Source : THE AGE NEWS
Members of the International Monetary Fund and World Bank meet in Washington this week, with America’s isolationism and Donald Trump’s trade war on everyone casting a shadow over the global economy and the future of two multilateral institutions that play critical roles in the global economy and financial system.
Trump’s tariffs will impact global economic growth materially. How materially is uncertain, given that their magnitude and coverage changes from one Trump social media post to another. That they will have a negative impact on the US economy and the rest of the world this year and beyond is, however, a certainty.
Donald Trump cannot simply announce a partial freeze on tariffs and expect investors in the bond market to forget that he ever declared a global trade war.Credit: Getty Images
The IMF will release its latest projections for global growth at the meeting, with its managing director, Kristalina Georgieva, saying last week that they will contain “notable markdowns, but not recession” from the 3.3 per cent global growth rate for this year and next, that IMF economists forecast in January.
The World Trade Organisation lowered its forecast for this year’s growth only last week, dropping it from 2.8 per cent to 2.2 per cent to consider the impact of the tariffs.
The biggest influence on the changes in outlook is that, where economists saw a continuation or even acceleration in the rate of growth in the US economy this year and next, as Trump’s tax cuts and deregulation provided a boost, they now see a significant slowdown, even a US recession, because of the tariffs, the uncertainty and inflation they will generate and, consequently, their impacts on business investment and consumer spending.
Georgieva warned that the impact of the tariffs could be greater if they undermined the stability of the global financial system.
Trust in the US financial system hasn’t been helped by Trump’s continuing attacks on Federal Reserve Board chairman, Jerome Powell.
She noted that, within the US bond market – which is at the heart of the global financial system – yields on longer-dated bonds have risen (sharply) but those on short-dated securities have fallen and that, despite the uncertainty, the US dollar has depreciated, signalling concern both in the near and longer term.
“Such moments should be taken as a warning,” she said.
In effect, the movement in the American bond market and in currency market is signalling a loss of faith in the US. US government debt and the dollar are being treated as risky assets where, for decades, they have been the world’s “safe haven” assets.
Trust in the US financial system hasn’t been helped by Trump’s continuing attacks on Federal Reserve Board chairman Jerome Powell (there was yet another on Monday), which has generated a question mark over the continued independence of the world’s most important central bank.
Both the IMF and World Bank, created by the Bretton Woods treaty in 1944, with the US the central participant, have played important roles in trying to head off economic and financial crises and, the IMF in particular, co-ordinating responses to them when they occur.
They, along with the World Trade Organisation and the other multilateral institutions that America helped create after World War II – and within which it has been the most powerful voice – have been fundamental to the development of the global economy and financial system that is now under threat from Trump’s “America First” isolationism.
They may not be immune from his assault on multilateralism, which includes America’s withdrawal from the Paris Agreement on climate change and the World Health Organisation.
The blueprint for Trump’s second term as president, drawn up by the conservative Heritage Foundation and labelled “Project 2025”, urged the US to withdraw from both the IMF and World Bank because both “espouse economic theories and policies that are inimical to American free market and limited government principles”.
The mood in London towards Trump.Credit: Getty Images
The document even took the IMF to task for recommending the US increase its tax rates!
Trump included both organisations in a 180-day review of all the international organisations of which the US is a member, along with all treaties and conventions it is a party to. The review’s findings are expected to be delivered in August.
To date, the torrent of executive orders he has been signing from his first hours in office have faithfully followed the Project 2025 playbook, so the prospect of a US withdrawal from the IMF and World Bank is real.
Both organisations, while not without their blemishes, seek to do good and promote sound economic policies in both the developed and developing world, and they do so at little real financial cost to the US, which gets disproportionate geopolitical and economic leverage from its leading roles in them.
Federal Reserve chair Jerome Powell has increasingly come under attack from Trump.Credit: AP
It appoints the World Bank’s president, approves the Europeans’ choice of IMF managing director and appoints their deputy and has an effective and exclusive veto over any major decision the organisations propose. Most of the IMF’s operations are in US dollars and the dollar is one of the key currencies within the World Bank’s currency pool.
The dollar has the largest weight (about 43 per cent) within the IMF’s “special drawing rights” (SDRs) – non-monetary assets whose “value” is based on a basket of the US dollar, the euro, China’s yuan, the Japanese yen and the British pound.
SDRs, used for the IMF’s internal accounting purposes, have been touted as a potential reserve currency – an alternative to the US dollar – in the past.
As only member currencies can be included in the SDRs, if the US withdrew from the IMF, the dollar would be removed from them and the European Union and China would haggle over who should (a) absorb the vacuum left by America’s departure and (b) inherit the larger share of its weighting within the SDRs.
The US would relinquish power and influence and jeopardise (further) the US dollar’s position as the world’s reserve currency, and the dominance of global finance and the geopolitical leverage that confers, while enhancing China’s influence and the role of the yuan in international finance and trade.
It would also mean that, in any future financial crisis – including one that is homegrown – the US and the Fed would have a diminished ability to co-ordinate a global response.
The damage to the US and global economies that will emerge as the effects of Trump’s tariffs – even, at this point, “just” the 10 per cent universal baseline tariff and the 145 per cent rate on imports from China while the 90-day pause on his “reciprocal” tariffs continues – has been self-inflicted.
Before Trump launched his trade war, America had long-standing allies in Europe and the Asia-Pacific it could call on for support as well as out-sized influence within the key multilateral institutions if it wanted to address unbalanced trade.
America runs big trade deficits because its extremely low savings rate means it can’t finance its consumption and investment.
It could have done what the IMF has prescribed and, while pressuring China to increase domestic consumption and reduce the involvement of the Chinese state in its industry and the subsidies for export industries, taken responsibility for its own contribution.
America runs big trade deficits because its extremely low savings rate means it can’t finance its consumption and investment.
It lives beyond its means, using the primacy of the US dollar to borrow from the rest of the world to maintain its standards of living and its economic growth. Cut government spending and the US deficit and attack the $US36 trillion of government debt, and it would help reduce its trade deficits.
The IMF and World Trade Organisation, as forums for co-ordinated pressure on China and its mercantilist policies, could have helped rebalance global trade. Instead, Trump chose a mutually destructive set of geopolitical and trade policies that will leave the US, China and the rest of the world poorer.
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