US-China trade war clouds global economic outlook as 'new normal' emerges

Finance chiefs relieved by global economy's resilience despite policy shocks

Washington: International finance chiefs are returning home with a measure of relief over the surprising resilience of the global economy to the cascade of policy shocks through the first nine months of Donald Trump's second US presidency but also drained by seemingly never-ending uncertainty over what lies ahead.

When finance ministers and central bankers gathered in Washington in April for the first of the twice-yearly meetings of the International Monetary Fund and World Bank, the anxiety over Trump's just-unveiled "Liberation Day" tariffs was palpable. Six months on at the just-concluded October meetings, that had been replaced by fatigue and wariness that the policy landscape is never fully settled.

"It's been just absolutely exhausting since Liberation Day as a policymaker, trying to make sense and then actually make policy and communicate to the public about this," Bank of Thailand Deputy Governor Piti Disyatat said. "So the uncertainty has been very difficult."

"The global economy appears to be more resilient than we thought several months ago. But there's no room for complacency given various types of uncertainty," said a Japanese delegation official who participated in talks in Washington. "There was a great degree of discussion over uncertainties."

A week of fractious back-and-forth between the US and China drove the point home as Trump responded to new export controls on rare earth minerals from Beijing with the re-imposition of 100 per cent tariffs on Chinese exports to the US.

The re-escalation of tensions between the world's two largest economies sharpened the focus among the hundreds of policymakers taking part in the meetings, amid growing momentum for new trade arrangements outside the US-China orbit.

IMF Managing Director Kristalina Georgieva said she had rarely seen as much constructive engagement at the semi-annual meetings of finance officials and central bankers.

"It may be because uncertainty is so high that there is no space for theatricals," Georgieva told a banking conference on Saturday. "It may be because now many countries realize that what they took for granted - international cooperation that helps us do better - we should not take for granted."

Strengthening regional, bilateral ties

Georgieva and World Trade Organization chief Ngozi Okonjo-Iweala told participants it was promising that US-China tensions - however intense - had not blown up into a wider trade war, and noted that many countries were in fact seeking to deepen bilateral and regional ties.

New Zealand Finance Minister Nicola Willis told Reuters she expected that trend to gain momentum against the backdrop of increasing geopolitical and economic uncertainty.

She said it was notable that the European Union was now looking to link up with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a free trade deal between 11 member countries.

"All of those trade relationships are very strong, and the messages that we're having from our partners is that they wish to continue to build on them and expand them, rather than go the other way," she told Reuters in an interview.

Rania Al-Mashat, Egypt's minister of planning, economic development and international cooperation, told Saturday's event that increased regional cooperation was a "fallout" of global developments, but would remain important going forward.

Reforms needed everywhere

The situation also focused attention on strains in the global economy, including persistent and "excessive" external balances, near-record debt levels, growing worries about the non-bank sector and disruption from artificial intelligence technologies.

Bank of England Governor Andrew Bailey said frank discussion was needed, given the international community's past failure to identify - and halt - the subprime mortgage developments that triggered the global financial crisis of 2007-2009.

Transparency was critical in an opaque world with tight cross-links between banking, insurance and private finance.

"It’s our duty to lift the lid and see what’s going on," Bailey said at an event hosted by the Group of Thirty on Saturday. “We’ve obviously had a few events that are going on at the moment where we are having to ask the question, are these one-offs or is it the canary in the coal mine?"

Georgieva underscored her concern about "stretched valuations," following the IMF's warning on Tuesday that markets are too comfortable with risks, including trade wars, geopolitical tensions and yawning government deficits, which heightened the risk of a "disorderly" market correction.

The IMF chief said she ended the week with a long list of to-do's, including reviews of how the IMF conducts its surveillance of countries' economies and assesses their debt levels, while Okonjo-Iweala underscored the urgency for WTO reforms.

"We need to diversify trade," WTO's Okonjo-Iweala said, noting that global trade had clearly helped many countries, even if results had been uneven, leaving other countries behind.

"We need to fix parts of it that don't work," she said. "We need to re-imagine globalization. We cannot have what we had in the past," she said.

Climate risks mounting

Climate change posed perhaps the biggest risk, officials agreed, despite Trump's recent comments at the United Nations, calling it a "con job."

The issue bubbled up during a meeting of the IMF steering committee on Friday, where South African central bank governor Lesetja Kganyago told officials that climate risk was indisputably a macro-critical issue with huge implications for insurance, economic fundamentals and financial stability.

"In trade negotiations, you can walk away ... and you can find another trading partner," Kganyago told the G30 conference. "With climate, when you walk away from the negotiations, the whole planet gets warm and we will all suffer."