In this very place, I spoke of low growth and high debt. But I also spoke about resilience, countries surviving large shocks thanks to strong fundamentals and agile policies. This resilience is being tested again by the reboot of the global trading system. Financial markets volatility is up and trade policy uncertainty is literally off the charts. Just glance at this figure.
As trade tensions flared, global stock prices dropped, even if many valuations remained high. And here we have a snapshot of the market action. What is this telling us? It is a reminder that we live in a world of sudden and sweeping shifts. To quote the Wizard of Oz, we are not in Kansas anymore. And it is also a call. It is a call to respond wisely. A better balanced, more resilient world economy is within reach. We must act to secure it.
So let me lay out the story by addressing three basic questions: What is the context? What are the consequences? And most importantly, what can countries do? Part one: What is the context? Trade tensions are like a pot that was bubbling for a long time and is now boiling over. To a large extent, what we see is the result of an erosion of trust. Trust in the international system and trust between countries.
Global economic integration has lifted a vast number of people out of poverty and made the world as a whole better off. But not everyone benefited. Communities were hollowed out by jobs going overseas. Wages were repressed by the growing availability of low-cost labor. Prices jumped up when global supply chains were interrupted. Many blame the international economic system for the perceived lack of fairness in their lives.
Trade distortions, tariffs, and non-tariff barriers have fed negative perceptions of a multilateral system that seems to have failed to deliver a level playing field. We see these distortions in the following two graphs. The first tells us that while in the first two decades of this century, the world saw a good convergence toward a low and stable US effective tariff rate, progress stalled in the last decade.
The second graph shows a count of the number, not the size, the number of net new subsidy measures by major jurisdiction. This is an incomplete picture, but one that shows the broad direction: non-tariff barriers on a rising trend.
This feeling of unfairness in some places fits the narrative: we play by the rules while others game the system without penalty. Trade imbalances steer trade tensions. Then comes national security. In a multipolar world, where things are made may matter more than how much they cost. The logic of national security says that a broad range of strategic goods, from computer chips to steel, must be made at home, and that is worth paying for. Self-reliance is staging a comeback.
All these concerns taken together have now bubbled over, leaving us in a world where industry gets more attention than the service sector, where national interests tower over global concerns, and where assertive actions trigger assertive reactions.
Part two: What are the consequences? Short answer: significant. Let's start with tariffs. Putting together all the recent tariff increases, pauses, escalations, and exemptions, it seems clear that the US effective tariff rate has jumped to levels last seen several lifetimes ago, and other countries have responded. And then there are the spillovers. As the giants face off, smaller countries are caught in the crosscurrents.
China, the EU, and the United States, despite having relatively low imports to GDP, are the world's three largest importers. Key implications: size matters. Their actions impact the rest of the world. Smaller advanced economies and most emerging markets rely more on trade for their growth and are thus more exposed, including to tighter financial conditions.
Low-income countries face the added challenge of collapsing aid flows as donor countries pivot to dealing with domestic concerns. What will be the impact of these tensions? Let me offer three observations. First, uncertainty is costly. The complexity of modern supply chains means imported inputs fit into a broad range of domestic products. The cost of one item can be affected by tariffs in dozens of countries. In a world of bilateral tariff rates, each of which may be moving up or down, planning becomes difficult.
The result: ships at sea, not knowing which port to sail to; investment and consumer decisions postponed; financial markets volatile; precautionary savings up. The longer uncertainty persists, the larger the cost. Second, rising trade barriers hit growth upfront. Tariffs, like taxes, raise revenue at the expense of reducing and shifting activity, and evidence from past episodes suggests higher tariff rates are not paid by the trading partners alone. Importers pay some part through lower profits, and consumers pay some part through higher prices. By raising the cost of imported inputs, tariffs act upfront. Of course, if domestic markets are large, they also create incentive for foreign firms to respond with inward investment, bringing in new activities, new jobs, but this takes time.
