Tariffs do not solve tensions but erode global growth – Lagarde

Christine Lagarde has said countries should work together to preserve the benefits of globalisation.

In a speech at the People’s Bank of China in Beijing on June 11, the European Central Bank president said coercive trade policies – such as tariffs – were “not a sustainable solution to today’s trade tensions”.

Such measures tried to address tensions by eroding “the foundations of global prosperity” rather than addressing the root causes of these tensions, she explained.

Lagarde spoke of a disconnect between economic globalisation and geopolitical alliances.

Countries remained “deeply integrated through global supply chains”, but few were willing to remain dependent on each other for strategic industries. She noted that given the experiences with supply chains during the pandemic, some de-risking was inevitable. However, if countries were “serious about preserving their prosperity”, they would need to work together, even if they had “geopolitical differences”.

Countries with trade surpluses and those with trade deficits had both contributed to the current state of global imbalances, she warned. Although countries in the latter group had become fewer in recent years, those that remained were “far more concentrated” with much higher deficits. Meanwhile, countries with surpluses had seen a tripling of “subsidy-related interventions”. These interventions were occurring in both emerging and advanced economies, a pattern the ECB president said was unprecedented.

She added that demand for imported goods had become concentrated in a small number of markets, foremost among which was the US.

“Current account surpluses and deficits are not inherently problematic, particularly when they reflect structural factors such as comparative advantage or demographic trends,” Lagarde noted.

However, when these imbalances become persistent, they create unease among populations, she explained. Perceptions could arise that such imbalances were the result of policy choices, such as “blocking of macroeconomic adjustment mechanisms or a lack of respect for global rules”.

Central banks could “stand firm as pillars of international co-operation”, the ECB president noted, and contribute by maintaining price stability. However, countries also needed to respect the multilateral frameworks that had given them considerable growth.

Lagarde concluded by calling on leaders to come together to “prevent a mutually damaging escalation of tensions” and draw a “new map of global co-operation”.