Washington D.C., United States – The International Monetary Fund (IMF) recently warned that a global trade war among major economies could lead to a contraction in the world economy equivalent to the combined size of the French and German economies. The concern arises as the possibility of a re-election of Donald Trump looms on the horizon.
Trump has proposed implementing a universal tax or tariff of up to 20% on all imports into the United States. In response, the European Union has started to devise plans for retaliation if the new levy is imposed. The discussions surrounding tariffs have become increasingly serious, with Trump proclaiming that “tariff is the most beautiful word in the dictionary”.
IMF Deputy Managing Director Gita Gopinath expressed the Fund’s inability to fully assess the specifics of Trump’s trade proposals. However, she highlighted the potential repercussions of significant decoupling and widespread use of tariffs, indicating a potential global GDP loss of close to 7%. This loss, she noted, would be equivalent to the economic output of both France and Germany.
Moreover, Gopinath emphasized the importance of addressing escalating global government debt during a period of sustained economic growth. She underscored the necessity of strengthening fiscal buffers to prepare for future crises, suggesting that the world economy may face additional shocks that require a robust fiscal response.
Despite the challenges posed by increasing government debt, Gopinath expressed optimism about the resilience of the world economy following past crises. She noted that the current period of economic stability represents an opportunity to enhance resilience and prepare for potential future disruptions. Additionally, she highlighted the positive outcomes of efforts to reduce inflation without significantly impacting employment rates.
As central banks worldwide navigate the complexities of global economic stability, Gopinath emphasized the importance of building resilience in a fragile world. The IMF’s warnings about the potential consequences of a full-scale trade war underscore the significance of proactively addressing economic vulnerabilities and fostering sustainable growth on a global scale.