Photo by IMF

JAKARTA (TheInsiderStories) – The International Monetary Fund (IMF) warned United States (U.S) President Donald Trump that its new tariff policy could damage the global trading system. Moreover, when inviting acts of retaliation from trading partner countries, it will turn against the US economy.

IMF’s Managing Director Christine Lagarde in an IMF report on Thursday (14/06) outlined, the U.S economy is better than last year. The growth is stronger, unemployment is near the lowest it has been since the 1960s, inflation is contained, and consumer and business confidence are high.

Within the next few years, she said, the U.S economy is expected to enter its longest expansion in recorded history. The tax cuts and jobs act and the approved increase in spending are providing a significant boost to the economy.

“We forecast growth of close to 3 percent this year but falling from that level over the medium-term,” Lagarde said.

In her discussions with U.S’s Secretary Steven Terne Mnuchin, she stressed it, several risks on the horizon despite the good news and a bright near-term outlook, at a longer horizon the U.S economy faces several risks.

First, the planned expansion in the federal deficit at this stage of the cycle could trigger a faster-than-expected rise in 2 inflation. That would be accompanied by a more rapid rise in interest rates that could increase market volatility both in the U.S and abroad.

“We are already starting to see symptoms of such negative effects in some emerging market countries, and this might not be the end of it. An important role of the Fund is to warn against these risks and cross-border effects,” she added.

Second, the fiscal boost is likely to translate into faster import growth and a larger trade and current account deficit in the U.S. This will be matched by growing surpluses in other systemic economies. It may also lead to a stronger U.S dollar.

Lagarde said, “All of this could lead to a growth in global imbalances, an issue that we at the Fund have long been concerned about.”

International trade policy recent actions by the U.S to impose tariffs on imports come with further risks. Unilateral trade actions can be disruptive and may even prove counterproductive to the functioning of the global economy and trading system.

In a so-called trade war, driven by reciprocal increases of import tariffs, nobody wins, she emphasized. One generally finds losers on both sides also the macroeconomic impact.

“It would be serious, not only if the United States took action, but especially if other countries were to retaliate, notably those who would be most affected, such as Canada, Europe, and Germany, in particular. We, therefore, encourage the U.S. to work constructively with its trading partners to resolve trade and investment 3 disagreements without resorting to the imposition of tariff and non-tariff barriers,” Lagarde said.

Furthermore she said, IMF look at the growing U.S. deficits and debt. The solutions to these fiscal problems are politically difficult and will require a broad social consensus.

But for her, reducing government debt has the potential to create space to finance priorities that have broad public and legislative support, such as upgrading U.S infrastructure. Federal Reserve policy finally, with the planned fiscal stimulus already in train, she believe that will need to raise policy rates at a faster pace to achieve its dual mandate.

“Of course, the Fed’s continued adherence to the principles of data dependence and clear communication will be vital. I received strong assurances from Chairman Powell of his commitment to this point,” she stated.

At the end she believed the set of policies outlined in its concluding statement for this year will be both good for the U.S and good for the global economy. Finally, it would be remiss of me not to express the IMF’s gratitude and appreciation for the time that U.S. officials have spent this year in facilitating the Article IV.