Avoid Protectionism at All Costs

The International Monetary Fund warned world leaders Friday to avoid resorting to protectionist measures "at all costs" due to the damage it would cause to their own and the global economy.

At a time when President Donald Trump has repeatedly blamed trade for US economic woes, and threatened to impose barriers to imports, the IMF said such policies would not work, AFP reported.

In its sixth edition of an annual report analyzing imbalances in the global economy, the Washington-based fund said while total trade and investment imbalances have narrowed since the crisis, there has been an increased buildup of excess surpluses and deficits in advanced economies.

About a third of the total are considered undesirably large imbalances, and countries should put in place policies to reduce these, whether they are surpluses or deficits, the External Sector Report urged.

But it is the deficit countries most at risk of a "backlash" that could lead to anti-trade policies, IMF research chief Luis Cubeddu told reporters.

"A key point of the report is that protectionist policies should be avoided at all costs," he said.

Such policies are "unlikely to meaningfully address external imbalances and they would be extremely harmful for domestic growth and global growth," Cubeddu added.

Even if there is a short-term impact on a country's trade deficit when a barrier is erected to imports, IMF research shows "global GDP losses increase with the duration of protectionist policies, while the impact on global imbalances lessens" and currencies adjust to compensate.

Reduce Imbalances

The IMF in recent weeks has issued annual reports scrutinizing key economies including the United States and Germany, in which it recommended increased focus on reducing the imbalances.

And while the Trump administration has accused Germany of taking unfair advantage of a relatively weaker euro currency value to boost its exports, Cubeddu said the IMF is "looking for actions from both sides, not just countries with surpluses."

In Germany's case, that means policies to boost domestic consumption, and for the United States reducing the government deficit and increasing productivity through things like education and infrastructure investment.

"As you are aware the surveillance of external positions is a core mandate of the IMF. These assessments are an analytical tool to determine on a globally-consistent basis, the difficult and often contentious issue of when external surpluses or deficits are appropriate and when they are assigned economic and financial risk.

"The external sector report brings together the individual assessments of 29 economies, representing about 85% of global GDP, and it also discusses the policies that should be adopted to reduce the excess imbalances. And by excess I mean the deviation of surpluses and deficits from desirable levels", Cubeddu said.

UK Has Biggest Deficit

Britain needs to save more, train up its workers and become a more competitive economy to try to bring down its very large current account deficit, the IMF has warned.

Analysts studied 28 of the world’s largest economies and found the UK has the biggest deficit, running at 4.4% of GDP.

The IMF fears that large imbalances between economies could lead to dangerous corrections in future, as well as dangerous political demands to reduce imports.

“A greater concentration of excess deficits in advanced debtor economies may engender protectionist sentiment and raise the risk of disruptive corrections down the road,” the fund said.

The current account deficit is made up of the trade deficit–as the UK imports more than it exports–combined with the balance of the flows into the economy from overseas investments, and out of the UK to foreign investors.

Britain’s deficit of 4.4% is the largest, followed by Turkey’s at 3.7% of GDP, Mexico’s 2.7% and Australia’s 2.6%. The US’s deficit has dropped sharply to 2.4% of GDP, from more than 6% in the pre-crisis years.

UK “structural reforms focused on broadening the skill base and investing in public infrastructure should boost productivity, improving the competitiveness of the economy,” the IMF said.

Singapore’s surplus of 19% is the largest, followed by Thailand’s 11.5% and Switzerland’s 10.7%. Germany stands at 8.3%.

The IMF also said that countries with high current account surpluses should work harder to reduce them, stimulating demand and increasing spending to suck in more imports and boost the flow of earnings outward to foreign investors.