JAKARTA (TheInsiderStories) – Protectionism and trade war are the most real threats to the world economy today, said International Monetary Fund (IMF). Caused of the facts, the Fund cut its global economic growth forecast in 2019.

The IMF predicts this year’ global economic growth of 3.5 percent, lower than 2018 at 3.7 percent. It said, current global economic conditions are influenced by two major players in the world economy, the United States (US) and China, which are responding to conditions of imbalance.

On the one hand, the US is experiencing a deficit and China which has the ability to produce commodities is very competitive. The agency also predicts US economic growth at the level of 2.5 percent, 19 countries of the euro currency down from 1.8 percent to 1.6 percent, developing countries are projected to slow from 4.6 percent in 2018 to 4.5 percent.

While China is predicted to slow to 6.2 percent, from 6.6 percent last year. The decline is the real impact of the implementation of developed countries’ protectionist systems. Under President Donald Trump’ administration, the US has implemented import tariffs for steel, aluminum and hundreds of Chinese products, which it’s trading partners also responded to.

Protectionism is an economic policy in which countries restrict trade between sovereign states using tariffs on imports, quotas, and other government-sanctioned regulations. Most critics of this policy contend that the long-term effects are detrimental and cause slow economic growth leading to increased prices.

After all, the US has engaged in more than twenty trade disputes with twenty-nine nations over various items such as Spanish olives, Canadian jetliners, and Korean washing machines. If the US is trending toward protectionism as a new economic model, that spells trouble for the global economy.

Sometimes peoples alleged that terms of macroeconomic gains are more jobs, more output, and a stronger trade balance. Indeed, some economies today are seemingly using commercial policy to pursue macroeconomic objectives. Tariffs can dampen imports, boost net exports (the difference between exports and imports, or the trade balance), and so boost GDP, other things being equal.

Economists, however, have generally been skeptical. Since the time of Adam Smith, open and competitive markets have been seen as most likely to maximize output by directing resources more productively. Tariffs, on the other hand, encourage both the deflection of trade to inefficient producers and smuggling in order to evade them, such distortions reduce any beneficial effects.

Further, consumers lose more from tariffs than producers gain, so there is a deadweight loss. And the redistributions associated with tariffs tend to create vested interests, so harm tends to persist. Broad-based protectionism can also provoke retaliation, which adds further costs in other markets.

Moreover, economists believe fiscal and monetary policies such as interest rates or the budget deficit to be the natural instruments for achieving macroeconomic goals, such as raising growth and jobs. Tariffs are more likely to lead to offsetting changes in exchange rates that frustrate the achievement of macroeconomic objectives, fewer imports and a stronger trade balance increase demand for the domestic currency, and so its value.

But times change. Some economies today are using commercial policy seemingly for macroeconomic objectives.

World Economy Forum report that those tariff increases have adverse domestic macroeconomic and distributional consequences: these effects are robustly and statistically significant, and are large enough in an economic sense to merit the attention of policymakers.

They also found that output (GDP) falls after tariffs rise because of a significant decrease in labor productivity. When firms in the import-competing sectors receive protection, resources are reallocated within the economy to relatively unproductive uses, and this is harmful to the added value generated by the economy.

That is, the wasteful effects of protectionism lead to a meaningful reduction in the efficiency with which labor is used, and thus to a fall in output. Nor they did find an improvement in the trade balance after a rise in tariffs, plausibly reflecting our finding that the real exchange rate tends to appreciate as a result of higher tariffs.

WEF also found that protectionism leads to a small increase in unemployment, further bolstering the case against protectionism, and that tariff increases lead to greater inequality after a few years.

WEF found that the hit to economic growth from a tariff increase is more pronounced if the tariff increase is undertaken during an economic expansion. It is also larger for advanced countries than it is for developing countries.

This is worrisome since tariffs are currently being used as a macroeconomic instrument in buoyant economic conditions and in advanced economies. So, higher tariffs seem to lower output and productivity while rising unemployment and inequality, and leaving the trade balance unaffected.

These results are wholly consistent with conventional wisdom from standard economics, and bolster the case for free trade. Protectionism just weakens the macroeconomy.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com