IMF Warns Tariffs Won't Fix Global Economic Imbalances

The International Monetary Fund (IMF) has issued a warning that tariffs are not the solution to global economic imbalances. The IMF's annual External Sector Report, which assesses the imbalance situations of 30 major economies, highlights that while external surpluses or deficits are not inherently problematic, excessive imbalances can pose significant risks. The report points out that prolonged domestic imbalances, persistent fiscal policy uncertainty, and escalating trade tensions could exacerbate global risk sentiment, intensify financial pressures, and harm both debtor and creditor nations.

The report specifically criticizes the approach of imposing higher import tariffs on almost all trading partners, a strategy employed by the administration of the . The administration argued that these tariffs aimed to increase fiscal revenue and correct long-standing trade deficits. However, the IMF report warns that further escalation of the trade war could have substantial macroeconomic impacts. Higher tariffs, in the short term, would reduce global demand and exacerbate inflationary pressures by driving up import prices.

The report also notes that escalating geopolitical tensions could trigger changes in the international monetary system, potentially disrupting financial stability. The data for this year's report, based on 2024 figures, shows that the expansion of global current account balances is primarily driven by increased surpluses in the three largest economies: the United States, China, and the Eurozone. The U.S. deficit widened by 228 billion dollars to 1.13 trillion dollars, accounting for 1% of global GDP. China's surplus increased by 161 billion dollars to 424 billion dollars, and the Eurozone's surplus expanded by 198 billion dollars to 461 billion dollars.

Domestically, the IMF's Chief Economist suggests that excessive surpluses or deficits stem from internal distortions. For instance, deficit countries may have overly loose fiscal policies, while surplus countries may have inadequate social security systems leading to high precautionary savings. The economist advocates for addressing these domestic drivers rather than relying on tariffs. This implies that China should focus on boosting consumption, Europe should increase infrastructure spending, and the U.S. should reduce its substantial public deficits and control fiscal expenditures.

The report's data was collected before the approval of a major tax cut and spending bill. The U.S. Congressional Budget Office indicated that this bill would increase the U.S. deficit by 3.4 trillion dollars over a decade, adding further pressure. The economist also noted that the recent broad depreciation of the renminbi, along with the dollar, poses a risk of expanding China's current account surplus. The economist emphasized that continually raising tariffs has almost no impact on global imbalances, as tariffs typically reduce both investment and savings in the taxing country, resulting in minimal change in the current account balance.

The IMF report also warns that tariff uncertainty could weaken consumer and business confidence, increase financial market volatility, and lead to sustained dollar appreciation. However, the report acknowledges that the dollar has depreciated by 8% since January, marking the largest six-month decline since 1973. While the dollar remains dominant, the report suggests that increasing geoeconomic fragmentation could pose future risks, and recent weakened demand for U.S. Treasuries may reflect concerns about the U.S. fiscal trajectory.

The increasing use of the renminbi in international trade and finance, the weakening role of the U.S. as the global banker and insurer, and the emergence of alternative payment systems and private digital assets could ultimately alter the landscape of international currency use. The economist wrote that while the risk of severe disorder in the international monetary system remains moderate, the rapid and significant expansion of global imbalances could produce substantial negative cross-border spillover effects. A major risk to the global economy is that countries may respond to widening imbalances by further raising trade barriers, exacerbating geoeconomic fragmentation. Although the impact on global imbalances would remain limited, the long-term damage to the global economy would be significant.