Tough times: World Bank chief David Malpass addresses the audience at the recent IMF and World Bank 2019 annual autumn meeting. Picture: REUTERS
Tough times: World Bank chief David Malpass addresses the audience at the recent IMF and World Bank 2019 annual autumn meeting. Picture: REUTERS

Washington — The collateral damage of the US trade wars is being felt from the fiords of Iceland to the automotive factories of Japan.

Central bank governors and finance ministers traded grim tales of suffering economies at the IMF and World Bank autumn meetings in Washington last week. Some also noted how far US policy has shifted from the 1940s, when Washington cofounded the IMF.

At that time “the world economy had been hammered for over a decade by high tariff barriers, depression and war”, prompting then US treasury secretary Henry Morgenthau to champion a global economic system, World Bank president David Malpass told attendees at a session.

Malpass said that at the time the US message was: “First, there’s no limit to prosperity. Second, broadly shared prosperity benefits everyone.”

As the IMF’s gathering of 189 member nations drew to a close, the unintended negative effects of the trade wars were becoming clear, IMF MD Kristalina Georgieva said. “Everybody loses.”

The US, the world’s largest importer, started a bitter tariff war with China, the world’s largest exporter, 15 months ago. US President Donald Trump is also in the midst of renegotiating, and sometimes upending, trade relationships with many of Washington’s top trading partners.

The fallout will slow global growth in 2019 to 3%, the slowest pace in a decade, the IMF estimated last week.

This pain is not being shared equally. The US remains the least exposed of the world’s 20 largest economies to a drop in exports, in part because of its huge domestic consumer base.

The damage is being particularly felt in European countries which “rely on exports and are open to trade”, EU economic and financial affairs commissioner Pierre Moscovici said.

More than 40% of Germany’s GDP was derived from exports in 2018, the most of any major global economy. Uncertainty in the business community is widespread, German finance minister Olaf Scholz told reporters.

German trade group BGA recently revised down its growth forecast for German exports in 2019 to just 0.5%, from 1.5%. As a result, many companies are scaling back their investment plans, which will have repercussions for years to come.

Scholz said concerns over Britain’s impending departure from the EU and the bloc’s trade dispute with the US are clearly dampening global economic growth. “The most important problem remains those factors that we cannot measure, specifically the reluctance to invest,” Scholz said.

The pain is also being felt in countries that do not rely on exports, such as Iceland, which became the first developed economy to seek aid from the IMF after a 2008 banking collapse. Since then, it has rebuilt its economy in what has been called a miraculous recovery. Now that is threatened.

“We have become dependent on tourism,” said Ásgeir Jónsson, the governor of Iceland’s central bank. Visitors have grown five-fold to 2.5-million a year since the crisis. But foreign arrivals have plummeted since the trade wars started and are down 15.6% this summer from the year before.

Iceland, with a population of about 300,000, built foreign currency reserves on the back of the increase in visitors, he said, but those are dropping too.

Trade links between countries have led to a more peaceful world in recent decades, but recent experience shows “you can never take global trade for granted”, Jónsson said.

No American immunity

On Friday, Japan’s Cabinet Office, which helps co-ordinate government policy, downgraded its assessment of factory output in October.

The softness in production was largely due to car exports to the US turning weaker after growing steadily until the spring, a government official said at a briefing.

“The pickup in global growth is being delayed,” Bank of Japan governor Haruhiko Kuroda said. “Japan’s economy is seeing exports weaken significantly and that’s affecting factory output.”

The US has not been immune to the effect of the trade wars. American farmers have been particularly hurt by Chinese tariffs on US agricultural products, prompting the Trump administration to give billions in aid to the farm belt.

Washington’s imposition of steel and aluminium tariffs and uncertainty about the passage of a new North American free trade deal — the US-Mexico-Canada Agreement — have also stalled local economic development.

Christopher Cabaldon, the mayor of West Sacramento, California, said bids for a $100m infrastructure project in the city came in 80% higher than expected, in part because of construction firms’ need to factor in higher costs and the risk of additional tariffs in the future.

“Even in small cities like my own, we see the impacts of trade. We have come to realise the deep integration of our local economies in the global system,” Cabaldon said ahead of the IMF and World Bank meetings. “Most of my economic development plans ... are playing out on a global stage, not down the freeway.”

The trade tensions are helping to spur a push among African nations to create a more self-reliant continent. “We must take it upon ourselves to grow trade among ourselves,” said Ukur Yatani Kanacho, Kenya’s acting cabinet secretary for treasury.

Abdoulaye Daouda Diallo, the finance minister of Senegal, told reporters the US-China trade tensions would affect African nations in the energy sector and cut funds available on financial markets. The dispute underscored the importance of the African Continental Free Trade Agreement, he said.


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