News ID: 188166
Published: 0201 GMT February 22, 2017

WB: Policy uncertainty threatens trade growth

WB: Policy uncertainty threatens trade growth

Political uncertainty is slowing trade growth, a World Bank (WB) report concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.

Major international institutions such as the IMF, the  Organization for Economic Cooperation and Development (OECD) and WB have recently upgraded their forecasts of global economic growth largely due to expectations that tax cuts, rising infrastructure spending and a wave of deregulation will boost the US economy under the new president.

But the report by WB economists, highlights the fragile state of one historically important engine of global growth — trade.

The study avoids naming Trump, but highlights rising protectionism and threats to unwind trade agreements — such as those made by the president.

It also raises the prospect that attempts by the Trump administration to force companies to repatriate global supply chains to the US could undermine efforts to boost lagging productivity growth.

International trade has been growing below historic trends for the past five years. The 1.9 percent growth recorded in 2016, according to the team at the bank, was the slowest since the 2009 collapse in commerce that followed the global financial crisis.

 The team found that some of the reasons for the anemic trade growth, which affected both developed and developing economies, were broader trends such as slow economic growth around the world and a collapse in commodity prices.

But in 2016 the principal change was a surge in uncertainty about economic policy. According to the WB’s calculations, such uncertainty was responsible for 0.6 percentage points of the 0.8 percentage-point fall in trade growth between 2015 and 2016.

The team at the bank based their figure on a study of the relationship between trade and economic policy uncertainty in 18 countries over three decades. They added they expected the impact to continue in 2017.

To the extent that the policy uncertainty will remain high we should continue to expect global trade growth to be subdued,” said Michele Ruta, one of the authors.

The WB team also sought to quantify the impact of trade agreements on global trade growth. World trade grew at an annual rate of 6.53 percent between 1995 and 2014, they calculated. Had no new members — including China — joined the World Trade Organization or no new trade agreements been signed, international trade would have grown at just 4.76 percent annually, they found.

One of the big consequences of the explosion in trade deals in recent decades has been the emergence of global supply chains. Such chains are widely seen by economists to have made businesses more efficient and boosted productivity.

But Trump and his administration have said they want to unwind those international supply chains and bring them home.

It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” Peter Navarro, one of the president’s top trade advisers, told the Financial Times last month.

According to WB team such a move, coupled with unwinding existing trade agreements that have encouraged the establishment of international supply chains, would hurt productivity growth.

Preserving and expanding the reach of trade agreements, rather than backtracking on existing commitments, would help to sustain the growth of productivity,” the bank’s economists wrote.

   
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