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WHEN: Today, Thursday, December 6, 2018
WHERE: CNBC's "Squawk Alley" – Live from the Business Roundtable CEO Innovation Summit in Washington D.C.
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with IMF Managing Director Christine Lagarde and CNBC's Sara Eisen on CNBC's "Squawk Alley" (M-F 11AM – 12PM) today, Thursday, December 6th. The following is a link to video from the interview on CNBC.com: https://www.cnbc.com/video/2018/12/06/markets-impatient-trade-reform-says-imf-managing-director-christine-lagarde.html.
All references must be sourced to CNBC.
CARL QUINTANILLA: Let's get to Sara Eisen in Washington, who is sitting down exclusively with Christine Lagarde, the Managing Director of the IMF. Sara.
SARA EISEN: Thank you very much, Carl. And yes, I am pleased to welcome IMF Managing Director Christine Lagarde back to CNBC. Thank you for being here.
CHRISTINE LAGARDE: Lovely.
SARA EISEN: We know you came from a business round table discussion with CEOs which we'll get to in a moment. But first on the stock market that's tanking again, what message do you think the market is trying to signal here?
CHRISTINE LAGARDE: I think the markets are saying that, you know, there is volatility, there is clouds relating to trade, there is tightening of the monetary policy, there is emerging markets that are also volatile out there, and there is this question mark about, you know, growth prospects going forward. My sense is on the latter point, it is a little bit overdone. You know, 3.7% growth forecast for next year is not bad, actually.
SARA EISEN: Globally.
CHRISTINE LAGARDE: Globally, yes.
SARA EISEN: What about the U.S.? We are starting to see parts of the yield curve invert. Does that mean a recession is coming?
CHRISTINE LAGARDE: It is not there, quite. It is getting closer. I see that. But you know, I don't see the elements of recession in short order for sure. And we still have a pretty strong growth forecast for next year for the U.S.
SARA EISEN: I was going to ask what happened. You know, consumer spending was booming. Confidence was high. We saw these growth rates that we hadn't seen in years. And why that seems to be peaking out and slowing down now.
CHRISTINE LAGARDE: As I told you, I think it's -- first of all, there is just more volatility now than there was a year ago. If you look at the VIX index, it's twice what it was a year ago. Second, I think that from a baseline that is reasonably optimistic looking at fundamentals, the economy is, as you said, consumption is high, numbers are looking pretty good. There is that concern about trade. And the trade tensions and rhetorics and threats and tariffs, those that have been applied and those that are being threatened, and the uncertainty as to how this is going to be resolved, which is weighing I think on the optimism of markets. Now, you know, what happened over the weekend should be a good reason to have reassurance that the lead players are going to want to sit down, negotiate, and address the issues that have been bones of contention in terms of trade.
SARA EISEN: So you saw this weekend -- and I know you had a front row seat, you were there at G20 in Argentina -- as a breakthrough between the U.S. and China? Or not?
CHRISTINE LAGARDE: You know, what was very different was that -- you know I've done quite a few of those G20 meetings -- and for the first time, I think all leaders around the table recognized that the rules of the road, the rules of trade, have to be revised. That the WTO needs to be reformed. That the dispute resolution system needs to be improved. And that was not a position they all had at the last G20 summit in Hamburg. So this time in Buenos Aires it was common view, including from China, that there had to be changes, there had to be revisions, there had to be improvement. The question is: how fast will that come? And you know, that's where markets probably are impatient and where they want results today. If not today, yesterday. Well, unfortunately when you negotiate those big-ticket items, such as intellectual property rights, such as subsidies to state-owned enterprises, such as rents, such as you know, extortion of this or that, it's going to take a long time. It's going to have to be defined, and understood in terms of scope, in terms of you know, how it's addressed, how it is sanctioned, how it is ruled.
SARA EISEN: Is 90 days a realistic timeframe?
CHRISTINE LAGARDE: You know, if people put their mind to it, certainly identifying the framework within which negotiations take place is, is probably doable. There has to be goodwill, there has to be hard work and there has to be an understanding that not all issues will be resolved at once. Because it's just really, really tricky, detail when you look at line items, in terms of tariffs, it's just, it's monumental. Just looking at that small thing. So talk about defining what is protected by intellectual property. How rights will be enforced. How sanctions will apply. How the judicial system in each and every member will play out. All of those are tricky issues. So having a framework would be, in my very humble view, may be a starting point from which the parties can actually with all the technical experts, helping them, reach hopefully a consensus.
