Concerns About Trump Administration, Geopolitics Dominate IMF, World Bank Talks

By Ian Talley and Tom Fairless Features Dow Jones Newswires

Economic leaders from around the world sought to find common ground Saturday, worried building geopolitical tensions risk derailing an accelerating global economy.

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While France's upcoming elections threaten to upend the European Union and revive market paroxysms in the region, it was the Trump administration that took center stage at the semiannual meeting of the World Bank and International Monetary Fund member countries.

Though finance chiefs have recently feared global politics -- such as the French elections, strife in the Middle East and a standoff with a nuclear-armed North Korea -- could spoil a long-awaited world-wide economic recovery, unease over U.S. policies -- such as the possibility of Washington starting a trade war with China -- dominated discussions between the world's finance ministers and central bankers.

"While the outlook is improving, growth is still modest and subject to heightened political and policy uncertainties," the International Monetary Fund's governing committee said in an official statement Saturday.

"We have probably moved from high financial and economic risks to more geopolitical risks," IMF Managing Director Christine Lagarde said Saturday.

Earlier in the week, the IMF forecast the global economy to hit its fastest pace in five years as a strengthening U.S. gathers steam, emerging markets recover from a commodity bust and the European and Japanese economies show signs of finally returning to health.

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The global economy faces numerous challenges, including weak productivity growth, high debt levels and potential financial turmoil in the U.S. and China, the IMF said.

Foreign governments are particularly nervous over the direction of U.S. economic and foreign policy. Two chief concerns are whether Washington will deliver on threats to levy sanctions against trade partners and if President Donald Trump might counter North Korea's aggression with force. Economists warn the first -- such as if the administration moves ahead with a proposal to curb steel imports -- could trigger a trade war that could potentially shave 2 percentage points off global growth, according to the IMF. The second, analysts worry, could ignite a dangerous regional conflict.

Recent gyrations in global markets show investors are jittery and less optimistic about the Trump team's ability to goose U.S. growth with tax cuts and infrastructure spending. And some governments are worried the new U.S. government could expose the world's largest economy to fresh debt problems if its tax cuts don't juice growth to the degree the administration projects.

When finance leaders from the world's top 20 economies met last month in Germany, many "were really upset, sometimes silent...in the face of positions that were expressed forcefully during the campaign and again during the first weeks of the administration," said Michel Sapin, France's finance minister, in an interview Saturday.

Now, say Mr. Sapin and other ministers, officials are waiting to see whether the Trump team's combative rhetoric turns into actual policy.

"Studies are being carried out," said Austrian Finance Minister Hans Jörg Schelling, but it remained to be seen what policies would emerge. Fears that the U.S. might move toward isolationism and protectionism under the new administration had created uncertainty, but weren't yet being translated into practice, said Ewald Nowotny, who sits on the European Central Bank's rate-setting committee.

Amid those anxieties, officials sought details on the administration's policy plans and to encourage the U.S. to more taking a more cooperative approach.

"Looking out for good deals for one's own country is completely legitimate," said German Finance Minister Wolfgang Schäuble. "However, experience shows that the best deal for one's own country is ultimately the deal that also benefits other parties," he said.

Anxiety over the Trump administration is why the world's finance chiefs were searching for common ground with U.S. Treasury Secretary Steven Mnuchin. Some looked to build diplomatic bridges by offering to work more closely to combat terror financing, a priority for the White House.

And in the IMF governing board's official statement published Saturday, finance chiefs dropped a reference to "resist all forms of protectionism" that previous communiques had used. Bowing to the IMF's largest shareholder, the U.S., the group instead adopted U.S. phraseology on trade.

"We will work to promote a level playing field in international trade and taxation," said the group, which acts as an executive board for the global economy.

"We tried to...strike a positive, constructive balance," said Agustín Carstens, Bank of Mexico chief and IMF governing-board chairman. "The word protectionism is very ambiguous."

Taro Aso, Japan's deputy prime minister and finance minister, said that while the U.S. is emphasizing national interests, "that doesn't mean they reject free trade."

The Trump team doesn't like other countries classifying its proposed actions -- some of which trade lawyers say could violate World Trade Organization rules -- as protectionist. Rather, it seeks to rebalance distorted trade relationships with China, Germany and other countries with large surpluses Washington says are caused by unfair practices at the expense of U.S. workers and industries.

"The U.S. is probably the most open market in the world," Mr. Mnuchin said Saturday after the meetings. "We have very little or no tariffs," unlike many other economies, he said. The administration's trade proposals are meant to pressure other countries to fix unfair trade policies.

At an Institute of International Finance policy conference Thursday, Gary Cohn, head of Mr. Trump's National Economic Council, said fair trade "means treating our trading partners the way they treat us."

"We should treat you in a reciprocal fashion," Mr. Cohn added.

Douglas Rediker, a senior fellow at the Brookings Institution and former U.S. representative to the IMF, said policy uncertainties "dominated the meeting, but were not resolved at the meetings."

That leaves many countries around the world on edge, "holding their breath," he said.

"We still need to see how Trump's main policies are going to be spelled out," said Domenico Lombardi, a former Italian representative to the IMF, now a director at the Center for International Governance Innovation.

The IMF, trying to accommodate what it sees as some legitimate U.S. complaints about distortions in the global economy, said it would bolster its oversight of member-country economic policies -- particularly on exchange rates and trade imbalances -- and sharpen its critiques of policies threatening to destabilize the global economy.

While that surveillance includes a detailed assessment of the Chinese and German economies, it will also focus on the U.S.

But, Ms. Lagarde said, the IMF can only give its counsel. It is up to the member countries to take it on, or reject it. "We will see...how seriously it is taken," she said.

--Yuka Hayashi contributed to this article.

Write to Ian Talley at ian.talley@wsj.com and Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

April 22, 2017 21:03 ET (01:03 GMT)