Whilst the dust has yet to settle on what Martin Wolf dubbed the Trump II ‘let’s-blow-the-world-economy-up-for-fun’ trade war, the outlines of an endgame are pointing less to efforts to address bilateral trade imbalances than to an assault on the rules-based global trading order. Otherwise, the proposal put forward by the European Union for a ‘zero-for-zero’ tariff agreement would not have been rejected by President Donald Trump on the grounds that the supranational union of now 27 member states was ‘formed to do damage to the United States in trade.’ International fears of a US decoupling from the global financial and trading system have translated into a rapid loss of international confidence in the US stock market, the US dollar, and long-term US Treasury yields, while reviving market jitters about growth, inflation, and public institutions (as well as the independence of the US Federal Reserve).
‘Back to Basics!’
Just three weeks after the unilateral challenge to the global trading system, seen by many as the trigger for a potential global depression, the two Bretton Woods institutions have invited the world’s financial élite to their Spring Meetings in Washington—against the backdrop of
A return to the core mandate of both the IMF and the World Bank, as defined in their respective Articles of Agreement, both adopted in July 1944, leaves some room for interpretation. In the Bretton Woods Agreement, the two organisations were mandated to ‘facilitate the expansion and balanced growth of international trade’ and ‘promote the long-range balanced growth of international trade’, respectively. These formulations leave the looming conflict between the US and most other members over the future role of the IMF and the World Bank hanging on the word balanced, largely a legacy of the pre-1973 Bretton Woods system in which currencies were pegged to the US dollar and gold (implying an unsustainable drain on a central bank’s foreign exchange reserves and a resulting balance-of-payments crisis in the event of prolonged periods of trade deficits). The adoption of flexible exchange rates has removed the economic argument for ‘balanced’ trade—until Michael Pettis (2013) provided an important puzzle piece to the intellectual underpinnings of the America first argument on global trade imbalances, identifying the suppression of domestic consumption (through high taxes and/or low wages) by surplus countries as the root cause of financial instability and global inequality.
The Elegance of Conceptual Gymnastics
Caught between the political rock of a possible US withdrawal and the economic hard place of irreparable damage to the rules-based trading order, the two Bretton Woods organisations had to position themselves very carefully. In doing so, they identified the point of minimum pressure and maximum support by anchoring the event around the theme of ‘Jobs—The Way to Prosperity’. In its accompanying Global Policy Agenda 2025, the IMF aimed at helping its member countries to ‘build economies for sustainable growth—the key to more jobs and higher incomes’. This would require stability (currently lacking) with support to find cooperative solutions (not unilateral coercion) to shared economic challenges (rather than nationalist agendas) and constructive solutions (instead of mercantilist approaches) to trade tensions: ‘A rules-based and level playing field is necessary, including by avoiding distortive policies designed to secure a competitive advantage and measures that impede the flow of trade’. The IMF added that it would continue its efforts to ‘identify excess imbalances and provide policy advice to promote an orderly rebalancing and reduce financial frictions that could interact with imbalances to undermine the stability of the [international monetary system].’
The biannual World Economic Outlook (WEO), the IMF’s flagship publication for the Spring and Annual Meetings, set the political challenges for both organisations (in terms of their own roles, mandates, sources of legitimacy, and access to finance) against the harsh backdrop of an economic reality (in which the very rules-based multilateralism they are supposed to uphold has come under attack from the centre). Arguing that uncertainty, particularly around trade policy, had risen to unprecedented levels, IMF economists adjusted their assumptions, re-ran their models, and—as a result of the abrupt increase in tariffs and the subsequent rise in uncertainty—lowered their 2025 growth projections for the US (world/EU) by 0.9 (0.5/0.2) percentage points to 1.8 (2.8/0.8) per cent, compared to their January 2025 WEO Update. This means that an estimated US$263 (553/39) billion of the total market value of goods and services in the US (world/EU) has been wiped out at a stroke.
The IMF went on to argue that, for the US, the trade tariffs represented a supply shock that would lead to lower productivity (i.e., lower innovation capacity in the longer run) and higher unit costs (i.e., persistently higher rates of inflation), the effects of which would be amplified by (i) the private sector’s reaction to increased uncertainty, leading to the postponement of investment and reduced spending; (ii) tighter financial conditions (particularly pronounced in countries with high public debt); and (iii) increased exchange rate volatility. In particular, as has been argued in these pages, the WEO warned the US authorities that continued elevated trade policy uncertainty could create new momentum for regional, plurilateral, and multilateral agreements that could mitigate risks and promote policy predictability. Indirectly, the IMF economists encouraged tariff-hit countries to broaden their reference markets and diversify their trading partners, arguing that ‘expanding and deepening international cooperation and regional integration … could increase investment, boost productivity, raise potential growth, and enhance countries’ resilience to external shocks’.
