International Monetary Fund MD Christine Lagarde speaks at the University of Hong Kong, China, on April 11 2018. Picture: REUTERS
International Monetary Fund MD Christine Lagarde speaks at the University of Hong Kong, China, on April 11 2018. Picture: REUTERS

Washington — Countries need to avoid being sucked into a protectionist spiral that undermines the momentum of the global economy, International Monetary Fund MD Christine Lagarde said.

The IMF remained optimistic about global growth prospects, Lagarde said on Wednesday in a speech in Hong Kong ahead of next week’s annual spring meetings of the fund’s 189 member nations in Washington.

The world economy was benefiting from surging investment, rebounding trade and favourable financial conditions, all of which encouraged companies and households to step up spending, Lagarde said.

The IMF will update its global forecast on April 17. The fund said in January it expected the global economy to grow 3.9% in 2018 and 2019.

Still, she warned that threats loomed, most notably a surge in protectionism. "Yes, the current global picture is bright. But we can see darker clouds looming."

Lagarde said the rise of the global trading system reduced extreme poverty, cut living costs and created millions of high-paying jobs. "But that system of rules and shared responsibility is now in danger of being torn apart," she said. "This would be an inexcusable, collective policy failure."

War of words

The IMF’s warning comes as the US and China engage in a war of words over trade that has unsettled financial markets and raised doubts about the broadest global growth surge in years.

US President Donald Trump has threatened to impose tariffs on $150bn in Chinese imports to punish Beijing for what the US sees as abuse of its intellectual-property rights.

China has responded by threatening to slap tariffs on everything from American soybeans to aircraft.

The fear of a trade war between the world’s two biggest economies will loom large next week as finance ministers and central bankers from IMF member countries meet in Washington.

The fund was conceived during the Second World War to promote open markets and discourage the "beggar-thy-neighbour" policies that took root during the Great Depression.

Without referring directly to the US or China, Lagarde warned that import restrictions hurt everyone, especially poor consumers. Such barriers prevented trade from playing its "essential" role in boosting productivity and diffusing new technologies, she said.

Unfair trading

Lagarde said unfair trading practices had little effect on a country’s overall trade deficit. "That imbalance is driven by the fact a country spends above its income."

The best way to address imbalances was not to impose tariffs, but to use policies that affected individual economies as a whole, such as fiscal tools or structural reforms. The US could help reduce global imbalances by narrowing its fiscal deficit, while Germany could contribute by spending more, Lagarde said.

She also encouraged countries to guard against fiscal and financial risks, noting that global public and private debt had climbed to a record $164-trillion.

Governments should also do more to foster more "inclusive" growth by reducing inequality, Lagarde said.

"The window of opportunity is open. Yet there is new urgency because uncertainties have significantly increased — from trade tensions, to rising financial and fiscal risks, to more uncertain geopolitics," she said.