The escalation of trade tariffs between the US and China would be “costly for everyone”: IMF

An escalation of trade and tariff tensions between the United States and China would have “costly” economic consequences around the world, Gita Gopinath, deputy managing director of the International Monetary Fund, told CNBC on Wednesday.

“We’re seeing geopolitically driven trade around the world, so when you look at overall trade relative to GDP, it’s holding up well, but who trades with who is certainly changing,” he said.

The United States and China trade less with each other and some parts of their trade are being diverted through other countries, he added.

Trade tensions between the United States and China and the European Union and China have been rising this year, with both the United States and the EU implementing higher tariffs on some Chinese goods over what they say are unfair trade practices by Beijing. .

China has also announced temporary higher tariffs on some EU imports as tit-for-tat measures continue.

If tariffs were to increase, IMF modeling suggests it would be “costly for everyone,” Gopinath told CNBC’s Karen Tso on the sidelines of the agency’s annual meeting in Washington.

“Output will be much lower than what we project for all countries in the world, there will be pressure on inflation, so that is not the direction we should go,” he explained.

Gopinath’s comments come after IMF Managing Director Kristalina Georgieva said last week that international trade would no longer be the “engine of growth” it once was, and that “retaliatory” trade measures could harm both those who impose them and their objectives.

Tim Adams, executive director of the Institute of International Finance, also warned on Wednesday that US presidential candidate Donald Trump’s tariff proposals would disrupt the path of disinflation and could lead to higher interest rates.

The IMF’s Gopinath said it would benefit both the United States and China to have “good working relations,” noting that this was also important for the rest of the world.

It is “in everyone’s interest that these relationships be maintained,” he said.

The IMF warned in its recent World Economic Outlook report that increased protectionist policies constituted a downside risk to growth.

“A widespread retreat from a rules-based global trading system is prompting many countries to take unilateral action. An intensification of protectionist policies would not only exacerbate global trade tensions and disrupt global supply chains, but could also affect the medium-term growth prospects,” the report states.

—CNBC’s Jenni Reid contributed to this story.