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Trade war, its implications for LDCs, SSA and small states

Mohammad A. Razzaque and Syed Mortuza Ehsan c | Published: April 17, 2019 21:06:02


The 2008 global financial crisis gave rise to an anti-trade and anti-globalisation sentiment, with many countries, particularly those in the G20, adopting protectionist measures aiming to protect their financial and real sectors from external competition. After decades of liberal policies and increasing international cooperation, these measures over the past several years have resulted in a heightened policy uncertainty affecting global trade and investment flows. These measures have also resulted in deteriorating trade relationships among the major economies of the world.

An important component of global trade turmoil has been widespread US trade policy reversals and the subsequent retaliations of other major countries. Since its 2016 presidential election, the USA has engaged in major policy shifts, creating tensions among trade partners and stakeholders. Imposing renegotiation of the 24-year-old North American Free Trade Agreement (NAFTA) and pulling itself out of the Trans-Pacific Partnership (TPP) trade deal were the initial major steps indicating major changes to US trade policy regimes. The USA also had issues with its traditional trade partners and allies such as the European Union (EU), resulting in escalating tariffs. In another major development, China and the USA got involved in a trade war when the latter's imposition of tariffs induced retaliation from the former.

Among others, the International Monetary Fund (IMF) estimates the potential impact that might result from the USA-China trade war and growing trade tensions across the world (IMF 2018). Simulation analyses capture several channels through which the rising tide of trade restrictions in the world can affect global economic activities. The results show that global gross domestic product (GDP) would fall by more than 0.8 per cent in 2020 as a result of an escalated trade war involving the world's two largest trading economies. According to an IMF study, the adverse effects of trade restriction would be quite large for China and the USA. The World Bank (2018) estimates that a full-blown trade war will lead to a 9.0 per cent decline in global trade, which would be comparable to the drop experienced in the aftermath of the global financial crisis. The same study also points out that a 1.0 per cent decline in growth in the USA, China or the euro area could reduce growth in overall developing economies over a year or two by up to 1.1 per cent.

This rise of reciprocal trade restrictions and uncertainty over global trade and investment flows can potentially result in significant adverse impact on the global economy's overall growth, especially those impacting the poorest, smallest and most vulnerable countries such as those in LDCs (least developed countries), small states and SSA (sub-Saharan Africa). Increases in tariffs and corresponding reductions in import demand from major economies are likely to have adverse distributional effects and can negatively impact poverty and income inequality in those countries. This also has far-reaching impacts on the labour market, raising the level of unemployment. Developing countries rely heavily on imported machinery and capital goods whose prices are rising because of the unfavourable situations in the global trading environment. Although world trade in metals, machinery and chemicals are the sectors most affected by the protectionist measures, barriers affecting the agricultural and food sectors have been gaining prominence. If sustained, these will severely and disproportionately impact exports of the poor and developing countries that are highly dependent on agricultural production and exports. The higher the reliance of an economy on external trade, the more adversely affected it will be from protectionist measures and trade war.

As per information provided in the UNCTAD (United Nations Conference on Trade and Development) database, of the US$302 billion of merchandise exports in SSA in 2017, 7.0 per cent went to the USA and 15 per cent to China. In the same year, of LDCs' total merchandise exports of $168 billion, 8.0 per cent was USA-bound while another 22 per cent went to China. As for the small state economies, 11 per cent and 9.0 per cent of their merchandise exports of US$81 billion went to the USA and to China respectively. Given these country groups' dependence on China and the USA, any trade disruptions involving the two biggest world economies are bound to have serious consequences. Since the most recent round of trade slowdown, LDCs, SSA and small states have already suffered from adverse trade and growth prospects. Results from the available studies seem to suggest that among several sectors that are likely to be most adversely affected by the trade war and protectionist measures are the agriculture and food sectors. Consequently, LDCs, SSA and small states that are highly reliant on agricultural outputs and exports are likely to be most adversely affected by the ensuing USA-China trade war.

