IMF Warns Against Customs Wars

The International Monetary Fund recently released a report where they claim that only macroeconomic factors, not tariffs, contribute to changes in the commercial balance between two countries. Despite not being explicit, chapter 4 of the April 2019 IMF world economic outlook seems to be making a reference to the current U.S. Trade Policy.

The aggregate trade balance, which is the difference between the value of two nations imports and exports, seems not to be affected by the use of mechanisms like tariffs, claims the report. In fact, according to the surveyed evidence, those changes are better explained by the combined effect of different macroeconomic factors, at least in the last two decades.

This casts doubts over Trump's international trade strategy, which mostly relies on imposing tariffs on other countries with the purpose of altering the balance of imports and exports and reaching a more favorable one. Ironically, despite having this intent, the American trade deficit recently hit record levels.

The study, which is based on the data of 63 countries over 20 years, claims that other factors like demographics, fiscal policy, and domestic demand levels explain better the changes in the commercial balance of a country’s economy. Changes in bilateral tariffs, on the other hand, have a more moderate role in explaining those changes.

However, this doesn't mean that tariffs don't have effects on the state of the economy. In fact, the report claims that increases in tariffs generally hurt economic growth, productivity levels, and jobs not only in the involved countries but also countries that are part of the complex global value chains.

This happens because other countries may benefit from trade diversion when a country decides to impose tariffs over the goods of a specific trade partner. This is why, in general, the aggregate trade balance remains unchanged.

The IMF recommends focusing on other macroeconomic factors and avoiding distortive policies. They also highlight that reducing trade barriers is generally beneficial for the involved agents, though may affect disadvantaged groups, hence they recommend considering complementary policies.

Sara Patterson
Sara Patterson has a Master’s Degree in political science and enjoys analyzing both current events and the international markets to get a fuller perspective of the currency market. Before turning to financial writing, she taught English writing skills to high-school age students. Sara’s work has been published on various financial and Forex blogs.