances.

And while the Trump administration has accused Germany of taking unfair advantage of a relatively weaker euro currency value to boost its exports, Cubeddu said the IMF is "looking for actions from both sides, not just countries with surpluses."

In Germany's case, that means policies to boost domestic consumption, and for the United States reducing the government deficit and increasing productivity through things like education and infrastructure investment.