By David Lawder

By David Lawder

WASHINGTON (Reuters) - The International Monetary Fund on Tuesday called on the Group of 20 major economies to work together to preserve the benefits of trade and avoid protectionism, while also urging them to reduce external imbalances and halt policies that distort global trade.

Under pressure from rising protectionist sentiment in many advanced economies, including the United States, the IMF said that international cooperation was needed to maintain trade as an engine of growth that has lifted millions out of poverty worldwide.

In a "surveillance note" outlining its view of prospects and risks to the global economy issued ahead of a G20 finance ministers meeting this week in Baden-Baden, Germany, the IMF appeared to try to balance stronger demands for fairer trade with its traditional calls for more globalization.


It said those countries with trade and current account surpluses needed to work with deficit countries to reduce these imbalances. A strong commitment to rules-oriented trading system was "vital" and protectionist measures as well as national policies that distort trade and investment.

"Above all, we should collectively avoid self-inflicted injuries," IMF Managing Director Christine Lagarde said in an accompanying blog post. "This requires steering clear of policies that would seriously undermine trade, migration, capital flows, and the sharing of technologies across borders. Such measures would hurt the productivity, incomes, and living standards of all citizens."

New U.S. Treasury Secretary Steven Mnuchin, who will make his G20 debut in Baden-Baden, will be "pushing hard" for U.S. interests at the meeting, including for the group to reaffirm past commitments to avoid competitive currency devaluations, a senior Treasury official said on Monday.

The Trump administration has pledged to reduce U.S. trade deficits with countries such as China, Germany and Mexico, and is looking to harness the G20 and other international institutions to help further those goals, administration officials have said.

Despite the IMF's concern over reversions to nationalist economic policies, the IMF said that the global economic outlook was improving, thanks in part to an upturn in global manufacturing and trade flows.

Growth prospects have improved in Britain, Europe and Japan in recent months, while expectations for expansionary fiscal policy from the Trump administration, including tax cuts and infrastructure spending, were improving prospects in the United States. Recent indicators of business and consumer confidence and manufacturing have strengthened, the IMF said.

The note did not change the IMF's latest global growth forecasts issued in January of 3.4 percent for 2017 and 3.6 percent for 2018 compared to 3.1 percent last year.

But the IMF's outlook assumes there is no major disruption in trade that could be brought about by protectionist policies. It also assumes that China's transition from an investment and export-driven economy to one driven by consumer demand continues without a major downturn.

But protectionism and China represent significant risks to the IMF's outlook, as does the potential for a much faster path of Federal Reserve interest rate hikes, which could prompt disruptive capital outflows from emerging markets.

The IMF also reiterated its call for G20 countries to use available tools to boost demand and growth. But for countries that are nearing full capacity, such as the United States and Germany, it said stimulative policies should be focused on improving productivity and expanding the workforce, such as investments high quality infrastructure, technology advancement, public education and child care.

(Reporting by David Lawder; Editing by Chizu Nomiyama)

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