By Smita Singh
Global trade has witnessed a slowdown in recent years owing to many reasons, including the US triggered trade war with China. However, it would not be wrong to say that the world economy has also shown a loss of impetus.
Although trade is supposed to be mutually beneficial, it may not be “equally” beneficial to all countries. The global trade scenario currently is against the export-led growth strategy, where a country seeks economic development by opening itself up to international trade. The global powers have slowly shifted to protectionism.
The global trade imbalance reflects a structural break in the international economic relationships which started at the beginning of the new millennium and has a direct link with increasing trade deficits in the US current account balance and surpluses in current account balance of China, South Asia and oil-exporting countries. Further, excessive accumulation of reserves in surplus countries and massive capital inflows in the US economy also has a direct impact. This has also led to US and China imposing tariffs on hundreds of billions of dollars’ worth of one another’s goods, leading to higher costs for business and consumers in the Trump regime.
With the world economy still struggling with the pandemic crisis, the external outlook is extremely vague. There might be a slight narrowing of global imbalances in 2020 as per various reports; however, the situation would vary across the globe. Economies dependent on severely affected sectors, such as oil and tourism, or reliant on remittances, could see a fall in their current account balances exceeding 2% percent of GDP.
Although the COVID-19 induced trade slowdown has spared no one, forecasts show a particularly rapid deterioration for developing countries which have seen decline in exports driven by reduced demand in destination markets combined with decline in imports indicating not only reduced demand but also exchange rate movements, concerns regarding debt, shortage of foreign currency.
I expect the international trade in goods to continue to nosedive in the coming months as economies struggle to recover from lockdown measures during the COVID-19 outbreak. In terms of data published by UNCTAD, merchandise trade may witness a 20% annual decline for 2020.
International trade is likely to remain below the levels observed in 2019 and its recovery would depend upon the pandemic’s evolution and extent of policies adopted by the governments in order to the type and extent restart their economies. However, a worsening of the COVID-19 pandemic could also dislocate global trade and supply chains, reduce investment, and hinder the global economic recovery. Already there is a tremendous shift in the supply chain, a change in production facility from China to other developing countries such as India and Vietnam. Further domestic laws are slowly gaining more importance than international agreements.
The global trade imbalance worsened inter alia due to rising tension among China and US was primarily owing to foreign trade policy in Trump’s regime which has been “putting America first” leading to re-negotiation of trade deals and imposition of high import tariffs in order to reduce US trade deficit.
Election of Joe Biden over Trump may have also changed the course of the global economy. Apart from the likely reduced uncertainties in global trade, what may be of immense importance is the fact that Biden understands the need to control the Covid pandemic before any sustainable economic recovery can take place — either in the US or elsewhere.
Chinese state media has also reacted positively to Biden’s win of the US presidential elections, stating that the strained relations between the countries could be restored to a state of greater predictability and could start with trade. However, Biden during his campaign has been promising a similar approach such as bringing back manufacturing to the US. Nevertheless, Biden is expected to work more closely with its allies, such as the EU countries.
While the president elect has criticised the tariffs, he hasn’t pledged to remove them either. Biden has said he believes in “fair trade” and signalled a return to a more rules-based, pro-free trade environment that opens markets to US goods and services, although he has said his priority is making more investments in domestic needs like health care, infrastructure and education before focusing on trade.
Biden also has a different approach on climate change and has shown his desire to “transition” the US away from an oil-based economy and re-join the Paris Agreement on climate from which Trump withdrew.
Thus, the world who has been glued to the couches during the countdown to US election results, will also be eagerly watching each step of Biden towards policies relating and impacting the global trade.
In the current scenario where there could not have been more challenges in relation to the future of global trade, pragmatic policies from world leaders leading towards a more balanced and not restrictive approach would pave way for the resurgence of the developed economies and resultantly the developing ones too.
( The writer is Partner, Singh & Associates.)