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2017 after a sluggish 1.6 percent rise in 2016, while the European Union is pro- jected to match its 2016 growth of 1.7 percent this year. In contrast, the IMF believes China’s economy will surge by 6.6 percent in 2017 and that India will record an impressive 7.2 percent in- crease.
Growth is fragile, however, and could be undone if nations choose to adopt what the IMF calls “inward-looking” (aka protectionist) trade policies that serve to upset global economic integra- tion and deemphasize worldwide collab- oration. The IMF’s October 2016 report illustrated the effects of a hypothetical 10 percent tariff increase on one coun- try’s imports by another. The model used indicates that the tariff-raising country would see growth in consump- tion rates but a decrease in imports,
exports, and overall GDP, as well as a currency appreciation. The country that is paying the higher tariffs would expe- rience a depreciated currency, a drastic reduction in consumption and imports, a slip in exports, and a GDP that would plunge in the short term before stabi- lizing later. Furthermore, if the high- er-tariff country were to retaliate with a 10 percent tariff of its own, all of these metrics would be substantially lower for both trading partners. And if more nations began adopting similar protec- tionist measures, the entire world econ- omy could suffer from lower total GDP, exports, consumption, and investment.
THE TRUMP FACTOR
The most widely cited source of econom- ic uncertainty can be found in the United States and the protectionist rhet-
oric espoused by Donald Trump. The U.S. president has promised to renego- tiate existing trade agreements, such as the North American Free Trade Agree- ment (NAFTA), which partners the United States with Mexico and Canada. Trump has already withdrawn his coun- try from the Trans-Pacific Partnership (TPP), a 12-nation trade agreement that former president Barack Obama helped negotiate, citing minimal benefits of the TPP’s tariff cuts and potential job losses and wage declines at the hands of cheap- er foreign labor.
What is unclear about the U.S. pull- out from the TPP is its impact on the emerging markets among the nations that were trying to craft the agreement. A joint World Bank–IMF report issued in early 2017 claims that the U.S. exit from the TPP, “[t]ogether with a risk of
12 STRATEGY
“On Mexico, we are really encouraged by the set of very solid, strong policies implemented by both the monetary authorities and the Secretary of Treasury. The price of oil has increased significantly, and inflation has gone up as a result, but the monetary response by way of tightening was the right decision.”
Christine Lagarde Managing Director, IMF
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