Trump’s tariff, currency policy won’t work: IMF

Will take China on, regardless of short-term impact: Trump

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WASHINGTON

US tariffs on China won’t fix the trade deficit, and neither will weakening the US dollar through interest rate cuts, International Monetary Fund (IMF) economists said on Wednesday. In unusually blunt language, the blog post seemed targeted straight at President Donald Trump, who has loudly and constantly demanded that the Federal Reserve cut interest rates to weaken the US dollar and juice the economy, while imposing round after round of tariffs on China to reduce the deficit he describes as theft.

But the US policy moves are counterproductive, won’t achieve the desired results and will slow the global economy, IMF chief economist Gita Gopinath said. “Higher bilateral tariffs are unlikely to reduce aggregate trade imbalances, as they mainly divert trade to other countries,” Prof Gopinath warned in a blog titled Taming the Currency Hype, co-authored by fellow IMF researchers Gustavo Adler and Luis Cubeddu.

“Instead, they are likely to harm both domestic and global growth by sapping business confidence and investment and disrupting global supply chains, while raising costs for producers and consumers.” And any plans to weaken a country’s own currency value “are cumbersome to implement and likely to be ineffective”, they said, adding that pressure on the central bank will not achieve that goal either.

The authors warned that “one should not put too much stock in the view that easing monetary policy can weaken a country’s currency enough to bring a lasting improvement in its trade balance”. “Monetary policy alone is unlikely to induce the large and persistent devaluations that are needed to bring that result… especially within a 12-month period,” they said.

With the US presidential election coming in November 2020, Mr Trump is especially focused on the next 12 months. With the IMF and others cautioning that his trade war is slowing global growth, and as warning signs of a US recession flash red, Mr Trump has doubled down on his attacks on the Federal Reserve and on China.

And he and his advisers have been talking up the economy to counteract the increasing jitters in US stock markets. But Mr Trump confirmed on Tuesday that he is considering some kind of tax cuts to boost the economy. However, he said: “We’re far from the recession. If the Fed would do its job, I think it would have a tremendous spurt of growth.”

Just last month, the IMF again downgraded its global growth forecast, and said the trade tensions make for a “precarious” 2020, adding that the tariffs threaten to exacerbate the slowdown of China’s economy. The IMF blog repeats much information released in separate reports, but highlights the key points and brings them together.

While economic theory states that a weaker currency tends to make a country’s exports cheaper and more competitive, the IMF notes that many products are priced in US dollars on the global marketplace. So in reality, “US importers and consumers are bearing the burden of the tariffs. The reason: the stronger US currency has had a minimal impact thus far on the dollar prices Chinese exporters receive because of dollar invoicing”.

A day earlier, President Donald Trump  said he had to confront China over trade even if it caused short-term harm to the US economy because Beijing had been cheating Washington for decades.

 

Trump’s strongly worded comments came hours before his government announced approval of an US$8 billion (S$11.08 billion) sale of Lockheed Martin F-16 fighter jets to Taiwan, a move sure to draw Beijing’s ire and further dim prospects for a quick trade deal.

On Monday, Vice-President Mike Pence had also poked China on another sensitive topic, Hong Kong, calling on Beijing to respect the integrity of the former British colony’s laws in its response to mass protests there. “Somebody had to take China on,” Trump told reporters during a White House visit by Romanian President Klaus Iohannis.

“This is something that had to be done. The only difference is I am doing it,” he said. “China has been ripping this country off for 25 years, for longer than that and it’s about time whether it’s good for our country or bad for our country short term. Long term it’s imperative that somebody does this,” he said.

Trump’s tariff plans have roiled global markets and unnerved investors as the trade dispute between the world’s two largest economies stretches into its second year with no end in sight. Concerns about a possible US recession weighed on financial markets last week and seemed to put administration officials on edge about whether the economy would hold up through the November 2020 presidential election.

Democrats on Sunday argued Trump’s trade policies were posing an acute, short-term risk. US stock markets tanked last week on recession fears with all three major US indexes closing down about 3 per cent on Wednesday, paring their losses by Friday. Trump, who is seeking re-election, again dismissed recession fears, saying: “We’re far from recession.”

Secretary of State Mike Pompeo told CNBC that US and Chinese officials were expected to speak by telephone about the trade disputes over the next week to 10 days, followed by a possible in-person meeting. But trade experts said the prospects for productive trade negotiations were clouded by Washington’s increasingly combative stance against China, including the arms sale to Taiwan and its increasingly tough language on Hong Kong.

The Pentagon on Tuesday formally notified Congress that the US State Department had approved the possible sale of 66 F-16 fighter jets to Taiwan, which Beijing considers a renegade province. China, which has never renounced the use of force to bring the island under its control, has warned it could take unspecified “countermeasures” in response to the sale.

Under Washington’s “one-China” policy, the US government officially recognises Beijing and not Taipei, while assisting Taiwan. It remains the main arms supplier to Taiwan. In a separate development, the US International Trade Commission said it had found that subsidised steel rack imports from China had materially harmed US industry, locking in duties imposed by the US Commerce Department on such products.

 

The Commerce Department last month said it had concluded that exporters from China had sold steel racks and parts at less than fair value, with total imports from China of such products amounting to about US$200 million in 2017.

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