Date: 07/11/2022

Relevance: GS-2: Effect of Policies and Politics of Developed and Developing Countries on India’s interests, Indian Diaspora.

Key Phrases: US-China trade war, Covid-19 pandemic, Russia-Ukraine conflict, Growth versus inflation dilemma, Strengthening of the dollar, medium-term debt sustainability, disruption in supplies of energy.

Why in News?

• In the last five years, three successive waves have swamped the world, affecting global growth, shattering lives, and shaking the confidence of people.
• Governments, administrators, and policymakers are still struggling with various policy options to minimize the impact of the waves of a challenge to growth.

The first wave: US-China trade war (2018-2019)

• The trade dispute between two of the world’s largest economies — the US and China — soon escalated into a trade war with both sides imposing tariffs and retaliatory tariffs on a host of goods.
• Importantly, no one wins a trade war; not even the bystanders. Some diversion of trade may temporarily benefit some countries.
• Tariff reversals usually take years to unwind especially in a slow-growth environment.
• Diversion of imports:
  • Roughly half of US imports from China subject to the tariff are intermediate goods, while a third are capital goods and the rest are consumer goods.
  • These tend to be more differentiated and are often dominated by China, making the diversion of imports more difficult.
  • In contrast, a majority of the targeted Chinese imports from the US are agricultural products (including soyabean and cotton) for which diversion is easier and faster.
  • The US-China bilateral trade conflict has multilateral ramifications. Tariffs have allowed US importers and Asian exporters to gradually (and partially) adapt to the new trading environment even in sectors where diversion tends to be more difficult (intermediate and capital goods). The semiconductor trade is a case in point.

The second wave: Covid-19 pandemic (2020-2021)

• The novel coronavirus (Covid-19) pandemic not only led to a global health crisis but also devastated the economic well-being of individuals and nations and the ‘cursed’ year spilled into 2021.
• National lockdowns, restrictions on the movement of people, alarming dislocation of global shipping and transportation, and disruption to established supply chains all combined to force a sharp downturn in economic activities with varying sectoral impacts.
• The world saw a massive loss of human lives, loss of jobs and incomes, closure of businesses, stalled investments, contraction in trade, and not the least, sharp de-growth of economies.
• With governments and central bankers initiating in a coordinated fashion a series of fiscal, monetary, and administrative measures, life began to normalize in the second half of 2021 following large-scale vaccination worldwide.
• Fiscal and monetary stimulus:
  • The sense of gloom gradually gave way to cautious optimism. Major economies provided fiscal and monetary stimulus, liquidity was enhanced and interest rates were slashed to near-zero.
  • As confidence picked up, markets boomed and asset prices skyrocketed which was essentially liquidity-driven.
  • Whether the stimulus-induced optimism will sustain or wane over a period of time is debatable. The positive effects of the stimulus packages will, inevitably, begin to fade over time.

The third wave: Russia-Ukraine conflict (2022)

• The Russia-Ukraine conflict has polarised nations. Sanctions have been slapped on Russia, but Europe is constrained to trade with Russia given its dependence on the Russian supply of natural gas.
• The industrial metals market is impacted. Production of energy-intensive metals like aluminium has taken a hit.
• Disruption in major supplies:
  • Russia and Ukraine are important suppliers of many primary and intermediate goods.
  • Russia is a large exporter of crude oil, natural gas, pig iron, palladium, nickel, enriched uranium, and wheat.
  • Russia has a large share in the global export of coal, platinum, and refined aluminium.
  • Ukraine is a key exporter of wheat, maize, barley, pig iron, and the largest in sunflower oil. Russia and Belarus are important suppliers of fertilizers (nitrogen, potash).
  • The Russia-Ukraine war has caused major disruption in supplies of energy, fertilizer, food, and metals from the Black Sea region.
  • Prices of several commodities propelled higher because of supply disruption, risk premium in market pricing, and flow of speculative capital.
  • There is now a supply-demand mismatch in several key commodities leading to heightened levels of inflation in developed and emerging nations.

Impacts of the successive waves:

• Growth versus inflation dilemma:
  • In recent months, governments and central bankers have begun to fight inflation (which in the US reached a 40-year high) by unwinding the stimulus packages and hiking interest rates.
  • Central bankers have faced the classic growth versus inflation dilemma; and more often than not, they have voted for inflation control.
  • Concerned over rate hikes by the Fed and other central bankers and the adverse impact it exerts on economic growth and on emerging market currencies, the UN has warned that any further increase in policy rates may push the global economy toward recession.
  • On its part, China is slowing to multi-decade lows; but its growth will still be in the positive territory. India, too, will register positive growth in 2022-23.
• Strengthening of the dollar:
  • While the Russia-Ukraine conflict continues, the world is beset with major economic challenges including high inflation, high energy prices, sharply rising interest rates, and unprecedented dollar strength.
  • The dollar is now at a 20-year high while emerging market currencies have depreciated. A weaker currency makes imports so much more expensive.
• Recession:
  • Europe is at the threshold of recession while the US is bracing for one sometime in 2023.
  • The severity and timing of the recession are unclear. Global growth is widely expected to slow in 2023 and a little beyond.
  • A growth slowdown will have consequences for global demand, trade, and investment.

Conclusion:

• Policymakers need to navigate a narrow path that requires a comprehensive set of demand- and supply-side measures.
• On the demand side, monetary policy must be employed consistently to restore, in a timely manner, price stability.
• Fiscal policy needs to prioritize medium-term debt sustainability while providing targeted support to vulnerable groups.
• Policymakers need to stand ready to manage the potential spill overs from the globally synchronous withdrawal of policies supporting growth.
• On the supply side, they need to put in place measures to ease the constraints that confront labour markets, energy markets, and trade networks.

Source: The Hindu BL

Mains Question:

Q. The US-China trade war, the COVID pandemic, and the Russia-Ukraine war have altered trade, investment, and growth patterns across the world. Critically examine.