Third observation: protectionism erodes productivity over the long run, especially in smaller countries. Shielding industries from competition reduces incentives for efficient resource allocation. Past productivity and competitiveness gains from trade erode. Entrepreneurship gives way to special pleadings for exemptions, protection, and state support. This hurts innovation. But again, if domestic markets are large and domestic competition is vibrant, negative effects can be mitigated.
Ultimately, trade is like water. When countries put an obstacle in the form of tariff and non-tariff barriers, the flow diverts. Some sectors in some countries may be flooded by cheap imports. Others may see shortages. Trade goes on, but disruptions incur costs.
We will quantify this cost in our new World Economic Outlook to be released next week. In it, and I see our chief economist right here, he will make the presentation. In it, our new growth projections will include notable markdowns, but not recession. We will also see markups to the inflation forecasts for some countries. We will caution that protracted high uncertainty raises the risk of financial market stress.
Earlier this month, we saw unusual movements in some key bond and currency markets. Here we see how, despite elevated uncertainty, the dollar depreciated and US Treasury yields curved. The curves of US Treasury smiled. Not the sort of smile one wants to see. Such movements should be taken as a warning. Everyone suffers if financial conditions worsen.
Conversely, our World Economic Outlook will also show that determined policy action to resolve differences and rebalance can deliver better outcomes. This is what I want to address in the last part of my presentation. What can countries do? A lot, and then some more.
First, all countries must redouble efforts to put their own houses in order. In a world of high uncertainty and frequent shocks, there is simply no room for delay in reforms to enhance economic and financial stability and improve growth potential. Economies face the new challenges from a weaker starting point, with public debt burdens that are much higher than just a few years ago. As such, most countries must take resolute fiscal action to rebuild fiscal space, setting out gradual adjustment paths that respect fiscal frameworks.
Some countries, however, may experience shocks necessitating renewed fiscal support. This, if it must be provided, should be targeted and temporary to protect price stability. Monetary policy must remain agile and credible, supported by a strong commitment to central bank independence. Central bankers must keep an eagle eye on the data, including higher inflation expectations in some cases or inflation dropping in others. In finance, strong regulation and supervision remain essential to keep banks safe, and rising risks from non-banks must be monitored and contained.
Emerging market economies should preserve exchange rate flexibility as a shock absorber. Policymakers can look to the IMF's integrated policy framework for insights on how and when temporary measures may be warranted.
Tighter budget constraints will entail difficult choices everywhere, but nowhere more so than in low-income countries. Here, weak revenues necessitate stronger efforts for domestic resource mobilization, but also call for support from international partners, both to improve capacity for reforms and to secure critical financial assistance.
Countries with unsustainable debt should move proactively to resolve sustainability problems, including in some cases by taking the difficult decision to seek debt restructuring. And I'm pleased to mention today that the Global Sovereign Debt Roundtable will soon publish a playbook for country authorities considering that restructuring, to help them in their decision making, to help them and everybody else around the table.
Policy tradeoffs can be eased by what? By lifting growth potential. You grow more, you can do more. The US economy has seen strong productivity growth while others have slipped behind. You can see this on the chart. How could they catch up? Well, through ambitious reforms in banking, capital markets, competition policy, intellectual property rights, and AI preparedness, all of which can contribute to higher growth. In many cases, the state can and must do more to reduce obstacles to private enterprise and innovation. In other words, eliminate self-inflicted injuries.
The IMF will help countries manage macroeconomic adjustment and advance reforms. Currently, 48 of those 191 countries are relying on our balance of payments support, including Argentina, where robust market-oriented reforms are now underpinned by our newest and largest program, and I see here the ambassador of Ukraine, including Ukraine, and thank you for being here, Madam Ambassador.
As a second hugely important priority, countries should renew their focus on internal and external macroeconomic imbalances. Internal imbalances between saving and investments are fundamental. If they tilt too far one way or another, they can cause problems. Here we illustrate with a sample of large countries and blocs showing savings and investment rates as a percentage of GDP.
