Trade barriers weigh on global economy on top of war fallout

Trade policy barriers and regulatory differences make up the largest component of trade costs when low-income economies trade with each other, according to the International Monetary Fund.

A trade barrier refers to any regulation or policy that restricts international trade, especially tariffs, quotas and licences.

The rise of trade barriers against China and other countries over the past year could cost the global economy $1.4tn, on top of the severe damage being done by the war in Ukraine, the head of the IMF has said.

“What I am hoping to see is some reversals in policy blocks towards China and globally,” Kristalina Georgieva said in a Bloomberg Television interview on Saturday. “The world is going to lose 1.5% of gross domestic product just because of division that may split us into two trading blocs. This is $1.4tn.”

For Asia, the potential loss could be twice as bad, or more than 3% of GDP, because the region is more integrated into the global value chain, Georgieva said.

US firms had $90bn directly invested in China at the end of 2020, and despite all the talk of decoupling, added another $2.5bn in 2021, according to data compiled by China’s commerce ministry.

The actual total is likely even higher, because some businesses are thought by analysts to route some investments through Hong Kong, or via tax havens like the Cayman and Virgin Islands.

US tech supply chains in China rely on firms from Taiwan and elsewhere as well as domestic Chinese firms, increasing the level of dependence further.

As dollar appreciation in double-digits so far this year is continuing to cause headaches across emerging markets, investors flock to safe havens amid signs that much of the global economy could be headed toward recession.

The IMF last month cut its forecast for global growth next year to 2.7%, far below the 3.8% it was predicting in January. It sees a 25% probability that growth will be less than 2%.

IMF calculations show that about one-third of the world economy will have at least two consecutive quarters of contraction this year and next, and that the lost output through 2026 will be $4tn.

Global merchandise trade will slow next year as “multiple shocks” ranging from Russia’s war in Ukraine, high energy costs in Europe and US monetary policy tightening raise manufacturing costs and squeeze households, the World Trade Organisation said in October.

The Geneva-based institution said it expects trade growth to fall sharply in 2023 to 1%, compared with its previous forecast of 3.4%.

The WTO forecasts – which are in line with IMF and OECD (Organisation for Economic Co-operation and Development) projections – mark a major deceleration from last year’s 9.7% growth in global trade.

Geopolitical tensions have raised the prospect that strategic competition and national security concerns may trump the shared economic benefits of global trade.

Inter-dependencies between economies mean that such a prospect would be very costly, especially for Asia, according to the IMF.

For example, about half of the imports in the US and a third in Europe come from Asia. In turn, Asian countries account for almost half of global demand for key commodities.

Rolling back damaging trade restrictions and reducing uncertainty via clear communication of policy objectives should be a priority for policymakers.

Most importantly, engagement and dialogue between countries will be key to avoiding the most harmful trade fragmentation crises.

US firms had an estimated $90bn directly invested in China at the end of 2020