By Andrea Shalal
WASHINGTON, July 22 (Reuters)
Global trade is one of the most talked about and, we must say, worrying issued around the world today. After years of relative stability, imbalances between countries have grown significantly once again. The international Monetary Fund (IMF) issued a warning saying that raising tariffs is not the solution to this problem. Instead of easing tensions, protectionist measures often create more uncertainty and economic instability.
Escalating tariffs and tensions could harm global growth, IMF says
In its annual External Sector Report, which assesses imbalances in the 30 largest economies, the IMF noted that external surpluses or deficits were not necessarily a problem, but could cause risks if they became excessive. It said prolonged domestic imbalances, continued fiscal policy uncertainty, and escalating trade tensions could deteriorate global risk sentiment and elevate financial stress, hurting both debtor and creditor nations.
The report took aim at U.S. President Donald Trump’s imposition of higher import tariffs against nearly every trading partner, which his administration says is aimed at increasing revenues and righting longstanding trade deficits. “A further escalation of the trade war would have significant macroeconomic effects,” it said, noting that higher tariffs would reduce global demand in the short term and add to inflationary pressures through rising import prices.
Rising geopolitical tensions could also trigger shifts in the international monetary system (IMS), which in turn could undermine financial stability, it said. This year’s report, based on 2024 data, showed the widening of global current account balances was due largely to increased excess balances in the world’s three largest economies – the United States, China and the Euro area.
Domestic policies, not tariffs, are key to trade stability
Tariffs raise costs for both consumers and businesses, reduce the efficiency of international trade, and often trigger retaliatory measures from other countries, leading to a spiral of restrictive policies. Moreover, the root of trade imbalances lies in domestic factors such as government spending, saving rates, and investment strategies. Fixing these issued requires deeper, long-term structural changes rather than simple border taxes.
In an accompanying blog, IMF chief economist Pierre-Olivier Gourinchas said excessive surpluses or deficits stemmed from domestic distortions, such as overly loose fiscal policy in deficit countries and insufficient safety nets that caused excessive precautionary savings in surplus countries. Changes aimed these domestic drivers – not tariffs – were needed, he said.
The report was based on data collected before approval of a massive tax cut and spending bill, which the Congressional Budget Office on Monday said would add $3.4 trillion to the U.S. deficit over 10 years, causing further pressure. Rising tariffs had little impact on global imbalances, Gourinchas said since they tended to reduce both investment and savings in the tariffing country, leaving current account balances little changed.
Coordinated international efforts is a better way to deal with it
The report emphasizes that international cooperation, combined with responsible fiscal policies and internal reforms, is the most effective way to reduce imbalances. Coordinated solutions provide more sustainable benefits than isolated measures.
“A major risk for the global economy is that countries will instead respond to rising imbalances by further raising trade barriers, leading to increased geoeconomics fragmentation. And while the impact on global imbalances will remain limited, the harm to the global economy will be long-lasting,” Gourinchas wrote in the blog.
So, it’s quite clear the IMP’s message here: tariffs are not the best answer for global trade imbalances. While they might appear to be a quick solution, they often cause more harm than good and the problem is even deeper, requiring structural adjustments within countries themselves. Coordinated solutions could be more effective in providing more sustainable benefits than isolated measures.