Drivers of imbalances include national saving habits, policy-induced distortions, capital market openness, exchange rate regimes, and more. And we have levers to deal with fiscal, monetary, exchange rate, and structural policies. Wherever rebalancing is needed, work starts at home. By definition, internal balances also drive external current account balances, shown here in dollar amounts, and thus capital flows. In other words, rebalancing can enhance stability internally, externally, and globally.
This is true on its own, given the risk of sudden stops to capital flows, and it is also true because, as noted, external surpluses and deficits can create fertile ground for trade tensions. At the IMF, we know rebalancing is difficult. Current surplus countries generally feel little urgency to adjust. They are exporters, not importers, of capital. And on the other side, countries with reserve currencies, not to be the United States, enjoy a special ability to sustain current account deficits.
But the net result of sustained surpluses and deficits can be a buildup of vulnerabilities. All countries can pursue policies for better internal and external balance, supporting collective resilience and well-being.
Let me zoom in on the three largest actors. In China, we have been advising on policies to boost chronically low private consumption. These include: one, steps to dial back industrial policies and pervasive state involvement in industry; two, measures to improve social safety nets and reduce the need for precautionary savings; and three, fiscal support to address property sector weaknesses. Such actions, if decisive enough, would lift confidence and domestic demand, help repair damaged trade relations, and set the stage for the next phase of China's growth story.
Among other things, the story needs to include a warmer embrace of the natural progression from manufacturing to services as economies develop.
In the EU, assertive fiscal expansion by Germany to facilitate defense and infrastructure spending will lift domestic demand, as would EU-wide policies to improve competitiveness by deepening the single market. Europe needs banking union. Europe needs capital market union. And Europe needs fewer restrictions on internal trade in services. The list is long. Taken together, fiscal easing and stronger integration would lift growth, increase resilience, and improve both internal and external balances.
Last but not least, in the United States, the core macroeconomic policy challenge will be to put federal government debt on a declining path. Achieving this path will require significant reductions to the federal budget deficit, which, among other things, will necessitate elements of spending reform. Lowering federal debt would both strengthen resilience and reduce the current account deficit.
Reforms and rebalancing are not just for the three big blocs here. They're for everybody. From ASEAN to the Gulf Cooperation Council, across the African continent, and elsewhere, policymakers are taking action to strengthen their economies, improve regional ties, and reduce surpluses and deficits. We strongly support these efforts.
Finally, let me go to the third major priority, and the most pressing one by far: ensuring that there can be cooperation in a multipolar world. In trade policy, the goal must be to secure a settlement among the largest players that preserves openness and delivers, very important, a more level playing field, to restart a global trend towards lower tariff rates while also reducing non-tariff barriers and distortions.
We need a more resilient world economy, not a drift to division. And to facilitate the transition, policies must allow private economic agents time to adjust and deliver. Critically, resilience requires that attention be paid to policies to cushion the blows on those who lose out. Distributional policies form a fundamental bridge between good economics and good politics.
Well, to sum it up, we have the Spring Meetings coming, and I expect that as we gather our 191 members, it will provide a vital forum for dialogue at a vital time. All countries, large and small alike, can and should play their part to strengthen the global economy in an era of more frequent and severe shocks.
Let me close with kind of an uplifting observation I've made over many years in public service: a challenge also creates an opportunity. Pushed hard enough, things that were not possible become possible. Mountains that couldn't be climbed are climbed. Vested interests that would not retreat are overcome. With cool heads, clear vision, and strong will, times of change can be times of renewal.
The secret to seizing the moment is to focus all energy not on preserving the old, but on building the new, a better balanced, more resilient world economy. Thank you very much.
To be in the picture. So, Maria and I are going to arrange for that.
The audience. Are you looking happy and smiley? Thank you. Thank you. Thank you. Perfect. Love it. Yes.
Okay, we need to switch. We need to switch. I took your seat. My apologies. My apologies.
