Global economy is at crossroads. Not only has the world economy witnessed a slow down, but it is also faced with enormous challenges arising from growing economic barriers to international trade.

GLOBAL ECONOMIC SLOWDOWN

According to the estimates of International Monetary Fund (IMF), the average growth rate of world economy for the period 2011-2018 is 3.65%, lower than 3.9% recorded in the preceding decade 2001-10 (IMF, World Economic Outlook, October 2019). 

The world economy is clearly on the downward trend now; it is projected to grow at 2.9% in 2019 compared to 3.6% in 2018. The current global economic slowdown is featured by slowdown across the advanced countries and emerging market and developing economies.  While advanced economies are expected to grow at 1.7% in 2019 against 2.2% in 2018, the emerging market and developing economies to grow at 3.7% in 2019 compared to 4.5% in 2018. Some of the countries that account for bulk of output of advanced countries like the United States (US) is expected to grow at 2.3% in 2019 compared to 2.9% in 2018 and countries in Euro area such as Germany, France, Italy, Spain and so on, are set to record an annual growth of 1.2% in 2019 against 1.9% in 2018. Canada’s output is expected to decline to 1.5% in 2019 from 1.9% in 2018. In contrast, output of Japan is expected to grow at 1.0% against 0.3%, and of United Kingdom to remain unchanged at 1.3% during the same period. Amongst the emerging and developing countries, China and India could be singled out.  Both these Asian countries are expected to grow at a slower pace in 2019 compared to 2018; China is expected to grow by 6.1% and India by 4.8% in 2019, against their respective growth of 6.6% and 6.8% in 2018 (IMF, World Economic Outlook Update, January 2020).

SLUGGISH TRADE UNDERMINING GLOBAL ECONOMIC GROWTH

The ongoing slowdown may be ascribed to several factors; growing political tension amongst nations such as drone attacks on oil refinery facility in Saudi Arabia have given rise to uncertainty in the movements of international oil prices. Indeed, there is uncertainty looming over everything- in political diplomacy as well as in economic diplomacy. This has particularly influenced business decisions. Businesses have deferred buying equipment and machineries leading to a depressed state of production of capital goods. There is also a slump in car manufacturing because of changing emission norms and technology. Resulting from all these factors is the major injury inflicted on international trade, which has been lubricating world economic growth for a while now. Taking cognizance of these situations, the IMF subtly notes: 

“With the slowdown in industrial production, trade growth has come to a near standstill. In the first half of 2019, the volume of global trade stood just 1 percent above its value one year ago—the slowest pace of growth for any six-month period since 2012” (World Economic Outlook, October 2019, p 1).

Thus, the present crisis faced by global economy is one that encounters trading arrangements amongst countries and the recent developments in this pose challenges to global economic order in a manner that has almost undone what has been achieved over the last three decades in the arena of global trade.  

PROTECTIONISM IN RECENT MONTHS AMONGST THE GLOBAL POWERHOUSES:

Recent months have witnessed a tariff war between the US and China; both have already delivered four significant rounds of tariff since July 2018. To begin with, the US imposed tariff of USD 36 billion on Chinese goods and China retaliated in equal measure. In August 2018, the US further imposed USD 16 billion on Chinese goods and China did the same on the American goods. Again, in September 2018, the US increased tariff to USD 200 billion on Chinese goods, and China retaliated by imposing USD 60 billion of the US goods. The US continued imposing tariff in May 2019 with USD 200 billion, and Chinese retaliation came a month later when it imposed to the tune of USD 60 billion. On the face of it, the tariff rate ranges anywhere up to 25%, by both countries. 

For a very long time, the US has been complaining that China did not import from it adequately, leading to a whoppingly high trade deficit of the US with China. As per the statistics provided by the Office of the United States Trade Representative, for instance, in 2018 the US imported USD 558 billion of goods and services from China, whereas it exported USD 179 billion to China, thus, having goods and services trade deficit of USD 379 billion with China. The US has goods trade deficit of USD 419 billion, whereas it has services trade surplus close to USD 41 billion with China. There is a clear-cut pattern in the advantage of nations; the US has advantage in services and China in goods. Since one’s advantage is likely to outweigh the others’, the escalation of tariff war is not unexpected.

The respite is that leaders of both economies have come together to end the tariff war. On January 15, 2019, Donald Trump, the President of the United States and Liu He, the Vice Premier, China, signed the US-China ‘phase-one’ trade agreement, which seeks to end the tariff war. However, this has been received with mixed reaction by economists because of the commitment it contains, whereby China needs to import goods and services worth more than USD 200 billion over 2017 level and strengthen its intellectual property rules. In return, the US administration is likely to reduce the tariff on Chinese products by a half. While this is a wholesome welcome, the fact of the matter is that the tariff war is far from over, yet. Just in case one of the trading partners fails to meet their commitments, it is certain to set off yet another tariff war.

