The biggest danger from the U.S.-China trade dispute is the threat to global confidence and investment, International Monetary Fund Managing Director Christine Lagarde said on Thursday.
The IMF chief said the tariffs threatened by the world’s two largest economies would have a modest direct impact on the global economy but could produce uncertainty that choked off investment, one of the key drivers of rising global growth.
“The actual impact on growth is not very substantial, when you measure in terms of GDP,” Lagarde said of the tariffs, adding that the “erosion of confidence” would be worse.
“When investors do not know under what terms they will be trading, when they don’t know how to organize their supply chain, they are reluctant to invest,” she told a news conference in Washington where world financial leaders gathered for the start of the IMF and World Bank spring meetings.
In its World Economic Outlook released on Tuesday, the IMF cited 2016 research showing that tariffs or other barriers leading to a 10 percent increase in import prices in all countries would lower global output by about 1.75 percent after five years and by close to 2 percent in the long term.
In Beijing, China’s Foreign Ministry warned that the Trump administration’s tariff threats and other measures to try to force trade concessions from Beijing was a “miscalculated step” and would have little effect on Chinese industries.
In the latest escalations in the trade row, Washington said this week that it had banned U.S. companies from selling parts to Chinese telecom equipment maker ZTE for seven years, while China on Tuesday announced hefty anti-dumping tariffs on imports of U.S. sorghum and measures on synthetic rubber imports from the United States, European Union and Singapore.
The U.S. Trade Representative’s office also is planning to soon release a second list of Chinese imports targeted for an additional $100 billion of U.S. tariffs, tripling the amount of Chinese goods under a tariff threat.
Lagarde said the trade tensions would be a major topic of discussion among finance ministers and central bank governors at the IMF and World Bank meetings.
“My suspicion is that there will be many bilateral discussions to be had between the various parties involved,” Lagarde said, adding that the issue would also be discussed in larger sessions involving the Fund’s 189 member countries.
“Investment and trade are two key engines that are finally picking up. We don’t want to damage that,” Lagarde said.
If the tariffs go into effect, the hit to business confidence would be worldwide because supply chains are globally interconnected, she added.