IMF warns US-China tariff escalation would crash global economy

The International Monetary Fund (IMF) has issued a serious warning regarding the potential escalation of trade tensions between the US and China.

According to Gita Gopinath, Deputy Managing Director of the IMF, ramping up tariffs between the two superpowers could have devastating consequences for the global economy.

Speaking on CNBC, she explained that the world is already witnessing a significant shift in trade patterns driven by geopolitical factors. In her own words:

“We are seeing geopolitically driven trade around the world, which is why when you look at overall trade to GDP that’s holding up fine, but who’s trading with whom is certainly changing.”

IMF’s economic projections

Gopinath pointed out that while global trade as a percentage of GDP remains steady, the participants in that trade are changing. The US and China are trading less with each other, and some of their trade routes are being redirected through other countries.

This re-routing has consequences for the global supply chain and could lead to inefficiencies, increased costs, and slower economic growth worldwide.

Both the US and the European Union (EU) have imposed higher tariffs on Chinese goods, accusing Beijing of unfair trade practices. China has retaliated by increasing tariffs on certain EU products. This tit-for-tat situation is actually already escalating.

“If tariffs escalate, the impact will be costly for everybody,” Gopinath said during the IMF’s annual meeting in Washington.

She further explained that inflation would also spike as higher tariffs would push up prices, creating even more pressure on already stretched economies. This isn’t the path any country should be on, according to Gopinath.

Trump’s tariff proposals

Trump’s economic agenda has centered on imposing massive tariffs on foreign goods. He’s floated the idea of a 20% tariff on all imports, with an even more aggressive 60% tariff on goods from China. And it doesn’t stop there.

Trump has also threatened to slap a 100% tariff on cars crossing the Mexican border and has pledged to punish any country that leaves the US dollar system by slapping them with a 100% tariff.

Tim Adams, President and CEO of the Institute of International Finance (IIF), warned that such extreme measures could stall the progress made in bringing down prices.  He said:

“It really depends on how other countries retaliate and whether it happens over time, but it would certainly break the momentum we’ve built in reducing inflation.”

Meanwhile, China has its own set of challenges, including an economic slowdown and political struggles on multiple fronts. The country has been involved in a border conflict with India, adding further strain to its already complex relationship with the US and other global powers.

This week, for the first time in years, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping met on the sidelines of the BRICS summit in Russia.

The two leaders discussed the easing of tensions after a deadly border clash in 2020, but the future of China-India relations remains uncertain.

Economic considerations play a huge role in these talks. While China has been India’s largest trading partner, the border standoff has created political and economic friction.

Indian businesses are eager for trade with China, but Modi’s government is treading carefully. China is also dealing with pressure over Taiwan, and a slowing domestic economy.