Kristalina Georgieva, Managing Director, at the International Monetary Fund (IMF), said at the Spring Meeting, held in Washington DC, last week, financial market volatility is up, trade policy uncertainty is literally off the charts.
As trade tensions flared, global stock prices dropped, even if many valuations remain high.
Georgieva said this is a call to respond wisely, to create a balanced, more resilient world economy.
She said the context is trade tensions are like a pot that was bubbling for a long time and is now boiling over.
“To a large extent, what we see is the result of an erosion of trust—trust in the international system, and trust between countries.”
Trade distortions—tariff and nontariff barriers—have fed negative perceptions of a multilateral system seen to have failed to deliver a level playing field.
“For about 20 years, the world saw a good convergence toward a low and stable U.S. effective tariff rate, progress stalled in the last decade. And then there are the spillovers. As the giants face off, smaller countries are caught in the crosscurrents. China, the EU, and the United States—despite having relatively low imports to GDP—are the world’s three largest importers. Key implication? Size matters—their actions impact the rest of the world.”
Smaller advanced economies and most emerging markets rely more on trade for their growth, and are thus more exposed, including to tighter financial conditions.
Low-income countries face the added challenge of collapsing aid flows as donor countries pivot to dealing with domestic concerns.
The impact of this tension is costly.
The result? Ships at sea not knowing which port to sail to; investment decisions postponed; financial markets volatile; precautionary savings up. The longer uncertainty persists, the larger the cost.
She also said rising trade barriers hit growth upfront.
Tariffs, like all taxes, raise revenue at the expense of reducing and shifting activity—and evidence from past episodes suggests higher tariff rates are not paid by trading partners alone.
Third observation, protectionism erodes productivity over the long run, especially in smaller economies. Shielding industries from competition reduces incentives for efficient resource allocation.
Georgieva said countries can do a lot, such as redouble efforts to put their own houses in order.
“Economies face the new challenges from a weaker starting position, with public debt burdens that are much higher than just a few years ago. As such, most countries must take resolute fiscal action to rebuild policy space, setting out gradual adjustment paths that respect fiscal frameworks. Some countries, however, may experience shocks necessitating renewed fiscal support; this, if it must be provided, should be targeted and temporary.”
To protect price stability, monetary policy must remain agile and credible, supported by a strong commitment to central bank independence. Central bankers must keep an eagle eye on the data—including higher inflation expectations in some cases.
Emerging market economies should preserve exchange rate flexibility as a shock absorber.
Tighter budget constraints will entail difficult choices everywhere—but nowhere more so than in low-income countries.
Countries with unsustainable public debt should move proactively to restore sustainability, including in some cases by taking the difficult decision to seek debt restructuring.
Picture: IMF