Trade wars resulting from erosion of trust in international systems: IMF

Moreover, Indian goods exports in FY25 barely grew as shipments of labour intensive sectors such as gems and jewellery and marine exports remained under stress registering a degrowth. Trade wars have also triggered concerns about dumping of Chinese goods with US tariffs on China reaching as high as 245 per cent.

“Trade distortions—tariff and non-tariff barriers—have fed negative perceptions of a multilateral system seen to have failed to deliver a level playing field. While the first two decades of this century saw significant convergence towards a low and stable US effective tariff rate, progress has stalled in the past decade. Taking into account all the recent tariff increases, pauses, escalations, and exemptions, it is clear that the US effective tariff rate has jumped to levels not seen in generations,” she said in a statement.

“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 import-to-GDP ratios—are the world’s three largest importers. Size matters—their actions impact the rest of the world,” Georgieva said.

Key players China, US, EU need reforms

Georgieva said the IMF has been advising China on policies to boost chronically low private consumption. These include scaling back industrial policies and widespread state involvement in industry, as well as strengthening social safety nets to reduce the need for precautionary savings.

“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, that story needs to include a stronger embrace of the natural progression from manufacturing to services as economies mature,” she said.

In the US, Georgieva said the key macroeconomic policy challenge is to put federal government debt on a declining path—requiring significant reductions to the budget deficit. This, she noted, would necessitate elements of spending reform. Reducing federal debt would both strengthen economic resilience and help lower the current account deficit.

Speaking on the EU, she said assertive fiscal expansion by Germany to support defence and infrastructure spending will lift domestic demand. EU-wide efforts to improve competitiveness—through deepening the single market—would also help. “Europe needs a banking union, a capital markets union, and fewer restrictions on internal trade in services,” she said.

‘Trade is like water’

“Ultimately, trade is like water: when countries put up obstacles 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 continues, but disruptions incur costs,” Georgieva said. That is an increasing worry for New Delhi.

Georgieva further said that countries must redouble efforts to put “their own houses in order” as, in a world of heightened uncertainty and frequent shocks, there is no time to delay reforms aimed at enhancing economic and financial stability and improving growth potential.

“Economies are confronting these new challenges from a weaker starting point, with public debt levels far higher than just a few years ago. Most countries must take resolute fiscal action to rebuild policy space, setting out gradual adjustment paths that respect fiscal frameworks. Some countries, however, may face shocks necessitating renewed fiscal support; if such support is required, it should be targeted and temporary,” she said.