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“Longstanding downside risks” to trade outlook

The OECD has attempted to put a positive spin on the trade message emanating from its latest economic outlook, released last week.

The intergovernmental organisation points to various trade agreements – including the US-China Phase I agreement signed earlier this year, recent free trade agreements between the EU and some Asian partners and Mercosur, and a recent noticeable increase in trade-facilitating measures – as signs that progress has been made in easing restraints on international trade. Add to this the agreed Regional Comprehensive Economic Partnership between China, Japan, Korea, Australia, ASEAN countries and New Zealand which encourages trade between those partners.

But the OECD Economic Outlook, Volume 2020 Issue 2 still foresees an uncertain outlook for trade with many “longstanding downside risks” affecting the global trade outlook.

“Some of the distortionary barriers to trade introduced around the world over the past two years are still in place,” said the OECD. “Tariff and non-tariff barriers remain high, and continue to limit global trade.”

The OECD projects that world trade will continue recovering slowly, rising on average by around 4.25% per annum over 2021-22, after declining by 10.25% in 2020. “The trade decline in 2020 is broadly similar to that seen during the Global Financial Crisis, despite the much greater fall in activity during the pandemic. In part, this reflects the sharp fall in consumer demand in services where trade intensity is low.”

Laurence Boone, the OECD’s chief economist, anticipates that global GDP will reach pre-pandemic levels by the end of 2021. Global GDP is projected to rise by around 4.25% in 2021 and a further 3.75% in 2022. “The exceptional fiscal relief provided throughout 2020 – and needed beyond – will pay off handsomely,” he said. “The rebound will be stronger and faster as more and more activities re-open, limiting the aggregate income loss from the crisis.”

Ups and downs

Under the OECD’s upside scenario – which considers the impact of a stronger boost to the confidence of consumers and companies, raising the prospects of a stronger rebound in spending and output – world trade growth strengthens substantially, rising by around 3.75% (relative to baseline) in 2022, boosting exports in all economies.

However, the downside scenario, characterised by heightened uncertainty and additional costs, could see a significant drop in global trade demand, with trade growth declining by over 7% in 2021, relative to the baseline.

The OECD also points to the continued uncertainty surrounding Brexit which is weighing on trade growth prospects. “Recent scenario analyses suggest that a no-deal exit of the United Kingdom from the EU Single Market would hit activity in the near term and continue to have strong negative effects in the medium term. It would entail physical and financial disruptions of different magnitudes across sectors, with exports falling by more than 30% in a few manufacturing sectors (notably the motor vehicle and transport, meat and textile sectors) and by almost 20% in the financial and insurance sector.”

Compounding the depressing trade environment are other Covid-19-related downside risks. For example, the rapid move by countries to tighten trade restrictions early in the pandemic – particularly in Europe and North America – caused uncertainly that was not entirely resolved by the lifting of those restrictions. “In the event of a substantial weakening in the recovery, with a new surge in global demand for medical supplies, a risk is that such restrictions could be reintroduced,” said the OECD.

Added to this, widespread disruptions and shortages for some essential products have revived discussions about the costs of the international fragmentation of production, said the OECD. “Reductions in trade dependency, including repatriating production, are seen as a potential way of reducing risk, but could also impose substantial efficiency costs. Besides, attempts to relocate production can weaken diversification, which reduces the scope for adjusting to shocks.”

Uneven recovery

Key to trade prospects for next year and beyond, the OECD projects that the recovery will be uneven across countries, potentially leading to “lasting changes in the world economy”, said Boone, highlighting China for its early recovery and strong growth projections, with it predicted to account for over one-third of world economic growth in 2021.

More broadly, OECD economies will rebound at 3.3% in 2021, but recovering only partially from the deep 2020 recession. Further, Boone notes that the contribution of Europe and North America to global growth will remain smaller than their weight in the world economy.

In a final compassionate plea to global governments, Boone shone a spotlight on international co-operation to facilitate trade. While the Global Financial Crisis only hit a handful of the world’s advanced economies, the response was resoundingly co-operative. But with the Covid-19 pandemic – the first fully global crisis since World War II – national responses have been overshadowed by closed borders and comparatively little co-operation.

“Protectionism and shutting frontiers are not the answer: they prevent the distribution of essential goods throughout the world and penalise economies that rely on their participation in global value chains to catch up,” said Boone. “This must be reversed.”

The OECD calls for “wide, rapid and generous production and distribution of effective medical treatments and vaccines” for all countries and enhanced multilateral action on debt transparency, including a moratorium where needed.
“The world must avoid the health and economic crisis also becoming a financial one,” concluded Boone.
Source: Baltic Exchange

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