Trade Frictions, Protectionism Could Harm Global Growth

As trade frictions mount among the world's major economies, the International Monetary Fund warned on Tuesday that large trade surpluses in Germany and China together with the large US deficit could exacerbate that conflict.

But in a message that seemed directed largely at US President Donald Trump, the IMF once again warned against using protectionist trade measures, calling this a "slippery slope" that could harm growth without resolving the problem, AFP reported.

In addition, Trump's own policies are driving some of the issues he has complained about: US fiscal stimulus—like the massive tax cut approved in December—"is leading to a tightening in monetary conditions, a stronger US dollar and a larger US current account deficit," the IMF said.

Those are precisely the developments Trump railed against on Twitter last week, breaking with longstanding tradition to chastise the Federal Reserve for raising interest rates, which has caused the dollar to strengthen.

He accused the EU and China of keeping their currencies artificially weak to make their exports more competitive.

Trump hammered his trade approach on Tuesday, declaring on Twitter that border taxes would force economic partners to negotiate. "Tariffs are the greatest", he said.

However, IMF chief economist Maury Obstfeld said, in fact, there were factors—including the threats of trade tariffs—that were putting downward pressure on currencies recently.

Obstfeld also told CNBC "there is no evidence of manipulation" by China and he noted the US Treasury "came to the same conclusion" in a report in April on currency manipulation by governments.

He told reporters earlier he viewed the chances of a currency war among leading economies as "very implausible". Since central banks in the US, EU and China were focusing policy actions on their own economic conditions, they "are not targeting their exchange rates", he said.

In its latest External Sector Report, the IMF again urged surplus countries to take steps to boost demand and reduce savings to lower the excess current account imbalance, which is comprised largely of international trade.

The concern is that the persistent surpluses in Germany and China if they continue "could be met with stiff protectionist responses," the report said. Obstfeld said there was "significant negative potential" for trade conflict to weaken global growth if the continuing threats turned into action and eroded business confidence.