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Global uncertainty and international trade


Global uncertainty and international trade

The exchange of goods and services between human beings is probably as old a practice as the human race itself. It all started when people knew they could specialise in producing certain goods and exchange it for others that were out of their field of expertise. It started on a small individualistic scale to become a practice for communities. When leaders and politicians started reflecting on the function of a nation, trade with different nations was definitely a thing to think about.

Intellectuals and economists started thinking and tried to determine what trade policy is best for their countries. This has led to different opinions; one advocating for the benefits of international exchange and the other opposing it on the basis that certain domestic industries will suffer tremendously from foreign competition.

Relativizing the benefits of international exchange and the pressure that it brings to local industries has led again to different intakes about the desirability of free trade agreements. Although everyone has agreed that the overall benefits of such agreements are of considerable importance, the tensions arising from this dual view of trade have never been overcome. Even that the discussion as stated is a never ending one, most if not all the countries in the world have business partners nowadays, and the terms of trade between them are determined by several factors.

These business partnerships can smoothly serve their purpose if the conditions are right but can as well be useless in case global uncertainty was rising. Global uncertainty can have direct tangible effects on the international trade. The rising tensions between China and the U.S, the Brexit, the Covid-19 pandemic, and the Russo-Ukrainian War are all examples of events that create global uncertainty; however, the magnitude of each one's consequences and impact on the economy differ based on how much uncertainty they create.

TENSIONS BETWEEN CHINA AND THE UNITED STATES: China and the United States (US) are the two biggest powers in the world in terms of their economy and military. The two countries are each other's largest trading partners, and this relationship is one of the most crucial to the global international trade.

Although both countries are aware of the role, they play in the global economy considering their vast nominal Gross Domestic Product (GDP). Tensions between the two of them are rising for several reasons and since both of them are being reactive to each other's decisions, the tensions escalated to a trade war. It all started by the exponential growth of China, growing from having only a tenth of the US GDP in 2000 into overthrowing the US from its sweet top spot in less than two decades in terms of GDP.

The US claims that this growth is sketchy and if anything, it is fueled by dishonest practices such as the undervaluation of the Chinese currency and the noncompliance with world quality requirements and human rights. When Trump entered the oval office, he turned these claims into actions primarily by tariff escalations.

China, on the other hand, tried to explore areas of trade compromise not to escalate things, but since Trump kept pushing, they saw no other option than to retaliate by targeting the US export sectors that will suffer the most, enacting additional tariffs and new trade threats, and the US will again retaliate by escalating attacks against Chinese industries, intellectual property rights, political and social issues, and military modernisation. This will definitely lead to an environment of uncertainty and increased volatility which will tremendously affect the US GDP and stop the Chinese economic growth.

The dangerous thing about it is that there is no way going to stop here, China and the US are not going to be the only nations suffering from this trade war. For example, any currency that is pegged to the US dollar will certainly suffer from the hit the US GDP will take, and any business partner of one of these two countries will also be greatly affected to the point where we might see another great global depression.

BREXIT: Brexit is a short for the British exit from the European Union (EU). It all started when the United Kingdom (UK) voted in favour of leaving the EU back in 2016, and that is what eventually happened in early 2020. This decision was based on the fact that a comparison between the benefits and the costs of being a part of the EU showed that they were not doing so good and such setup was nowhere near beneficial to the country. The free movement of immigration was badly affecting the U.K to the point where all of the benefits of belonging to the unified union were overshadowed.

Some might say that this decision can be beneficial to the country, but facts suggest otherwise. Since the UK has left the EU, their economic growth has slowed, and many businesses have moved their headquarters to the EU. The British Pound lost its value which means prices of import increased, and even the exports will not see any improvement since even with a weak currency, the British products will not be appealing to other countries because of the tariffs that would raise the price of exports unless they agree to trade deals with countries.

This decision has impacted other aspects of the British economy such an increased unemployment rate since British workers were not able to freely find jobs within the EU. And most of this has been due to the uncertainty surrounding the final outcome of such decision. But the major impact remains relative to the international trade, since now exports to the UK will be more expensive because of a weaker currency, and imports from the UK will also remain expensive because of the removal of the tariff-free trade with the EU and any country that is directly dealing with the EU which represents almost every country in the world.