At the Spring Meetings, the global financial élite made a concerted effort to resolve the internal differences within the US administration between reform advocates, such as Treasury Secretary Bessent, and those more inclined to a US withdrawal, most notably Commerce Secretary Howard Lutnick and trade advisor Peter Navarro. In its final communiqué, the International Monetary and Financial Committee (IMFC)—an advisory body to the IMF’s Board of Governors on the surveillance and management of the international monetary and financial system—thus sought to reassure the international community of its commitment to economic multilateralism, while, at the same time, strengthening the hand of the reformers within the current US administration. Noting that the global economy was at a crucial juncture, it stressed that trade tensions had risen abruptly, fuelling heightened uncertainty, market volatility, and risks to growth and financial stability—with slower growth and higher inflation aggravating ‘an already challenging context of weak growth and high public debt’. The IMFC took up the jobs angle as a link between the reaffirmation of rules-based multilateralism (‘We will work together to improve the resilience of the world economy … and ensure the stability and effective functioning of the international monetary system’) and the recognition of US concerns (‘We will also work together to address excessive global imbalances’). Specifically, the IMF’s senior advisory body extended an olive branch to the US Treasury Secretary, embedding the reaffirmation of its institutional commitment (which Bessent considered to be of ‘enduring value’) in a promise to explore further ways to ensure that the IMF becomes ‘agile and focused’ (as an implicit acceptance of his criticism of ‘mission creep’).
Impact and Outlook: What Will Lie Ahead?
The overarching question, however, remains whether this elegant compromise formula, carefully crafted during these politically delicate Spring Meetings, would actually represent a first step towards reducing economic uncertainty and calming the overall environment. Whether by design or default, the week-long event fell into the political lull of the three-month ‘tariff pause’ and the temporary truce in the US President’s challenge to the independence of the Federal Reserve. However, if one follows the (private) argument proposed by Stephen Miran, who now chairs President Trump’s Council of Economic Advisors, it is the persistent overvaluation of the US dollar that has hampered US competitiveness and caused persistent trade deficits. He proposed a Mar-a-Lago Accord (a 21st Century version of a multilateral currency agreement) in which non-Americans would take on greater defence responsibilities and agree to a new multilateral agreement aimed at realigning exchange rates (implying a substantial depreciation of the US dollar against major trading partners), thereby addressing global imbalances. Such an agreement would require the cooperation of major trading partners, as provided by the Bretton Woods organisations, which Miran suggested could be achieved as follows: ‘How can the U.S. get trading and security partners to agree to such a deal? First, there is the stick of tariffs. Second, there is the carrot of the defense umbrella and the risk of losing it’ (emphasis added).
From a politician’s perspective, trade imbalances are easier to communicate to the wider public than current-account deficits, not least because of their direct link to domestic production and employment. But when it comes to the risks associated with deficits in goods and services, they imply an excess of consumption over production that can only be financed by capital inflows and foreign borrowing, which has been made easier and cheaper by the US dollar’s status as the world’s reserve currency. If the US government is now jeopardising confidence in both the US as a reliable trading partner and the US dollar as international reserve currency, there is only one rational justification for such a strategy—viz., the preparation for a soft default on the US public debt, which the current IMF estimates, in gross terms, to have reached around 121 per cent of gross domestic product (GDP) in 2024. The Congressional Budget Office reports that about 3.1 per cent of GDP has been spent on interest payments in 2024 (or about 13 per cent of total spending and more than on defence). In the current fiscal year, the US government will have to finance a budget deficit of about 6.2 per cent of GDP. As argued on earlier occasions, even under optimistic assumptions, the fiscal projections raise significant concerns about the ability to make sufficient room for discretionary spending. More worryingly, if left unaddressed, interest liabilities will continue to rise relative to the total value of the country’s goods and services—implying increasing difficulty in financing them.
To do this, there is considerable US government interest in restructuring the terms of the US debt on much less favourable terms for creditors. In such an instance, the mercantilist view of trade seeks to camouflage the implicit blackmail inherent in tariffs (or tariff threats). They are then aimed at (i) increasing the political acceptability of restructuring short-term, high-interest US debt into longer-term, lower-interest papers; (ii) delegating defence obligations that have become unaffordable; and/or (iii) increasing exports of, especially, US fossil fuels. It would therefore not be in ignorance of David Ricardo’s insight into the role of international division of labour on global prosperity, but an exploitation of that very insight as a means of coercing other countries into accepting the rule changes sought by the US. If this is indeed the case, then the language used by the IMFC in April 2025 (‘We reaffirm our April 2021 exchange rate commitments’, which read: ‘We remain committed that our exchange rates reflect underlying economic fundamentals and note that exchange rate flexibility can facilitate the adjustment of our economies’; emphasis added) foreshadows major turbulences, realignments, and risks ahead as the global economy is nudged to move away from the US dollar as the international reserve currency at a pace much faster than predicted by the IMF less than a year ago. There seems to be a much more serious reason explaining the trade war than the curious tariff formula suggests.
Jan-Peter Olters
powered by Borlabs Cookie
1 comment