International Monetary Fund (IMF) chief Christine Lagarde has warned countries that a looming trade war risks “tearing apart” the World Trade Organisation’s global economic order.

In a speech at the University of Hong Kong, Lagarde warned that protectionism creates uncertainty and instability by undermining confidence in the global supply chain and markets.

Her comments came as storm clouds gathered between the world’s two biggest economies — the US and China — after talks to solve a simmering trade dispute reportedly broke down yesterday.

Lagarde said:

The multilateral trade system has transformed our world over the past generation. But that system of rules and shared responsibility is now in danger of being torn apart. This would be an inexcusable, collective policy failure.

In a swipe at the recent protectionist policies of US President Donald Trump’s administration, Lagarde warned countries to “steer clear of protectionism in all its forms”.

She said:

[They] not only lead to more expensive products and more limited choices, but they also prevent trade from playing its essential role in boosting productivity and spreading new technologies.

The best way to tackle global imbalances is through structural reforms and other fiscal tools, she said.

Remember: the multilateral trade system has transformed our world over the past generation. It helped reduce by half the proportion of the global population living in extreme poverty.

Following days of talks between trade delegates in Washington, Liu He, a senior economic adviser to Chinese president Xi Jinping, yesterday rejected demands by the Trump administration to stop subsidies to support China’s high-tech industry.

Beijing had offered to help bridge the US trade deficit with China with measures that include importing more US liquefied natural gas, agricultural and luxury products and semiconductors, it was reported by Bloomberg.

Global markets rallied yesterday as trade war fears ebbed following a conciliatory speech made by China’s president Xi Jinping.

However, Asian stocks had given up early gains when the markets closed this morning, as investors remain cautious over trade tensions between the US and China.

Tokyo’s Nikkei 225 fell nearly 0.5% or 107.22 points at 21,687.10. Seoul’s Kospi was down 6.52 points or about 0.3% at 2,444.22. Australia’s S&P/ASX 200 index slipped 0.5%, or 28.3 points, to 5,828.7.

Hong Kong’s Hang Seng has defied the trend, having so far gained 0.5% or 157.8 points to 30,886.22.