It is not only that these major powerhouses are at loggerheads, but the other fastest developing country like India has begun to practice somewhat inward-looking strategy. A case in point is its decision to withdraw from the Regional Comprehensive Economic Partnership (RCEP), which is a free trade agreement amongst the 10 Association of Southeast Asian Nations (ASEAN) and its six trading partners such as India, China, South Korea, Japan, New Zealand and Australia. If RCEP would become a reality, it would have brought together nations that have 2 billion population and account for one-third of global income. India has pulled out of the RCEP because of the fear of surge in import from China. The fear is not misplaced as India’s trade deficit with China is about USD 50 billion. Once Indian market is flooded by Chinese goods without any safeguards against import surge, they are likely to wipe out domestic production and will go against the government’s thrust on its project of ‘Make in India’.

In fact, India’s recent restrictive trade approach has transcended economic logic. Apparently, the Malaysian Prime Minister has made certain comments against India’s recent internal issues. This has not been received well by the government and the result is that its trade with Malaysia has been restricted. To quote a local newspaper: 

“India, the world’s largest buyer of edible oils, last week restricted imports of refined palm oil and effectively halted all palm oil purchases from Malaysia in retaliation over the Prime Minister Mahathir Mohamad’s comments on Kashmir and citizenship law.” (Times of India, January 17, 2020)

It now appears that countries are racing in erecting trade barriers – tariff as well as non-tariff barriers for a variety of reasons. These trade barriers seek to ensure market for domestically produced goods and reduced import dependence; in other words, protectionism is ruling the day.

FREE TRADE WITH FAIR RULES

The major challenge faced by global economy is ensuring free trade with fair rules. Protectionism is basically an ideologue which the US has time and again opposed. Ever since the Uruguay Round, the US joined hands with other like-minded countries to ensure inclusion of trade promoting provisions in the Charter of World Trade Organisation (WTO). After becoming WTO members, developing countries in particular had to reduce protection given to their domestic firms. 

As maintained by proponents of free trade, countries expect to enhance their economic welfare by participating in world trade. When world trade takes place under the WTO umbrella on the principle of national treatment, economic welfare of trading nations is expected to go up.   

The US has been championing the cause of globalization by providing market access to foreign firms and is simultaneously gaining too. A win-win situation was painted in its trade policy. Given its size, the US market is significant not only for its trading partners belonging to North American Free Trade Agreement (NAFTA) or G8, but also for many emerging economies like India, China and Brazil.  Denial to market access will not augur well for international trade and, hence, for world economy.

SMOOTHENING TRADE IS A CURE FOR THE AILING GLOBAL ECONOMY

Economic slowdown, as it has been witnessed, in many of these countries has gone hand in hand with slowdown in international trade. When large economies like the US use tariff measures, they can potentially reduce world trade, as it had happened at the beginning of Great Depression when many countries clamped trade barriers by using tariff. Trade barriers can adversely affect the business of its trading partners and the trade linkages in the rest of the world.  

If major economies impose trade barriers, developing nations like China and India will become the most affected ones. These are the nations which have experimented with trade liberalization policies in the last few decades.  They have become more outward looking with the expectation that they would gain market access in developed countries and that their access would not be contained. No doubt, these countries also have the option of reversing their trade policies, if they are denied market access; thus, further exacerbating the international trade.  Given the fact that they are small countries in international trade, whether they will be able to retaliate in equal measure remains a moot question. 

Major challenge for global economy is, therefore, ensuring orderliness in international trade, such that the world trade should not be reduced to a zero-sum game; in which one trading partner wins and the other loses. It’s time that all global powers work together and strengthen the WTO that seeks to promote free trade and ensure orderly flows of goods across the border. The present global economic circumstances call for strenuous collective efforts of global communities to address the ongoing crisis.  

ABOUT THE AUTHOR

 Dr. J. Dennis Rajakumar is the Director of Economic and Political Weekly Research Foundation, Mumbai. He received his Ph.D (Economics) and M. Phil (Applied Economics) from Jawaharlal Nehru University, New Delhi through Centre for Development Studies, Thiruvananthapuram. He was Charles Wallace India Trust Visiting Research Fellow at The Management School, The University of Edinburgh, Edinburgh, UK (February – April 2005). His research interests include applied macro economics, applied financial economics and studies of corporate sector in India. He has published several research papers.