Many LDCs, SSA countries and small states are granted preferential market access to the USA under the Generalised System of Preferences (GSP) facility.  Similarly, LDCs also receive duty-free market access in a wide range of products in China.

 It is a matter of concern that during times of global crisis when countries resort to protectionist measures, poor and vulnerable countries can be badly affected. For instance, Evenett and Fritz (2015) found that LDCs had incurred a loss of about one-third of their total exports owing to the protectionist measures implemented between 2009 and 2013.

The trade war can have a far-reaching impact if it is going to generate weakened demand for imports by China and the USA. Many poor and vulnerable countries, especially small states, have a small domestic market, requiring them to rely more heavily on trade for economic growth than many other countries, and thereby they become subject to disproportionately greater adverse consequences from global trade crises. An analysis of a simple measure of association reveals that on average there is more than a one-to-one correspondence between world trade and trade of LDCs, SSA and small states. That is, a 10 per cent fall in global exports could lead to a close to 15 per cent decline in exports of the three country groups combined.

World trade is in crisis in a manner unprecedented for many decades. Recent trends seem to suggest that trade policy regimes in major economies could change fundamentally, giving rise to profound implications for the world's poorest, smallest and most vulnerable economies. Although the tariff war involving China and the USA draws intense focus, world trade is also going through some structural changes, complicating the situation further. The impact of the global financial crisis of 2008 on global trade flows was actually a short-lived one, but more recent trade turmoil since 2015 could signal a new lower level of trading activities persisting. It appears that future long-term growth rates would be much lower than that of the period 1980-2007 (of more than 6.1 per cent). Another major development is the weakening relationship between trade and GDP growth. In the three decades prior to the global financial crisis, an average annual global output growth of 3.0 per cent was accompanied by a 6.0 per cent trade growth. In the post-financial crisis period, both GDP and trade grew at an average annual rate of just 3.0 per cent. This has resulted in reduced trade orientation in the world economy. The gloomy trade prospects have further been worsened by protectionist measures undertaken by many developed and large developing countries in the wake of the global financial crisis and their failure to rollback those interventions over time. China's settling lower economic growth, structural changes in economic activities focusing on more consumption of services and higher domestic value-added manufacturing production are also causing reduced trade linkages. Finally, US policy shifts and proactive trade policy measures going beyond the world trading system overseen by the World Trade Organisation (WTO) have seriously hampered the global environment's conduciveness to international trade and investment flows.

WHAT DOES ALL THIS IMPLY FOR THE WORLD'S POOREST, SMALLEST AND MOST VULNERABLE COUNTRIES? First and foremost - as this paper has highlighted - since the global financial crisis of 2008, LDCs, small states and SSA have witnessed a lost decade of gains from trade in the sense that each of these country groups' combined trade hardly expanded. Robust trade performance during the late 1990s and early 2000s resulted in LDCs' and SSA's rising global trade shares, which have been reversed. However, the diminishing relative significance of small states has accelerated. The sustained trade crisis has already jeopardised one specific target of the SDGs as agreed by United Nations members, in which the preset objective of doubling the share of LDCs in global exports (to 2.1 per cent) by 2020 now appears to be unachievable. The average growth in exports of LDCs, small states and SSA over the past five years (2013-17) has been negative. The analysis presented in this paper has also revealed a rather dramatic declining export orientation (i.e. export-GDP ratios) for these groups of countries. Small states are critically dependent on trade for their economic activities and thus the falling significance of exports in these economies would have serious consequences. The long-term association between exports and GDP has weakened over the past two decades, suggesting that improved growth prospects could be difficult if the trade slowdown persists. There are thus reasons for apprehension that the role of trade in contributing to countries' overall economic development, at least in the short to medium term, is likely to be limited.

