If “decoupling” and “derisking” were the watchwords of 2022, then “fragmentation” is a clear candidate for 2023.
As Russia’s invasion of Ukraine drags on, the threat of global warming grows and inflation – driven by key commodities such as oil, gas and food – continues to undermine the economic recovery from the Covid-19 pandemic, raising fears among leading economic institutions of damaging fragmentation of the economy is growing The global economy is growing from month to month. International Monetary Fund Managing Director Kristalina Georgieva prepares the framework for upcoming IMF/World Bank meetings this week in MarrakechMorocco, has warned that many countries are now “increasingly going their own way” and that “economic fragmentation threatens to further undermine growth prospects”.
In August, IMF economists estimated that increasing trade restrictions could reduce global economic output by 7 percent, or about $7.4 trillion in today’s dollars. “A fragmented global economy is likely to be poorer,” they said. After successive shocks over the past three years that have already cost the global economy around $3.6 trillion, the IMF’s message is clear: we cannot afford any deeper divergence and must urgently return to multilateral cooperation.
Last week, the World Trade Organization (WTO) joined the fight. In the words of its general manager: Ngozi Okonjo-Iweala: “Global economic fragmentation would only worsen the challenges…The global economy, and particularly poor countries, will struggle to recover without a stable, open, predictable, rules-based and fair multilateral trading system.”World Trade Organization Director-General Ngozi Okonjo-Iweala shares a light moment with Indian Prime Minister Narendra Modi ahead of the Group of 20 leaders’ summit on September 9 in New Delhi. Photo: AFPGiven that a slump was reported in the October Global Trade Outlook update, the WTO is issuing a stark warning of an increase in global trade in goods since the final quarter of 2022 and a halving of its forecast trade growth for 2023 of 1.7 percent 0.8 percent Signs of fragmentationWhen examining trade in intermediate goods – the exports that go not to consumers in an end destination market but to the next country along a global supply chain – as an indicator of global economic integration, it was found that intermediate goods accounted for only 48.5 percent of world trade in first half of 2023 – a decrease from an average of 51 percent over the last three years. This is clear evidence that supply chains work shortened and simplifiedHowever, on a positive note, the WTO report also noted that the measures taken under the WTO report Trade conflict between China and the USA “have triggered some changes in international trade patterns, but evidence that they have reversed globalization remains limited.”
Asia’s share of bilateral trade in intermediate goods with the US is 38 percent – down from 43 percent in the first half of last year, but virtually unchanged from 39 percent in 2019, before the pandemic. China’s share of US trade stands at 11 percent – essentially unchanged from 2019 levels, despite the hopes of many politicians in the US Congress.
In fact, it is just as difficult to identify or interpret global trade and investment trends today as it has been over the past three decades. It will take a brave economist to discern whether the changes in trade patterns are due to fragmentation and decoupling, the bumpy recovery after three years of pandemic upheaval, or the rise in inflation over the past four years Oil prices increased by 38 percent since 2019, Natural gas prices In Europe, prices rose by 133 percent, food prices rose by 46 percent and fertilizer prices rose by 93 percent. But intuitively they must know that the danger is serious. It is impossible to believe that Russia’s invasion of Ukraine did not take place a massive polarizing effect on global patterns of economic engagement. The same goes for the U.S. shift to “Made in America” policies and subsidies, its technology war with China, and its changing stance on the multilateralism that it has shaped and promoted for decades.
Further evidence of a major risk of fragmentation is clear. Since the paralysis of the WTO’s trade dispute settlement mechanism, there has been a surge in trade restrictions, from an average of 500 restrictions per year between 2013 and 2017 to 1,500 in 2020 and 2,800 last year.
According to a Reuters report, 29 international trade disputes are pending over the deal’s sidelining WTO dispute settlement mechanism. The number of “trade issues” officially reported by WTO members rose from 31 in 2016 to 130 last year. Keith Rockwell, the WTO’s longtime communications chief and now at the Hinrich Foundation, summed up the precarious state of multilateralism when he noted that the WTO is “teething on the precipice of irrelevance.”
The US remains key to saving the World Trade Organization, but will it do so?
Even though the data is still sparse and difficult to interpret, companies around the world share the fear of fragmentation. The Paris-based International Chamber of Commerce is already coming to the worst conclusion: “Technology is being nationalized and weaponized to ensure national security or strategic autonomy,” it recently reported.
Next week, numerous leading economists will gather in Marrakesh to vividly describe the costs and dangers of economic fragmentation and call for an urgent return to multilateral cooperation.
Unfortunately, they will likely whistle in the wind as many of the world’s most powerful countries continue to dig deeper and deeper protectionist trenches. There is no telling how long it will take for them to realize the folly of their decisions.
David Dodwell is CEO of trade policy and international relations consultancy Strategic Access, which focuses on developments and challenges in the Asia-Pacific region over the past four decades
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