The global outlook
As per a recent report published by the World Bank, the global economy is set to showcase a growth of 5.6% in FY 2021 compared to a 3.5% contraction witnessed in 2020 due to the outbreak of the COVID-19 pandemic. This is inevitably the strongest post-recession or post-pandemic growth shown by any fiscal year in 8 decades.
The recovery, however, is uneven across the globe. Many nations such as the United States, China, Vietnam, Russia, etc., are showing sharp rebounds due to substantial financial support and an educated population.
Meanwhile, in emerging markets and developing economies (EMDEs) such as India, Mexico, Japan, Chile, etc., increased cases of COVID-19, obstacles in the availability of vaccination, and a significant withdrawal of macroeconomic support, together are causing a delay in their recovery. They’re losing out on the benefits of global imports & exports, which is not only affecting their overall growth but the prices of many essential commodities in both domestic and international markets.
At the current growth rate, it is expected that by 2022 the global output will only show a rise of 2%, still below the pre-pandemic projections forecasted by international market veterans. Additionally, the loss in per capita income incurred in 2020 will continue to remain the same, especially among the EMDEs.
Amidst the expected FY 2021 growth rate, the international trade market continues to remain at the mercy of COVID-19 as the world has (in the past) and is still expecting to witness many more pandemic waves.
The virus continues to mutate at an exceptionally vast scale. New variants are being diagnosed now and then in some or the other part of the world. This alternative and ongoing distress is creating a significant financial burden among the EMDEs and even adding to their already huge debt levels.
Controlling the spread of the corona virus across the world is the only practical solution to curb the ever-increasing commodity prices and the fiscal sustainability of all nations. Global policymakers are also taking necessary steps to promote growth-enriching reforms and pushing world economies towards adopting a green, resilient, and inclusive development path.
The regional perspective
Compared to the global economic recovery rate, that of EMDEs will continue to show insufficiency. Industry veterans claim that even in 2022, the output of all regions will remain below the pre-pandemic predictions and will weigh down further if the world experiences any more COVID-19 waves such as the one that broke out in April 2021. If that happens, the debt load of many countries will increase, which will, in turn, cause significant damage to many potential output drivers.
The recovery in small and tourist-dependent countries such as Thailand and Indonesia is expected to be particularly weak as travel restrictions will remain the same until the pandemic is brought under control.
On the other hand, East Asian and the Pacific countries are expected to show the strongest recoveries, majorly due to the strength of China.
In South Asia, industry veterans were initially vouching for the Indian economy to bounce back faster than its neighboring nations. However, the dreadful episode of the COVID-19 second wave marked the largest outbreak in any country since the beginning of the pandemic and has changed all perceptions.
In the Middle East, North Africa, the Caribbean, and Latin America, the pace at which the countries are growing or recovering in 2021 is way lesser than the magnitude of contraction seen in these countries in 2020.
The tepid recovery in Sub-Saharan Africa will make some progress in the positive direction reversing the increase in extreme poverty caused by COVID-19.
On a global graph, the risk of the pandemic continues to tilt in the upward direction. However, nations are trying their level best to reduce these vulnerabilities, financial stress, and debt levels. Although the virus will continue to disrupt the global economic activities, growth will still benefit from the development of vaccines and the rapid recovery of major economies like the United States, the Euro area, and Japan.
High Trade Costs: Causes and Remedies
As the world economy tries to rebound from the recession caused by COVID-19, the escorting strength in international trade serves as an excellent opportunity for nations, especially EMDEs, to jumpstart their recovery and stabilize their economies. Lowering cross-border trade prices may aid the revival of global business and activities.
On average, the cost of goods traded in the international market doubled in 2020 compared to domestic goods. If you look at the current tariffs, they account for only one-fourteenth of the average goods being traded. A major chunk of this trade cost is being incurred in shipping and logistics activities as well as tedious trade processes.
Although the prices fell for the first time since 1995, trade costs remain higher in EMDEs than in advanced economies. Of this, nearly one-third of the gap is due to higher shipping and logistics prices, and another one-third is because of the cumbersome trade policies.
Also Read: Rise in shipping charges flair retail prices
Looking at the current scenario, a comprehensive reform package is needed to lower the skyrocketing trade costs, which should include:
- Measures to facilitate trade activities
- Deeper trade liberalization efforts
- Streamlining trade processes and clearance requirements
- Better transportation infrastructure
- More competition in the domestic logistics, retail, and wholesale trade markets
- less corruption
It is believed that some of these measures have the potential to yield huge benefits. Among the EMDEs currently performing the worst from a global perspective, implementation of hypothetical reforms could improve logistics movement, maritime connectivity, and border processes, bringing down the prices to half of the trade cost.
Emerging Inflation Pressures: Cause for Alarm?
After showing a downward trend in the first half of 2020, global inflation has bounced back quickly on recovering activity. Although global inflation is anticipated to continue to rise even in 2021, industry veterans expect it to remain within the targeted bands, especially in most inflation-targeting nations.
In the case of EMDEs, where recent price pressure has caused a rise in inflation rates above their targeted range, they may not guarantee a monetary policy response, provided they are temporary, and inflation expectations remain well within limits.
