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."