THE COVID PANDEMIC: It is needless to reiterate what the Covid-19 pandemic is and how it happened, but what one should remember is its huge economic impact. The rapid spread of the virus and the measures taken by governments such as border closure to contain it had serious consequences on the world's greatest economies.

This pandemic has caused a major disturbance in production activities because of factories and plants shutting down first in Asia, followed by the United States and Europe, then the rest of the world. This has led to high unemployment rates which means people were no longer able to afford goods and services.

The combination of a decline in the local demand in every country and the border-closing policies has eventually led to a huge decline in the volume of international trade transactions. The reason why Covid-19 has directly and greatly affected international trade is linked to the global value chain; countries have closed their borders as a response to the pandemic and therefore import and export activities were suspended. Not only import and export of goods was suspended but also tourism suffered a lot during the pandemic, it dragged down services export.

To sum it up, the fall in export and import activities was due to a combination of a supply shock (partial suspension of most of the production) and a demand shock (economic decline in most if not all the markets) and finally the logistic side of the operations. The Covid-19 pandemic has tremendously affected the world's economy and had left individuals and businesses suffering from bad repercussions. What fostered this economic shock was the interconnectedness of the logistics chain, because once borders started closing, the goods movements were disrupted leaving suppliers with no way to serve the demand and clients with no way to satisfy their needs. 

THE RUSSO-UKRAINIAN WAR: While the world was still recovering from what the Covid-19 pandemic caused to the international economic scene, tensions between the Russian and Ukrainian neighbours continued to escalate, which has eventually led to Russia invading Ukraine. This invasion resulted in an abrupt disruption of the local activities and value chains. Consequences were obviously severe on both countries, but the rest of the world also suffered due to breakdown of food and energy exports.

The EU is most likely to be the main one, considering the close economic ties, but other emerging economies have also suffered tremendously due to the surging prices of basic goods and commodities.

Countries that are non-energy producing and who rely mostly on imports to satisfy their internal demand are the ones who will be seeing a slowdown if not a regression in their growth rates. With escalating prices, inflation continued to spike which has also led central banks to increase their interest rates causing tight monetary conditions. Within this uncertain environment, the financial markets have also seen a rapid fall and a higher volatility.

This economic contraction is definitely the direct result of the Russo-Ukrainian conflict, but some may argue that it would have been less severe if the existing infrastructures and value chains were not already weakened by the Covid-19 pandemic. This unfortunate event has showed that solely focusing on imports and relying on a unique trade partner might have adverse effects. The situation would have been less critical if the production of certain basic goods was not concentrated in one specific area of the globe.

What one should keep in mind is that such a conflict does not only harm the taking parts but also every other country that takes part in international trades considering the interconnectedness of the logistics and value chains. Such conflict creates a climate of uncertainty that affects everyone and hits the most vulnerable the hardest.

CONCLUSION: The four major events discussed above have definitely affected the international trade with different magnitudes. Some of them have direct short-term effects, and others have foreseeable long-term effects but what they all have in common is the ability to create some type of global uncertainty.

In terms of creating uncertainty, Covid-19 has exceeded all the other events because it directly affected the whole world at once. But in terms of having the biggest direct economic impact, some may argue that the Russo-Ukrainian War did it. However, this direct economic impact was only amplified because the world did not get to recover yet from the repercussions of the pandemic. The only positive thing about all these unfortunate events is that it will push people and decision makers to reflect on the importance of the common interests in international trade and the international relations.

Especially the pandemic as it has acted as a motivator for major disruptions in global value chains related to creative technologies, it will also spur national jingoistic emotions. The pandemic has led to a rede-finition of multiple concepts, and how business should be conducted between different nations is certainly one of these.

Nations should do more in order to help minimise the risk of global uncertainty because of the tremendous impact it has on the global business and the international trade. That can go from either by working on policies, ensuring sustainable and resilient transport infrastructure and trade facilitation, or even just seeking compromises in term of trade agreements.

 

Professor M. Kabir Hassan, University of New Orleans, USA.

Ayoub Ghalim, Ph.D student, University of New Orleans, USA.

[email protected]

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