This would be particularly unfortunate since, unlike its predecessor, the 2030 Agenda for Sustainable Development (SDG) provides an elaborate role for international trade - both direct and cross-cutting - in achieving many specific goals (SDGs) and targets. The Millennium Development Goals (MDGs), implemented during 2000-2015 explicitly mentioned 'trade' only once (under MDG 8 relating to global partnerships), while in the SDGs it appears directly under seven goals concerning hunger, health and wellbeing, employment, infrastructure, inequality, conservative use of oceans and strengthening partnerships. All in all, the word 'trade' has been used 19 times in the text of the SDG document. However, if the current global trade turmoil and the resultant weakness persist, the first decade of the SDG implementation period could be the slowest era of trade expansion in many decades. Trade tensions can result in reduced levels of global commitments for trade-led development. This could be reflected in donors' support for trade capacity building as well as developing countries' own initiatives in improving supply response. In any event, the confidence of the private sector will be weak given the intensified policy uncertainty and ambiguous export market prospects. As international trade promotes efficiency gains through improved resource allocation and improved competition, the absence of a conducive world trading environment would restrict developing economies' capacity to benefit from those.

Nevertheless, attaching less importance to trade is not an option for LDCs, small states and SSA. While certain relatively large economies within these country groups might be able to stimulate domestic demand, thereby expanding economic activities, this cannot be sustained for long given their limited fiscal capacities. On the other hand, for many small states this is unlikely to be a viable choice given their overwhelming dependence on trade and their relatively small fiscal space. Furthermore, the role of trade in efficiency gains and other externality effects should be borne in mind. Therefore, countries should continue to build their trade capacity including export supply response and trade-related institutional development. Making progress in these areas takes time, and efforts should not be discouraged by the stagnation in global trade.

One important finding of this paper is the rising significance of LDCs, sub-Saharan African countries and small states trading with other developing countries. This trend emerged in the late 1990s and has remained more or less unaltered in the aftermath of the 2008 financial crisis and more recently of the world trade slowdown. LDCs, SSA and small states should therefore aim to further expand their trade with the Global South while exploiting any market access advantage in their traditional export destinations in developed countries. Expanding trade through regional engagements could be another strategy for LDCs, SSA and small states. Numerous analyses and discussions have shown that the trade potential of regional trading arrangements involving developing countries has remained largely unutilised. Furthermore, effective implementation of many of these agreements has been either very slow or non-existent (Commonwealth Secretariat 2015). This is an area that requires serious attention, as with growing incomes many neighbouring countries and developing country partners within regional trading arrangements can be sources of increased export demand.

Non-tariff barriers, lack of trade facilitation measures and weak connectivity are known to restrain trade response in most trading blocs involving developing countries. Addressing these issues can be aligned with the overall development objectives of individual countries in LDCs, small states and SSA.

The current state of trade turmoil also reflects in a profound way the weak state of the multilateral trading system that has now long persisted. Failure to make progress and conclude the Doha Development Round has greatly damaged confidence in the WTO system. The current crisis shows that the world's poorest and smallest countries are so vulnerable in the absence of a strong multilateral trading system that they become victims of others' aggressive trade policy choices. Therefore, it is time to consolidate efforts and advocate for renewed trade multilateralism. While it may not be easy at this stage given the unfolding nature of the crisis, proactive engagements and raising global awareness of the catastrophic impact of unresolved trade disputes and disregarding multilateral trade rules can help reduce the tensions and contain the damage.

Finally, LDCs, small states and SSA should co-ordinate among themselves and work with other regional and international stakeholders to engage with development partners so that trade- and development-related international commitments are maintained. How the expected positive impact of global trade in achieving SDGs is being undermined and what the global community should do in response to it should be a critical first step to consider. It is also important for LDCs, sub-Saharan African countries and small states to collaborate and look for trade-related adjustment support, either as part of the Aid for Trade initiative or beyond, as the trade turmoil adversely affects their export performance.

Dr Mohammad A Razzaque, is Senior Fellow for International Trade and Globalisation at Bloomsbury Institute London, UK, and Director, Policy Research Institute of Bangladesh (PRI).

Dr Syed Mortuza Ehsan is Assistant Professor, Department of Economics, North South University, Dhaka.

Excerpted and slightly abridged from The Commonwealth International Trade Working Paper titled ''Global Trade Turmoil: Implications for LDCs, Small States and Sub-Saharan Africa' written by the authors.

 

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