Christine Lagarde made the comments at the IMF’s annual meeting in Bali, against a backdrop of tumbling stock markets and the biggest fall on Wall Street in eight months, which President Trump partly blamed on the Fed’s actions.
Lagarde also said policymakers should be seeking to “de-escalate” trade tensions and support efforts to bring down protectionist barriers.
She said: “We certainly hope we don’t move in either direction of a trade war or a currency war. It will be detrimental on both accounts for all participants. And there would also be lots of innocent bystanders,” caught in the crossfire.
The growing threat from escalating trade tensions was a key factor in the IMF’s downgrade of global growth earlier this week. The Washington-based organisation said its prediction of 3.9% global growth for 2018 and 2019 made earlier this year needed to be trimmed to 3.7% in both years after the US imposed tariffs on imported Chinese goods.
US investors have for some time ignored the increasingly strident White House rhetoric over trade with China to send stock markets to new highs. Earlier this week Trump boasted that under his presidency the S&P 500 had hit 102 fresh highs.
But on Wednesday US stocks plunged more than 3%, triggering similar falls across Asia. Stocks in Europe tumbled this morning and London’s FTSE 100 index is down 1.6%.
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Lagarde said: “Some of the risks that we have highlighted, particularly at our spring meetings in April, have now begun to materialise, especially from the rising trade barriers.
“And if these tensions were to escalate, the global economy would take a significant hit. So our strong recommendation is to deescalate those tensions.”
Lagarde rejected the concerns of the US Treasury secretary, Steve Mnuchin, that China might manipulate its currency to make trade with the US more favourable and offset the effects of tariffs imposed by the Trump administration.
Mnuchin told the Financial Times in Bali that there was “no question that we want to make sure China is not doing competitive devaluations”.
Lagarde said that China had decoupled its currency, the renminbi, from tracking the dollar and let it float more freely along with many other countries.
Lagarde said: “If you compare the position of the renminbi relative to the dollar, it has a lot to do with the strength of the dollar. If you compare the same currency, the renminbi, with a basket of currencies, there is a bit of depreciation but certainly not as much.
“And, you know, we have supported the move of China towards flexibility, and we have encouraged the authorities to continue along that path going forward,” she said.
IMF officials have repeatedly voiced concerns about the threat of trade barriers to an expansion of global trade over the next few years.
Lagarde has supported proposals for more flexibility in World Trade Organization rules that govern subsidies for agriculture and manufacturing. With WTO boss Roberto Azevêdo, she agreed that in the face of further threats to the multilateral trade body, countries needed to accept as the price of de-escalating trade wars, the lines between developed and developing countries could be blurred.
China is designated as a developing world country, which the Trump administration disputes, saying it should be considered a developed nation and lose those privileges.
This article was written by Phillip Inman in Bali, for theguardian.com on Thursday 11th October 2018 13.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010
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