World divided into trading blocs will shrink global economy by 5% in long run, Davos told

Nations in emerging markets and developing countries stand to lose more with fragmentations and decoupling of trade, managing director of the WTO says

Shipping containers stored at the Port Newark in New Jersey. The US has been embroiled in a trade tiff with China since Donald Trump took office in 2016. AFP

A world divided into two trading blocs will result in 5 per cent shrinkage in the global economy over the long term, which is more than the world economy lost during the financial crisis, director general of the World Trade Organisation said in Davos.

Nations in emerging markets and developing countries stand to lose more with fragmentations and decoupling of trade, Ngozi Okonjo-Iweala told the World Economic Forum on Tuesday.

“One thing we cannot do if we want growth is to talk about fragmentation [and] decoupling because there are serious costs. I always say that talk is cheap,” she told a panel in the Swiss resort.

“And for emerging markets and developing countries, it would be even worse: like 12 per cent [or] double-digit losses.”

The world will need to strengthen multilateralism and co-operation if it intends to recover from the economic and trade slowdown and pick up pace, Ms Okonjo-Iweala said.

“We have to look at those parts of trade that are growing … trade is the future," she said.

Digitally delivered services are growing in “leaps and bounds”. In 2005, that trade was worth about $1 trillion and it rose to $3.5 trillion in 2021.

“That's the wave of the future, so there is some optimism,” she said.

The US and China, the world’s two biggest economies, have been embroiled in a trade war since Donald Trump won the US elections in 2016. The US has slapped duties on more than $300 billion worth of Chinese imports, which prompted the Asian country to impose levies on American imports.

The US has also imposed restrictions on advanced technology sales to Chinese companies that has driven China to start building its own advanced tech industrial base.

The US-China trade issues have yet to be resolved, despite President Joe Biden's administration taking control of the White House.

The tiff had slowed global trade even before the Covid-19 pandemic, which severely disrupted the flow of goods as countries shut borders.

The global merchandise trade volume rebounded strongly in 2021, jumping 9.7 per cent amid a strong bounce back in global economy. However, it remained weak in the second half of last year and is expected to increase by 3.5 per cent in 2022, the WTO estimates.

“We can all participate in the doom and gloom and, you know, when we look at the projections that we have for 2023, we are projecting a 1 per cent growth in the volume of merchandise trade compared to 3.5 per cent last year,” Ms Okonjo-Iweala said.

“But it's not the number that is a problem, it's the uncertainty around the estimates, depending on what happens with the war in Ukraine, [and] how we come out of China's pandemic.”

There is a possibility of a contraction in global trade next year, as well as a chance of a “soft landing”, depending on how the macroeconomic situation evolves and what monetary policy decisions central banks take.

“If we have interest rates that are not going up so much, [and] we have inflation coming down, [then] we have a soft landing,” Ms Okonjo-Iweala said. “We have the war in Ukraine [and] if things work out well, we could see a situation in which trade grows even more. We shouldn't forget that there is an upside.”

In November, the leaders of the International Monetary Fund and the WTO warned against the negative impact of deglobalisation for the global economy.

IMF managing director Kristalina Georgieva said globalisation was facing its biggest challenge since the Second World War, with factors including the effects of the pandemic and Russia's war in Ukraine.

The fragmentation in global trade, driven by the “national security” needs of various nations, was also fanning inflation, Larry Fink, chairman and chief executive of money manager BlackRock, said on Tuesday, adding that the phrase is being "abused repeatedly".

“When you overlay something more important than price, something called national security … you're willing to substitute or sacrifice price and that is one of the causes of the inflation that we have,” he told the panel discussion.

“If we want to have a world where we are lifting more human beings [out of poverty], we want to have a world where price stability is more important.”

The WTO, UN and other multilateral organisations will need to play their role in finding ways of “better, fairer, more sustainable trade agreements, however, the world need grounds for the debate to move forward", Alexander De Croo, Prime Minister of Belgium, said during the discussion.

“Having a business case, having a stable environment and having trade is the number one [way] of how we lift people out of poverty and there are still way too many people in the world who live in poverty,” he said.