Lagarde warns of US-China trade war ‘shock’ to emerging markets

Christine Lagarde has warned that the escalating US-China trade war could deliver a "shock" to already struggling emerging markets, raising the prospect that a crisis ripping through Argentina and Turkey could spread across the developing world.

The International Monetary Fund managing director told the Financial Times that her staff does not yet see "contagion" spreading to multiple countries beyond those currently fighting investor flight.

But she warned that “these things could change rapidly” and cited the “uncertainty [and] lack of confidence already produced by the threats against trade, even before it materialises”, as one of the main dangers facing the developing world.

Ms Lagarde's comments came as US president Donald Trump is preparing to slap new tariffs on $200 billion on Chinese imports, sharply ratcheting up the US trade war with Beijing. China vowed to retaliate, and Mr Trump has said he is prepared to impose levies on a further $267 billion in Chinese products in response.

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The brinkmanship has intensified just as emerging markets are struggling to win back market confidence after a sharp sell-off triggered by a rising US currency, which has raised questions about whether governments and companies can pay off billions in dollar-denominated debt.

So far, the developing world crisis has focused on Argentina and Turkey, both of which have specific fiscal or political issues that have raised investor concern.

But countries as diverse as South Africa, Indonesia and Brazil have in recent weeks seen outflows, raising the risk of a broader crisis.

Turkey’s central bank is due to meet on Thursday after signalling that it was prepared to raise rates to restore investor confidence, and Argentina has asked the IMF to speed up a $50 billion bailout loan to shore up its finances.

Ms Lagarde said the new austerity measures announced by Mauricio Macri, Argentina's president, would be a "key determinant" of the fiscal policy going forward. The IMF, she said, was considering the Argentine request for a "rephasing" of payments.

Asian vulnerabilities

Ms Lagarde said that an increase in US-China tariffs would have a “measurable impact on growth in China” and would “trigger vulnerabilities” among its Asian neighbours because of their integrated supply chains.

She also said the adverse impact in the US would mostly be felt by the “low-income people within the consumer population” who would be hit by higher prices on a wide range of goods.

“It would add a shock to a situation where there is no contagion but there are fragmented vulnerabilities. It would add an additional shock to it,” Ms Lagarde said of the developing world. “Trade is a positive, trade is a plus, trade needs fixing certainly but it is a tool and an engine for growth that should not be under threat, particularly at the moment.”

In Argentina, Mrs Lagarde said the IMF was looking for monetary policy to have “clarity, transparency, proper and due information to market operators, and improved communication”.

This would have a significant impact on domestic confidence given citizens’ focus on the currency markets, she said.

In addition, the fund was looking at whether Mr Macri’s austerity measures would deliver the promised balanced budget a year earlier than originally planned. The IMF was also weighing economic reform measures and their impact on the economy.

Ms Lagarde said it was essential to continue focusing on vulnerable citizens of Argentina, who could take a hit as a result of the tightening. The IMF is hugely unpopular in Argentina for past programmes which many voters believe were overly focused on austerity.

She said Argentina had about 0.2 per cent of economic output, if needed, as a “safety valve that should be used” to protect the most vulnerable.

“If President Macri includes serious reforms in his plan then we will look at it, we will assess the impact on the macroeconomic situation of Argentina, determine the debt sustainability and work with them,” she said. – Copyright The Financial Times Limited 2018