If global supply chains are forced to adjust to the ongoing trade tensions between the U.S. and China, it could cost the world economy about 1 percent of its GDP by next year, a senior IMF official warned.
When resources are reallocated due to market forces, that is considered to be an improvement in efficiency, said Tao Zhang, deputy managing director at the International Monetary Fund. But when those changes happen due to unnatural distortions in the global environment, the cost of adjustment is high, he told CNBC's Nancy Hungerford on Saturday, during the IMF and World Bank annual meetings in Bali, Indonesia.
It would cost the entire world "close to 1 percent of GDP by 2019," Zhang added. "This gives you (an) illustration of how serious the result will be, but, in reality, we will see probably even more complicated implications, not only on trade, investment, but also on confidence and people's psychological reactions."
The IMF recently cut global growth forecasts: It predicted that the world economy would grow at 3.7 percent this year and next year — down 0.2 percentage points from an earlier forecast. The fund also cut its predictions for global trade volumes: The total goods and services flow is expected to grow by 4.2 percent this year and 4 percent next year — down 0.6 and 0.5 percentage points, respectively, from earlier estimates.
According to Zhang, there are no beneficiaries in a trade war. Even if a country appears to have come out on top, it would potentially do so at the expense of production capacities and a reduction in final demand.
The U.S. and China are currently embroiled in a trade spat, in which Washington and Beijing have both applied tariffs on some of each other's imports.
"There's no winner in this game, so we would urge the two countries, or any of the trading partners, whenever they get into trade disagreements, let them talk to each other and de-escalate this tension," Zhang said.
That is, he said, what the "international community needs" because the relationship between the two largest economies is "quite important" to the world at large.
The worst case scenario, he said, would be a continued escalation of the trade spat where the countries keep applying tariffs on each other's imports.
— CNBC's Yen Nee Lee contributed to this report.
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