IMF Says Tariffs Are Ineffective Tool to Right Trade Imbalances

International Monetary Fund Tariffs
SeongJoon Cho/Bloomberg News

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Tempting as it might be to think a stronger dollar offsets higher U.S. tariffs by making Chinese imports cheaper, the International Monetary Fund says the greenback’s global prevalence tells a different story.

“U.S. importers and consumers are bearing the burden of the tariffs,” IMF Chief Economist Gita Gopinath wrote Aug. 21 in a blog post titled “Taming the Currency Hype” with co-authors Gustavo Adler and Luis Cubeddu. “The stronger U.S. currency has had a minimal impact thus far on the dollar prices Chinese exporters receive because of dollar invoicing.”

That runs counter to U.S. President Donald Trump’s assertions that China is paying steep import tariffs, and he has accused the country of devaluing the yuan to soften the impact. “Our consumer is paying nothing,” Trump tweeted earlier this month.

The IMF said the average U.S. tariff on Chinese goods is up about 10 percentage points since early last year and will climb another 5 points if new levies are enacted as Trump has threatened to do Sept. 1. Meanwhile, China’s yuan has slid about 10% versus the dollar, “largely as a result of these trade actions and associated uncertainties,” and such flexibility allows it to help buffer trade shocks, the report said.

The post suggests alternative ways to address concerns about trade imbalances that better support global growth, noting that trade tensions are dimming the fund’s global growth outlook. It comes as China’s economy slows amid the escalating trade war and Trump formally labeling Beijing a currency manipulator after the yuan broke the 7 per dollar mark earlier this month.

“Higher bilateral tariffs are unlikely to reduce aggregate trade imbalances, as they mainly divert trade to other countries,” the IMF said. “Instead, they are likely to harm both domestic and global growth by sapping business confidence and investment and disrupting global supply chains, while raising costs for producers and consumers.”

The post echoed themes from the fund’s External Sector Report released in July. The effects of a currency weakening are generally small within a 12-month period, with a 10% depreciation against all currencies improving a country’s trade balance by about 0.3% of gross domestic product on average.

“In part, this reflects the fact that trade is largely invoiced in dollars, which means that for most countries export volumes tend to respond little to exchange rates in the short run,” the IMF said Aug. 21. “This applies to key U.S. trading partners, where the bulk of exports to and from the U.S. are invoiced in dollars.”

IMF Mission Chief for China James Daniel repeated Aug. 9 that the fund sees the yuan as “broadly in line with fundamentals,” not significantly overvalued or undervalued. That echoed External Sector Report findings.