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Lagarde warns Trump-style protectionism would hit world economy

The antitrade policies championed byRepublican presidential candidate Donald Trump risk sparking a dangerousprotectionist movement that could severely damage the global economy, ChristineLagarde has warned.

Britain’s vote to leave the EU is alreadycasting a shadow over international growth, the International Monetary Fundchief said in an interview, adding that the imposition of new trade barriers inanother large economy could have ruinous effects.

“I think it would be quite disastrous,actually. Well I don’t think I should say disastrous because that is anexcessive word and I should refrain from excessive words. But it wouldcertainly have a negative impact on global growth,” she told the FinancialTimes.

Any uncertainty surrounding a Trump presidencywould probably yield more instability in financial markets, similar to theupheaval in the wake of last month’s UK referendum, she said in response to aquestion. But the IMF chief took care to avoid singling out any politician orreferring to Mr Trump by name.

Ms Lagarde, who this week begins a secondfive-year term, warned of the risk of another great pause in the march ofglobalisation, akin to the disruption caused by the beginning of the firstworld war.

“I hope it is not a 1914 moment and I hopethat we can be informed by history to actually address the negative impact ofglobalisation in order to leverage the benefits that it can deliver. Because ithas historically delivered massive benefits and it can continue to do so,” shesaid.

Ms Lagarde said “waves of protectionism” inthe past had “preceded many wars” and that protectionism “hurts growth, hurtsinclusion and hurts people”.

Ms Lagarde said she did not want to getinvolved in the political debate in the US, the IMF’s biggest shareholder. Butshe made clear her dim view of the policies of Mr Trump, who has proposedpunitive tariffs on goods from China and Mexico and ripping up US trade pactssuch as the North American Free Trade Agreement.

The IMF has also backed the Obama administration’spush to get a vast new Pacific Rim deal, the 12-country Trans-PacificPartnership, through the US Congress. Mr Trump has attacked the TPP as a“disaster” for the US economy.

“We have to work with all governments andall authorities but we certainly hope that whatever new government is in placein the US and whoever is elected as president will look at trade in positiveterms,” Ms Lagarde said.

The IMF chief also called on the UK to movequickly to resolve the uncertainty caused by last month’s Brexit vote.

She had previously said she had hoped thatIMF economists would be able to upgrade their 3.2 per cent forecast for globalgrowth this year when they release an update later this month. But that nowseemed unlikely, she said.

Brexit barometer: Leave vote hits the highstreet

She added that the uncertainty set off bylast month’s Brexit vote was already having a much broader impact on the globaleconomy and on the IMF’s own forecasts for growth.

“We want to see clarity sooner rather thanlater because we think that a lack of clarity feeds uncertainty, which itselfundermines investment appetites and decision making,” Ms Lagarde said.

The IMF’s assessment of the impact of theBrexit vote on the UK economy depends heavily on what sort of traderelationship with the EU a new government would be able to negotiate, she said.

Should a deal preserve access to the singlemarket — such as Norway now enjoys — then the UK economy would be only 1.5 percent smaller by 2019 than would be the case if Britain remained part of the EU.Were a deal to lead to the UK’s access to the EU’s 27 other economies beingsubject to tariffs under World Trade Organisation rules, it would cost the UK4.5 per cent growth.

The IMF had not modelled the economicimpact of a scenario in which the UK’s exit from the EU drags on anduncertainty continues for a year or more, Ms Lagarde said, but the politicalcrisis set off by the vote could make such events likely.

“Do we have a forecast and scenario withprolonged uncertainty, total lack of clarity, no triggering of Article 50 [theofficial notification required to leave the EU], things staying in limbo for along period of time? No. We don't have that. We doubt that it would besustainable politically, geopolitically,” she said.

That uncertainty would feed through to theglobal economy and force some creative approaches at the Fund. For the July 19update of the IMF’s World Economic Outlook, Ms Lagarde said the organisationwas looking at presenting a variety of possible scenarios for the globaleconomy depending on the outcome of Brexit discussions — a departure from itsusual format.