By Chris Prentice
WASHINGTON (Reuters) – An escalation of the U.S.-China trade war would drive manufacturing away from both countries and likely cause job losses, but would not change their total trade balances, an International Monetary Fund (IMF) report showed on Wednesday.
The United States and China would see “sizable” losses in manufacturing as capacity moves toward Mexico, Canada, and East Asia if tariffs were hiked to 25 percent on all goods flowing between the two countries, the IMF said in its April World Economic Outlook.
That would escalate a tit-for-tat tariff battle between the two economic giants that has gripped global financial markets since mid-2018. The United States already has tariffs of 25 percent on $50 billion worth of Chinese goods and levies of 10 percent on another $200 billion. China has retaliated with duties on U.S. products, including key agricultural crops.
The countries have been trying to negotiate a deal to end the spat. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are due to resume talks with Chinese vice premier, Liu He, on Wednesday, just days after the two sides reported progress in talks last week in Beijing.
The electronics and other manufacturing sectors in China would be hard-hit and the U.S. agricultural sector would see a significant contraction if the trade war were to escalate, the IMF report showed.
The group forecast a scenario where “large sectors in both countries shed a significant number of jobs.”
That would translate to about 1 percent of the workforce in the U.S. agricultural and transportation equipment sectors, and 5 percent in Chinese manufacturing other than electronics, like furniture and jewellery.
Growth in both economies would lose steam. On Tuesday, IMF Managing Director Christine Lagarde said U.S. gross domestic product would fall by up to 0.6 percent and China’s would fall by up to 1.5 percent.
Any attempts to address a trade deficit or surplus with another country through tariffs would shift the trade balances with other countries, making no impact on a country’s aggregate balance, the IMF said.
For example, U.S. imports of electronics and machinery from China would drop to 11.5 percent after the tariffs from about 22.1 percent of total imports, while the proportion of imports from other countries would rise.
The share of imports from East Asian nations would climb to 17.7 percent from 15.6 percent, Mexico’s share would rise to 14.6 percent from 12.6 percent, and Canada’s would increase to 12.3 percent from 10.8 percent, according to the report.
Even though some countries would benefit from the new trade flows, most countries are “likely to be worse off” because of increasing macroeconomic uncertainty, the IMF said.
(Reporting by Chris Prentice in Washington; Editing by Bernadette Baum)