Meanwhile, a higher inflation rate can significantly complicate things for EMDEs, especially those that are constantly breaching their inflation targets and heavily relying on expansionary policies to ensure considerable and durable recovery. Strengthening the credibility of central banks can help keep inflation in check in these economies,
Contrary to EMDEs, low-income countries are anticipated to experience a rise in aggregate and food inflation throughout this year, worsening food availability conditions and increasing poverty. Attempts are being made to control food inflation by implementing subsidiaries in many nations.
Sustained, comprehensive global upturn
As stated above, advanced economies like the United States, the Euro area, and Japan are now driving the global recovery. Industry veterans claim that the spillovers from activities in these economies could help undam a large reservoir of pent-up demand. They could further strengthen confidence and even catalyze a streamlined and self-sustaining boom in the global market that pushes international activities to commence above the forecasted baseline, even if some EMDEs continue to experience COVID-19 outbreaks.
A stronger, more durable, and comprehensive global leap is the only plausible way to reduce the scarring caused by the COVID-19 pandemic.
- A robust labor market would attract more discouraged workers to join back the labor force and help their respective economies recover and get back on their feet.
- Faster growth would drive recovery in investment above the forecasted baseline.
- The need to meet an ever-increasing demand could also encourage faster adoption of new technologies amidst economies, especially in the service sector.
- Stronger potential output growth would help keep inflation in check and reduce the debt ratio, especially amidst EMDEs and low-income countries.
A more comprehensive recovery would also mean reaching those vulnerable groups that have been most affected by the pandemic and further help move a large number of people out of poverty.
While the global import & export economy is expected to bounce back by the end of 2021, many complications exist at a micro-level. Sustaining global recovery and tackling the many effects of the COVID-19 pandemic cannot be done by a handful of nations but with the collaborative efforts of all countries, multilateral organizations, and the private sector. The sooner the world economies vaccinate their forces, the sooner trade activities will resume, and the sooner the global economy will rebound to its pre-pandemic mark.
Frequently asked questions
What are the trends in international trade?
- Merchandize volume in the global trade market is anticipated to increase almost 8.0% in 2021 after a down-turn of 5.3% in 2020.
- In 2022, trade growth will most probably show an increase of approximately 4.0%, considering new pandemic waves cause less disruption. The number remains below the pre-pandemic trend.
- Global GDP at market exchange rates will likely increase by 5.1% in 2021 and 3.8% in 2022, after contracting by 3.8% in 2020.
- The falling prices of oil have led to a contraction of 35% in fuel trade in 2020. The graph is expected to show some positive turn in the coming months.
- Travel restrictions continue even in 2020 and are not expected to fully recover until the pandemic fades away completely.
What are 3 benefits of international trade?
Trading in the international market offers many benefits. Some of them are as follows:
- Availability of a greater variety of goods for consumption: Global trade gives countries the leverage to choose from a wider variety of goods that are either not available in their nation or accessible at a better (cheaper) price in the international market.
- Efficient allocation and better utilization of domestic resources: International trade allows nations to concentrate their energies on producing goods they enjoy a competitive advantage. For instance, India is the largest producer of milk, pulses, and jute, and has fewer reserves as oil. So, to utilize its resources better, it will continue to produce more quantities of milk, pulses, and jute and procure oil for the Middle East nations. This serves as a win-win situation for everyone.
- Promotes production efficiency: Global trade promotes production efficiency as nations will try to adopt better production methods to keep the cost of their goods down to remain competitive at a global scale. A nation that can produce goods at the lowest possible price will gain a larger share in the world trade market. For instance, China offers the cheapest electronic components in the world. Hence, a major chunk of electronic companies source their raw materials from China.
How does international trade affect globalization?
Globalization has increased the interaction and interdependence of nations on one another. The phenomenon has resulted in better and greater interconnections among different markets and increased awareness of business opportunities in the world’s far corners. Today, more investors can access better investment opportunities in nations that were once difficult to tap. For instance, through globalization, many multinational companies have been able to establish their bases in potential markets and have gained huge profits. Walmart, Amazon, eBay, Apple, etc., are some examples to quote here.
Globalization initially accelerated in the 18th century due to advancements in the field of communication technology and transportation. Products and services available in one country are now accessible to a larger audience base at a competitive price, thanks to globalization. Additionally, nations with good relations between them have been able to unify their economies through increased investment and trade and benefited much from the unification.
Products and services previously available within one country are made available to new markets outside the country due to globalization. In addition, countries with positive relations between them are able to increasingly unify their economies through increased investment and trade.
Is international trade increasing or decreasing?
Over the past 7 decades, International trade has increased at an exponential rate. It would be appropriate to say that international trade has become an indispensable part of the world economy. Global exports stood at USD 61.81 billion in 1950. The numbers have staggeringly increased to USD 19 trillion in 2020, increasing 8.56% in 70 years.
Today, China stands as the largest source of goods exported globally, with total export merchandise valuing at about USD 2.5 trillion in 2019. Meanwhile, the United States is the largest importer of merchandise in the world as of 2019. The global superpower accounted for nearly 18% of the world’s merchandise imports.