For the first time since the pandemic began, there is now hope for a better future. Progress with vaccines and treatments has raised expectations and uncertainty has diminished. For this reason, the OECD has attempted to put a positive spin on the trade message emanating from its latest economic outlook, published last week, seeking to turn hope into reality.
The intergovernmental organisation points to several trade agreements, including the Phase I agreement between the United States and China signed earlier this year, as well as recent free trade agreements between the EU and some Asian partners and Mercosur, and a recent notable increase in trade facilitation measures, as signs of progress in easing restrictions on international trade. Added to this is the Regional Comprehensive Economic Partnership (RECP) agreed between China, Japan, Korea, Australia, ASEAN countries and New Zealand, which encourages trade between these partners.
But OECD Economic Outlook, Volume 2020, Number 2, still sees an uncertain path for trade with many “long-standing downside risks” weighing on global trade expectations.
“Some of the trade-distorting barriers introduced around the world over the past two years are still in place,” the OECD said. “Tariff and non-tariff barriers remain high and continue to constrain global trade.”
The OECD projects that global trade will continue to recover slowly, increasing by an average of 4,25% annually during 2021-22, after declining by 10,25% in 2020. “The decline in trade in 2020 is broadly similar to that seen during the global financial crisis, despite the larger collapse in activity during the pandemic. In part, this reflects the sharp fall in consumer demand for services where trade intensity is low.”
Laurence Boone, chief economist at the OECD, expects global GDP to reach pre-pandemic levels by the end of 2021. Global GDP is projected to rise by around 4,25% in 2021 and by another 3,75% in 2022. “The exceptional fiscal relief provided throughout 2020, and what is needed beyond, will be worthwhile,” he said. “The rebound will be stronger and faster as more and more activities reopen, limiting the aggregate income loss from the crisis.”
Ups and downs
Under the OECD's bullish scenario, which takes into account the impact of rising consumer and business confidence - improving prospects for a stronger rebound in spending and output - global trade growth is projected to strengthen substantially, rising by around 3,75% (relative to the baseline) in 2022 and boosting exports in all economies.
However, considering a downside scenario, characterized by greater uncertainty and additional costs, there could be a significant decline in global trade demand, with trade growth falling by more than 7% in 2021, relative to the baseline.
The OECD also points to the continuing uncertainty surrounding Brexit, which is affecting trade growth prospects. “Recent scenario analyses suggest that a no-deal UK exit from the EU Single Market would hurt activity in the short term and continue to have strong negative effects in the medium term. It would entail physical and financial disruptions of varying magnitude across all sectors, with exports falling by more than 30% in a few manufacturing sectors (notably the motor vehicles and transport, meat and textiles sectors) and by almost 20% in the financial and insurance sector.”
Compounding the gloomy trading environment are other risks related to Covid-19 – for example, the rapid move by countries to tighten trade restrictions early in the pandemic, particularly in Europe and North America. This led to uncertainty that was not fully resolved by the lifting of restrictions. “In the event of a substantial weakening of the recovery, with a renewed surge in global demand for medical supplies, there is a risk that such restrictions could be reintroduced,” the OECD said.
Added to this, logistical disruptions and shortages of some essential products have revived discussions about the costs of international fragmentation of production, the OECD said. “Reducing trade dependence, including repatriation of production, is seen as a potential way to reduce risk, but could also impose substantial efficiency costs. Moreover, attempts to relocate production may weaken diversification, reducing the scope for adapting to shocks.”
Uneven recovery
Based on the trade outlook for next year and beyond, the OECD projects that the recovery will be uneven across countries, potentially leading to “lasting changes in the global economy,” Boone said, singling out China for its early recovery and strong growth projections. It is projected to account for more than a third of global economic growth in 2021.
More broadly, OECD economies are expected to recover by 3,3% in 2021, but only partially from the deep recession of 2020. Moreover, Boone notes that the contribution of Europe and North America to global growth will still be smaller than their weight in the world economy.
In a final, impassioned plea to global governments, Boone called for international cooperation to facilitate trade. While the global financial crisis affected only a handful of the world’s advanced economies, the response was resoundingly cooperative. 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 cooperation.
“Protectionism and border closures are not the answer – they impede the distribution of essential goods around the world and penalize economies that rely on their participation in global value chains to catch up,” Boone said. “This must be reversed.”
The OECD calls for “widespread, rapid and generous production and distribution of effective vaccines and medical treatments” for all countries and enhanced multilateral action on debt transparency, including a moratorium where necessary.
“The world must prevent the health and economic crisis from becoming a financial crisis as well,” Boone concluded.
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