Recent years have seen a drastic deterioration in the global trading environment, which is a fundamental determinant of both trade and economic growth. World trade growth is currently at a historic low and is expected to decline from 5.1 per cent in 2022 to 0.9 per cent in 2023, with no signs of improvement.
This deterioration in the trading environment follows significant government activism in the form of industrial policy across the world. In the year 2023 alone, the count of industrial policy initiatives saw an almost six-fold rise. This notable surge stems from advanced economies and is primarily fuelled by strategic competitiveness, environmental concerns, and national security priorities.
Emerging economies have likewise expanded their adoption of industrial policies, although they have leaned less on subsidies and, instead, put greater emphasis on trade limitations like tariffs and export controls. In recent years, there was an explosion of trade restrictions. Governments imposed almost 3,000 trade restrictions last year-3 times the number in 2019 (Chart 1).
Evidence suggests that industrial policies can succeed in correcting market failures, but they are mostly unsuccessful in raising exports, besides the fact that they are expensive.
Presently, the world is marking a point of inflection -moving from an era of globalisation to an era of deglobalisation. It may be noted that in mid-1944, in response to the Great Depression and uninterrupted economic instability, the world, under the US leadership, built an international economic architecture. This architecture, which consisted of International Monetary Fund, the World Bank, and the predecessor of the World Trade Organisation, sought to foster a dense web of economic ties based on the realisation that economic interdependence is crucial for sustaining global peace and prosperity.
For much of the past 75 years, policymakers from across the world recognised the power of economic interdependence. Countries tore down trade barriers, opening their economies to one another. On balance, this record was impressive. Over the last six decades, global trade increased 20-fold, accompanied by an increase in per capita income twenty-seven times while the world's share of extreme poverty tumbled by three quarters.
This economic vision which was once celebrated is now being challenged--and its accomplishments are in peril. A series of crises over the past decade, including the global financial crisis, the COVID-19 pandemic, and the war in Ukraine, have given rise to an alternative narrative about globalisation. This new perspective argues that rather than making countries stronger economically, globalisation exposes them to excessive risks. Economic interdependence is no longer viewed as a virtue; it is seen as a vice. The new mantra is that countries should strive for independence rather than interdependence, with integration limited at best to a small circle of friendly nations.
The most vocal articulation of this position comes from the United States administration. Jack Sullivan, the US National Security Advisor, spelled out the US international strategy in a Brookings Institute lecture in April 2023. He attributed the hollowing out of the US industrial sector to globalisation and spells out a protectionist strategy of reshoring-bringing production back home-- and friend shoring-bringing production back to friendly countries. He provided a spirited defence for adoption of an industrial policy. In keeping with this policy, the United States enacted the CHIPS and Science Act in 2022. This single act of industrial policy provides a whopping allocation of $280 billion in new funding (which is almost four times the national budget of Bangladesh) to boost domestic research and manufacturing of semiconductors in the United States. The current policy also vows to protect "our foundational technologies with a small yard and high fence," a move which precludes international cooperation in technology development (a belligerence directed particularly at China).
This adoption of the US industrial policy has rankled other advanced countries. As expected, this was at once followed by the European Chips Act to strengthen European competitiveness. However, this is a path few developing countries could follow. Most developing countries cannot afford to allocate generous subsidies to their local producers as these countries are mostly in a dire fiscal straight jacket; in addition, there is also a wide realisation that the potential benefits of such policies are uncertain.
It is ironical that following the World War II, the United States has been instrumental in spearheading the opening up of global markets and the expansion of international trade (which is a key driver in the growth of American prosperity); the US is now leading the effort to deglobalise the international economy. This move, which is likely to end up fragmenting the global economy, is likely to encounter wide resistance.
After the end of the Second World War, the US was at the helm of the global economy. In this unipolar world, the US -- in conjunction with Western Europe -- could impose any set of international economic rules with little obstruction from other countries. In the 1990s, after the dissolution of the Soviet Union, celebrated Yale political scientist Fracis Fukuyama prematurely declared the "The End of History" that will perpetuate the hegemonic position of the US. However, there have been radical changes in global economic configuration since then. The world economy has become multi-polar, with China emerging as the largest or the second largest economy (depending on the measure you take). Country blocs such as the BRICS have a larger GDP share of the world economy than the G7 countries. In addition, the economic importance of BRICS will further be bolstered as the new six members, including the oil-rich countries, join this club.
Thus, with the changing relative position in the global economy, the hegemonic dominance of the US has diminished-- it has lost its power to single-handedly impose the international rule of law that will be universally accepted. The inevitable outcome of multi-polarity has been the fragmentation of the global economic system.
According to research by the World Trade Organization, a scenario in which the global economy splits into two distinct economic blocs is projected to result in a notable reduction in international trade and overall productivity. This research suggests that average global real incomes would decline by a minimum of five per cent from the current trajectory. Such a downturn in the global economy would be more severe than the impact of the global financial crisis. Notably, low-income nations may experience income declines of up to nine per cent, which would significantly hinder their developmental progress.
It is also suggested that the relocation of production to domestic shores could potentially have an adverse effect on the flexibility of supply chains rather than improving it. This shift could lead to increased challenges in production and transportation, particularly in the face of emerging environmental issues like droughts and floods. Increased friend- shoring could increase countries' resilience to geopolitical shocks, such as war, but cut resilience to other shocks, such as pandemics. Decreased foreign competition in the form of trade and immigration could contribute to higher prices and wages in the United States.
As advanced economies turn inward, poverty reduction and development would slow in lower income countries that have relied on exports. Restricting international trade could also heighten a country's vulnerability to such challenges.
Conversely, a more globally interconnected world economy would offer nations greater diversification in their supply sources, rendering them more resilient in the face of these challenges.
Globalisation has reached an inflection point and the rhetoric of deglobalisation a crescendo. Unless pushed back, the global trade regime is on the verge of fragmentation, which will seriously challenge the export and gross domestic product (GDP) growth -- consequently, poverty reduction-in the developing countries.
Bangladesh, which currently finds itself in a precarious foreign exchange crunch, must significantly increase its exports earnings to keep the momentum of development going. However, this will not be an easy task. a closer examination of the recent data suggests that the export earnings of the country have been both diminishing and erratic. and with the coarsening of the international trading environment and increasing fragmentation of the global economy, efforts at export expansion are likely to face insurmountable headwinds.
An oft-suggested policy prescription emphasises that the country needs to adopt a strategy to diversify its trade partners, strengthen regional trade agreements, diversify exports, enhance domestic productive capability, etc. However, such a strategy is easier to advocate than to implement -- at least in the short run. In the short run, the country must be proactive in addressing the evolving dynamics of global trade to minimise adjustment costs. However, in the long run, the most critical ingredient for success in the global economy is the country's education (a glaring example is Singapore). However, this is an area where Bangladesh has messed up badly. The original sin of Bangladesh's political evolution is the fact that it has hyper-politicised the education space-and ensuring quality and disentangling politics may not be an easy task.
M.G. Quibria, an academic, author and economist, was a former Senior Advisor at the Asian Development Bank Institute, Japan. His latest book includes: The Elgar Companion to the Asian Development Bank.(2024 forthcoming).
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