SARA EISEN: You just said there has to be goodwill. And I think investors have questions about that, after we get news this morning that the CFO and daughter of the founder of Huawei has been arrested by the U.S. What is the significance of that?
CHRISTINE LAGARDE: Well, I, you know I would not necessarily put that in the same basket as the determination of the two leaders to address their trade issues. Because, you know I was a witness to that, I was not at the table where they had lunch – sorry, dinner. But I was certainly saw them operate during the G20. And there is clearly a desire to work together, to move forward, and to resolve some of the issues. It was very clear. Now if one individual is violating rules that apply, you know, thank goodness, there's a legal system in place that has to be respected.
SARA EISEN: I know you must have been happy to see that the leaders seem to suggest that there wouldn't be an escalation in tariffs and the tariff rate in the United States. How much damage is being done by the tariffs between the U.S. and China?
CHRISTINE LAGARDE: You have the direct and the indirect damage. The direct damage: if things stand still where they are now, no more escalation, no more tit-for-tat, it's minimal, frankly. We're talking about, you know, .15% here, .10% hardly so, there. So this is minimal. But if you add the indirect damage. In other words, if you factor in confidence, markets apprehension and uncertainties, then you're talking about more than that. So there's the direct and the indirect impact. And in the same vein, if there was, no truce, if there was continued escalation, if there was tit-for-tat, and if the whole business was actually under 25% tariffs, then you're talking about much more than that. By all -- you know it's modelization. But by our modelization, we are talking about .8% less growth by 2020. And that's assuming that you know, it's full range escalation.
SARA EISEN: You mentioned confidence as one of the swing factors there. After meeting with business executives this morning, what's your sense of the level of optimism? They were so happy after the election. And yet -- we're seeing lots of evidence that that's fading.
CHRISTINE LAGARDE: Well, I only spent you know, 30 minutes with all of them. But it's true that it was a crème de la crème of the of the U.S. business community. And one thing for sure is that they like the tax reform. That was a clear message. What they don't like is trade uncertainty and an attack on trade. Because that's how many of them have built their business model. That's how they've organized their supply chain. And those, those business leaders were not from the banking or financial community. Well, there were some bankers, but not many. It was predominantly real, economy leaders.
SARA EISEN: What was your message to them?
CHRISTINE LAGARDE: Well, you know, please support the factors that are going to generate business for you. Because that will materialize into growth, into jobs, into thriving economies. So if you believe that tax did help, great. If you believe that trade should be predictable, should be rules-based, should be well sorted out, participate in the process and support it.
SARA EISEN: Do you think the business community has not participated enough in the trade fight and the trade policies of this administration?
CHRISTINE LAGARDE: You know, I'm not sure that a fight is necessarily the desirable outcome. I think that now that there is a platform and there is a desire to move forward, and to improve and to reform, I think what the business community needs to indicate is, you know, what are the directions? Where does it matter and help in that respect?
SARA EISEN: Finally there's a lot of angst right now about the Federal Reserve. Do you think they've been moving too fast on interest rate hikes?
CHRISTINE LAGARDE: My read of the latest communication is that they're probably going to slow down a little bit. And there was talk about dovish positioning rather than hawkish. So that might signal less than the dots that we have been expecting, and possibly you know, an adjustment to their reading of the facts, their reading of inflation and expected inflation, their reading of the state of the economy.
SARA EISEN: Would you suggest they pause as soon as December?
CHRISTINE LAGARDE: Not for me to say. You know, our recommendation is that their policy be data-dependent always, be very well communicated because there are consequences outside of the U.S. and some of the big markets out there will either adjust or suffer depending on how well it's communicated and how gradual and cautious it is. I think that's our take.
SARA EISEN: Well, we always appreciate your thoughts. Especially on a big market day like today, with some of the concerns out there. Thank you for joining us here in our bureau.
CHRISTINE LAGARDE: Thank you, Sara.
SARA EISEN: IMF Managing Director Christine Lagarde after her chat with the CEOs, Carl, of the Business Roundtable. Many of which are going to speaking later on CNBC later.
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