It was odd to hear for me and everyone else in the room. The words that emanated from Treasury Secretary Mnuchin at the 2017 IMF and World Bank Spring Meetings would have made you think you might have been listening to James Baker or Timothy Geithner, not the chief financier of a three-month old government headed by an avowed protectionist. “President Trump’s agenda is to make sure we have free and fair trade,” adding that “the United States is probably the most open trading market there is.”
What a difference a year makes I guess.
By the time I was at the IMF for the 2018 Spring Meetings President Donald Trump had forced NAFTA negotiations, bullying the deal’s counterpart countries, and it increasingly appears members of Congress, to accept his vision; levied tariffs on steel and aluminum imports, sourced mostly from U.S. allies, only to grant exemptions to those allies who are now coming to Washington to fight for their extension; and last but not least, the blockbuster, threatening tariffs on $150 billion of Chinese exports to the U.S.
In the trade row with China, Mnuchin and People’s Bank of China Governor Yi Gang worked together at the Spring Meetings this year to attempt to engineer a safety valve to prevent an eruption in trade tensions, with Mnuchin expressing his desire to travel to Beijing in the coming weeks to help pull the lever to ease the pressure. But the world is on edge regardless.
Speaking on the morning of April 19, IMF Managing Director Christine Lagarde noted there is “an erosion of confidence among investors,” as a result of uncertainty surrounding such trade tensions, and that “unilateral trade restrictions have not proven helpful.” Her conversation partner later in the afternoon as attendees of the meetings assembled in the cavernous central atrium of IMF Headquarters had much the same to say. “Trade wars will hurt the same people they hurt every time, the poor,” Michael Bloomberg stated from his chair atop the dais he shared with Lagarde. In regards to free trade and a litany of other issues he had discussed he preempted naysayers who would opine that such are only theories of elites, “they may claim gravity is just a theory, but it’s not a smart bet to think things won’t fall.”
One group that is patently aware of the risk of things falling are the members of the G-20. Chaired this year by Argentina with an upcoming meeting in Buenos Aires, the G-20 press conference at the IMF, headed by Argentine Minister of the Treasury Nicolás Dujovne and Central Bank Chairman Federico Sturzenegger, focused on risks to global growth stemming principally from “retreat to inward looking policies,” and “geopolitical risk.” Both of those seemed to be euphemisms for U.S. tariff threats and the U.S.-China trade dispute. Reportedly, behind the closed doors of the G-20 Finance Ministers and Central Bank Governors’ meeting on April 20, the U.S.–without being named–became the subject of challenges from multiple countries for its assault on the multilateral global system of trade and economic governance undertaken with increasing vehemence by the Trump administration of late.
Despite the storm clouds Lagarde was sanguine, noting that a prospective U.S.-China trade war would have small short term consequences totaling “fractions of a percent of global GDP.” Where her fears really lie in regards to the current trade tensions are the aforementioned long term “erosion of confidence” and disruptions of supply chains pulling third countries into the fray if finger pointing turns into salvos of tit-for-tat tariff measures. In her view, and that of her staff at the IMF, the greatest potential source for headwinds and possible hurricanes is debt.
Global growth has been chugging along at 3.8 percent in 2017 with the IMF forecasting an uptick to 3.9 percent in 2019 and 2020. The U.S. itself is predicted to experience growth of 2.9 percent this year and 2.7 percent next year. Aided by the recent tax cuts on the back of longstanding robust economic growth, the U.S. economy is on pace for the longest expansion in its recorded history. Lagarde herself praised the tax reform but pointed out the implicit danger in one of their side effects. The U.S. Treasury is set to borrow an average of $1 trillion per year for the next three years. This debt issuance has been made necessary by the shortfall in revenues engendered by the tax cuts coupled with the increase in social spending and defense expenditures negotiated between Republicans and Democrats, and passed in February.
The U.S. is not alone in its burgeoning debt commitments. The IMF estimates that outstanding world debt is now $164 trillion, equivalent to 225 percent of world GDP. In an interest rate environment where the U.S. 10 Year Treasury yield is past 3 percent and climbing, debt servicing costs across the globe are beginning to rise, with an imperative towards policy normalization at the Federal Reserve driving the Federal Open Market Committee to continue pushing their policy rate upwards. The potential slowdown to growth caused by higher borrowing costs and potential for recession if rates rise too quickly coupled with the ever-present dangers of high debt levels, potential for surging inflation, and stock market volatility borne of continual uncertainty surrounding Trump’s trade policies has led the IMF to warn of a bumpy road ahead for the global economy.
It is in this climate of potential for rain clouds to turn to torrential floods that Lagarde and her colleagues are impressing upon countries–the U.S. included–that “when the sun is shining is when you need to fix your roof.” I heard that quote no less than five times from three different officials during the few days I spent at the Spring Meetings this year and they were serious. Lagarde specifically encouraged the U.S. to “take advantage of the upswing” created by corporate tax reform, and “reduce the deficit and move debt downward.” Unfortunately, with the aforementioned bipartisan penchant for raising expenditures, increasing indebtedness, and slashing revenues, the chances that the U.S. will put on its work boots, climb the ladder, and swing the hammer are slim.
Especially now that one of our most experienced men, Paul Ryan, has decided to exit the worksite. Regardless of your opinion of him, Ryan was always willing to raise the issue and work towards a resolution of the inconvenient truth that spending on Medicare and Social Security were placing the U.S. on a path to fiscal and financial ruin. You may be hard pressed to conjure issues on which Ryan and Lagarde would be in accord, but this is one. Alas, come next January the stalwart budget wonk will exit his role as Speaker of the House, and the clearest champion of reining in U.S. fiscal profligacy and enacting entitlement reform will return to the lakes and streams of Wisconsin.
Regardless, in the near term trade tensions will continue with consequences for global investment markets; borrowing by the U.S. government will rise with consequences for the long-term health of the U.S. economy; and debt-leveraged spending by Republicans and Democrats alike will continue to create expectations among voters that will eventually be to our long term detriment. It would be nice to think that President Trump and his administration would listen to the advice of Ryan and the IMF, and put on some overalls while the sun is still shining, but this author doesn’t see them buying new shingles any time soon.
Brian Wemple holds an MA in International Affairs from American University’s School of International Service with specializations in US Foreign Policy and National Security, and International Economic Relations.
