Trade tensions and friction inflict long-term damage on investments; erode investor confidence, says IMF chief Christine Lagarde

Washington: Trade tensions and frictions could inflict long-term damage on investment by eroding the confidence of investors, IMF chief Christine Lagarde said amid widespread concerns about a potential trade war brewing between the US and countries like China. The US in March imposed steel and aluminum tariffs in the name of national security, a move widely regarded as potentially devastating to the global trading system if other countries follow suit by bypassing the World Trade Organisation. The US also threatened tariffs on US $150 billion worth of Chinese imports. In return, China has proposed retaliatory measures and vowed to fight to the end. “In terms of the impact of the trade tensions, frictions, and threats on the global growth, some modeling has been done; and the actual impact on growth is not very substantial when you measure in terms of GDP. We are talking about decimals in most cases,” Lagarde told reporters. [caption id=“attachment_3440560” align=“alignleft” width=“380”]  IMF chief Christine Lagarde. File photo: AFP[/caption] “What is more important is something that is difficult to measure in the short-term, and that has to do with the erosion of confidence. When investors do not know under what terms they will be trading, when they do not know how to organise their supply chain, they are reluctant on investing,” the IMF managing director said. Growth, she said, is currently being driven by more investment than seen in the previous years and more trade. “So why damage those two engines that are effectively working for growth?” she asked urging countries not to take steps that increase trade tensions. “What is extraordinarily meaningful is the questioning of the overall system under which operators have been operating for decades. It is the confidence of that risk being eroded, and hopefully that can be remedied. It does not mean to say that only one party has to do something, Lagarde said. Referring to the recent announcement by the Chinese President Xi Jinping that he would take steps to open up, remove caps, reduce tariffs, she said certainly those are helpful measures. “We will be very attentive to the actual implementation and delivery of such measures because this is what actually matters, what effectively happens, what impact does it have on the economy, but it is certainly going in the right direction of removing barriers and facilitating investment,” Lagarde said.