The global economy could be hit by $455 billion next year if the trade war between the United States and China continues in the way it is now, warned the International Monetary Fund.

The global trade flows were being negatively impacted because of the trade war along with eroding confidence and prohibiting investment because of recent trade policy actions, the Fund said.

The warning was issued by the Fund in its External Sector Report which was released recently, where in the global financial body also added that nothing to reverse external imbalances thus far has been done by any of the concerned parties.

It suggested that those countries that have surplus and deficit trade relations need to get together to revive liberalization efforts and to should focus on upholding the functionality of rules-based multilateral trading system which has guided the global trading systems for the last 75 years instead of imposing tit-for-tat tariffs on each others’ goods, the IMF said.

Since the positions of debtors are concentrated in reserve currency-issuing economies, therefore short-term financing risks were generally contained, it said. However, there are lingering long term risks for the global economy, it warned.

“An intensification of trade tensions or a disorderly Brexit outcome – with further repercussions for global growth and risk aversion – could …. affect other economies that are highly dependent on foreign demand and external financing,” the IMF said in the report.

It further warned that there can be “costly disruptive adjustments in key debtor economies that could spill over to the rest of the world” over the medium term if there is entrenchment and lingering of trade wars and a further divergence of external stock positions.

Spending should be pared back a growth-friendly manner by countries that have a trade deficit with their trading partners such as the United States and Britain, the IMF said. It also suggested boosting of public infrastructure investment and discouraging of excessive saving as ways of salvation for those countries that have big trading surpluses such as Germany, the Netherlands and Korea.

On the currency aspect, the report noted that there was an overvaluation of between 6 to 12 per cent of the US dollar when weighed against near-term economic fundamentals. It however said that other major currencies such as the euro, Japan’s yen and China’s yuan were more in line with the fundamentals.

While hitting out at the trade policies of the USD president Donald Trump, the assessment of the IMF that the US dollar is overvalued would in all probabilities provide Trump with more ammunition to push his frequent complaint that US exports are being hampered because of the strength of the dollar. He has been critical of the currency policies followed by the European Union and China which, he claims, resulted in what he calls devaluation of the euro and other currencies against the dollar.

(Adapted from Canada.com)

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