Global trade optimism

Downside risks in 2024 must also be evaluated

The March 2024 edition of the “Global Trade Update” from the United Nations Conference on Trade and Development (Unctad) was released last week and made for optimistic reading. While it estimated that global trade had in fact contracted by about $1 trillion during the calendar year 2023, it also argued for a reversal of that trend in 2024. Unctad backed up the claim by saying that the first quarter of this calendar year had seen a “small but positive increase in both goods and services trade”. The drivers for positive growth in trade in the ongoing year include a moderation in global inflation and a strengthening of global growth.

For India, this is good news. The contribution of trade to domestic growth needs to be increased. Several export-oriented sectors are particularly sensitive to external growth trends, and will see comfortable order books. A recent analysis by Goldman Sachs suggested that India-based information technology (IT) and IT-enabled services companies, for example, would see a 9-10 cent growth rate in revenue over the course of 2024-25, driven by “pent-up demand” and new technological innovations such as generative artificial intelligence.
 

The broader risks to global trade, however, should not be underplayed. Unctad identifies several, some of which should be carefully scrutinised by Indian policymakers. Disruptions to shipping routes are likely to continue for some time over the course of 2024. The attacks by Houthi rebels, based in Yemen, on shipping may not have taken many lives, but they have increased risks and insurance for the Red Sea route, which matters a great deal for merchandise trade from the Indo-Pacific to the Mediterranean.

Unctad also points to unexpected fluctuations in commodity prices as a possible problem. The invasion of Ukraine by Russia two years ago threw energy markets into turmoil. It also created significant problems for the supply chains of several commodities, including agri-commodities. The effect of warfare on input costs and trade cannot be ignored. Indeed, it was reported last week that new sanctions by the US on some carriers of Russian oil had caused delayed deliveries of fossil fuel to Indian refiners. The ripple effect of these and other conflicts on trading networks cannot be foreseen, but are likely to be negative.
 

Finally, there are a set of concerns that Unctad expresses about geo-economics and those are broadly linked. In response to concerns about the dominance of China over global supply chains, both companies and governments are taking actions of varying intensity. The report points out that supply chains are lengthening. On the one hand, this renders them less efficient and increases costs. On the other hand, it might allow for some countries, including India, to enter into value chains to a greater degree than they had earlier. Certainly that appears to be the logic behind Indian government efforts with regard to semiconductors, mobile phones, and electric vehicles. But related issues, including the hoarding of or trade restrictions on critical minerals, will also have to be forecast and dealt with.

Finally, the danger of a race to the bottom on domestic subsidies in several countries is real. India will not be able to compete under those circumstances. Thus, it becomes ever more important for it to create closer economic integration with economies like the US and the European Union, which could moderate these effects.