The trade war between the United States and China has escalated further in recent weeks and that is bad for the global economy. The International Monetary Fund (IMF) fears that the situation will significantly undermine the sentiment of companies and financial markets, thereby hampering the expected recovery of global growth in the second half of this year.
Only a few weeks ago, the end of the trade feud seemed near, by reports that China and the US were almost ready to sign a trade deal. But at the beginning of this month, President Donald Trump decided to increase the pressure by imposing a new series of import duties. He also said that the Chinese would not keep to certain agreements. As expected, China struck back by announcing new rates for billions of US goods.
Consumers in China and the US are certainly the victims, IMF chief economist Gita Gopinath notes in a blog. She has kept all sorts of information about the prices of products side by side with importers. And what turned out? Basically, so excluding the higher import rates, the prices of imported products have remained virtually the same. This means that companies pass on a large part of the levies to the consumer.
The big picture is more complicated. Trade between the two superpowers has declined in size in recent months, while trade in goods between, for example, Mexico and the US has increased. Gopinath and her colleagues at the IMF estimate that the recent escalation of the conflict will pick up about a third of a percentage point of global economic growth in the short term.
That may seem like a small impact, but the IMF already took into account in April that the world economy would clearly take back gas this year. The only real bright spot in the fund’s last estimate was the forecast that economic growth would probably pick up somewhat in the second half of this year. And it is precisely this recovery that is now in danger of being crushed. Next month the IMF will publish a report with a more detailed analysis.