Spring 2022 Economic Outlook: Geopolitics and Geoeconomics – International Trade and Investment

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Introduction and summary

International trade and investment is a crucial channel through which economies and individual firms specialize, innovate, become more productive and increase incomes, output and employment while controlling input costs and inflationary pressures through to a competitive offer.

Today, several factors combine to cloud the outlook for trade and investment, posing new challenges for global and national economies and for businesses that have global reach and potential.

  • covidThe impact on supply and demand continues, with new waves of infection still likely and political responses and consequences largely unpredictable.

  • The Russian-Ukrainian Warand the sanctions in response, are also likely to have a continuing impact on the prices and availability of energy, raw materials and products, as well as on transport on a global scale.

  • United States-China trade relations remain subject to additional tariffs and restrictions affecting certain goods and investments and, more importantly, intense geopolitical rivalry.

  • American trade policy in the run-up to the mid-term elections are characterized by broad protectionist sentiment.

  • The multilateral framework of the World Trade Organization (WTO) does not keep pace with a changing world, pushing many countries to forge new rules through regional and plurilateral initiatives which, in turn, fragment the body of rules.

  • Increased attention to energy transition and decarbonization and more generally to environment, social and governance (ESG) These considerations may introduce new cross-border challenges, for example adjustments to carbon borders to align with a national carbon price and multi-jurisdictional anti-corruption investigations.

  • Close to the house, relations between Canada, the United States and Mexico under the Canada-United States-Mexico Agreement (CUSMA) are increasingly contentious.

This volatile, disrupted and highly uncertain international economic environment will require the agility and foresight of governments and businesses to continuously anticipate and adapt to changing trade and investment patterns and the changing supply chain configurations.

Specifically, companies must remain alert to rapid and frequent changes in trade and investment rules and regulatory requirements, including sanctions, border controls and financial records where they do business. A forward-looking analysis of emerging risks and opportunities should be undertaken regularly.

Short term outlook

Despite the recovery in activity following the COVID-related lockdowns in most parts of the world, the outlook for global trade and investment is clouded by a number of factors and aggravated by the war in Ukraine. After trade in goods and services rebounded in the fourth quarter of 2021, in April the WTO forecast only 3.0% growth in the volume of trade in goods for 2022, well below its previous forecast of 4.7%. As cross-border investment returned to pre-COVID levels last year and funding for international infrastructure projects provides some momentum, the United Nations Conference on Trade and Development (UNCTAD) was predicting even before the war that the underlying growth of international investment would be relatively muted.

The diminished short-term outlook for trade and investment is mainly due to supply-side factors. As this economic outlook highlights, the global economy is currently characterized by supply shocks, the political and economic causes and consequences of which combine to complicate relations between countries and trading blocs and regions. As Bank of Canada Senior Deputy Governor Carolyn Rogers said in early May:

“What started as narrowly targeted problems in a few key products – like computer chips – has spread to a wide range of products. The invasion of Ukraine has intensified supply chain problems and made driving up commodity prices and inflation around the world. And large parts of China are now under a new lockdown, leading to further supply issues, transport backlogs and uncertainty.”1

Rising costs and accelerating inflation in turn depress confidence and dampen demand, further depressing trade and investment.

The effects of global developments on trade and investment, as well as the configuration of supply chains, deserve constant attention from governments and businesses. Immediately, this includes assessing the continuing effects of COVID, the Russian-Ukrainian war, government responses, relations between Western economies and China, trade policy and politics in the United States and Mexico, and the weaknesses or shortcomings of rules-based multilateral frameworks. and the fragmentation of the body of trade and investment rules. Attention should also be paid to other factors, such as environmental policy and labor standards, which may have a greater impact in the medium term.

These factors are reviewed below.

Factors Affecting Trade and Investment

A.COVID

The virus has kept workers at home, away from factories, offices, ports, customs or other workplaces, halting production and transport by road, rail, air and ship, and contributing to shortages in supply of various goods, with widespread side effects. In what has been described as the “economic contagion” of COVID2, disruptions have worked their way through supply chains. Manufacturing sectors in less affected economies have found it harder and more expensive to source needed inputs from the hardest hit countries, and therefore from each other. The automotive sector has been among the hardest hit by the disruption of supply chains: beyond labor constraints, manufacturers and OEMs have been particularly affected by a shortage of semiconductor chips, itself caused by both supply bottlenecks and a surge in demand for personal computers and other consumer electronics. Along with new surges of virus variants, recent shutdowns in several key markets have affected production, transportation and consumption. For example, Shanghai’s busiest container port, through which more than 10% of China’s trade normally passes, only recently reopened – an expected increase in shipments could add to backlogs at west coast ports. from the United States and Canada.

Government responses to COVID, such as import or export restrictions, have exacerbated the negative impact of the pandemic on the supply and access to goods and services across borders, with significant consequences in industries such as pharmaceuticals and medical equipment and supplies, as well as food and agricultural products.

Demand has also been a channel for COVID-induced economic contagion. Although global demand growth in the second half of 2021 and early 2022 was robust, inflation fears are now contributing to a continued decline in consumer sentiment.3 Recent business shutdowns in China have also reduced the demand and therefore the world market for merchandise exports.

B. The Russian-Ukrainian War

The horrific military conflict unleashed by Russian aggression against Ukraine is accompanied by economic warfare and significant trade consequences. Markets in the energy, agriculture and minerals sectors have been most directly affected. As explained in a separate companion document to this economic outlook:
Commodity markets, the impacts on prices and on supply and demand patterns for oil and gas, food, fertilizers and critical minerals have been severe – the European Bank for Reconstruction and Development estimates that 17% global calories are now landlocked. The destruction of roads and bridges and military operations in the main ports have aggravated supply constraints in markets that are sometimes already tight. Actions from third countries further aggravated tensions in the market. For example, in the name of its own food security, India has banned all wheat exports and China has ordered its companies to stop selling fertilizers overseas to preserve domestic supplies. Rapidly rising prices and global shortages are reducing food security and nutrition in the poorest countries and causing hardship for farmers who depend on imported raw materials and/or fertilizers.4

Footnotes

1. “The Bank of Canada, a matter of trust”, speech by Carolyn Rogers – Senior Deputy Governor, Bank of Canada at the Women in Capital Markets conference, May 3, 2022 The Bank of Canada: a matter of trust – Banque de Canada

2. Baldwin and Freeman, The COVID Concussion and the Supply Chain Contagion Waves | VOX, CEPR Policy Portal (voxeu.org)

3. Inflation fears and falling buying conditions prolong the drop in consumer confidence in May – Robert Hughes | WallStreetWindow.com

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