Guarded optimism over global economic growth
Subir Roy
Senior economic analyst
As the year 2019 draws to a close, it is critical to assess which way the world economy is headed and whether there is some hope that 2020 will offer a better fare. Although global economic growth is likely to rise by only a hair’s breadth — to 3.4 per cent from 3.1 per cent in the current year, according to Goldman Sachs — this could signal a turning point from the slowdown that has been on since 2018.
The turnaround in expectations becomes clear when we compare this with the ‘precarious’ scenario that the World Economic Outlook of the International Monetary Fund (IMF) foresaw as recently as two months ago in October. This sentiment was dictated by two factors: the sharp slowdown in manufacturing to levels not seen since the global financial crisis and rising trade and political tensions.
The perception of a turning point having been crossed is based on two developments. One is the results of the UK General Elections which were fought on the single issue of Brexit — Britain exiting the European Union. The clear verdict that the Conservative party has won under the leadership of Boris Johnson removes all the uncertainty over the issue that had plagued the global economy for three years now. Europe and Britain’s trading partners now know that Brexit is coming, though there is lingering uncertainty over what kind of a deal the EU and Britain are able to thrash out.
The second, which is more significant, but more ephemeral (it may not last long), is the positive vibes resulting from the US and China being able to agree to the first phase of a deal to end their trade standoff. As a result, the US will not initiate the fresh tariffs that it had threatened to. But the weakness of this positive development is that a standoff may emerge soon and, thus, stymie a follow-up phase. This partial US-China trade deal is expected to restore business confidence and restart global investment.
However, before any kind of exuberance can emerge, it has to be emphasised that the world is fundamentally in riskier territory as a result of inward looking attitudes being on the ascendant. A clear electoral verdict in favour of Brexit means that Britain is decisively stepping back from the process of European construction which sought to create and expand the European Union. This resulted from global leaders saying ‘never again’ after World War II and forging a system that would give up sovereign rights in favour of cooperation, peace and prosperity.
This reassertion of the national prerogative is stark in President Donald Trump’s decision to first start a trade conflict with China and then call a temporary halt to it. Implicit in it is the threat that if things don’t go his way, then he will be back to sabre-rattling over trade. This is a real possibility as 2020 is the election year for him and he will persist with de-escalation of trade tension only if he finds that to be electorally advantageous. Totally missing is any kind of faith in the goodness of cooperation in trade and more.
Beyond the temporary changes in the US and UK scenarios is a more fundamental change in approach and thinking. Seven decades of global thinking, that economic integration leads to human progress, is ending. Now national interest is beginning to override the concerns of many, giving bilateral trade agreements primacy over multilateral arrangements. After World War II, the victorious allies had built an international order on the belief that trade would create prosperity and remove the need to go to war.
A serious negative development is President Trump delivering a fundamental blow to multilateralism by crippling the World Trade Organisation (WTO). He has blocked the process of selection of new judges for the appellate authority for trade disputes to the point where the organisation is faced with having only one judge instead of the optimum seven. The minimum bench needed to arbitrate on a dispute is three. If the appellate authority becomes non-functional, the WTO will be rendered toothless.
Now, when a complaint is lodged by a country at the WTO against a trade partner, there is an initial round of negotiation and arbitration and a ruling emerges. The country that does not like this can go in appeal and a bench of the appellate authority takes the issue on board. Eventually, when a ruling is issued, it carries the authority of a quasi-judicial pronouncement. All who wish to remain within a rule- based global trading community go by the appellate authority’s final ruling.
The WTO was created a quarter century ago as the successor to the General Agreement on Tariffs and Trade (GATT) which came into being right after World War II in 1947 to lay the foundations of rule-based trading among nations. While GATT relied on cooperation and good sense, the WTO went a step further by creating a supra-national authority whose final verdicts member countries agreed to live by. The long-term grouse of American politicians, acted upon by President Trump, is that the sovereign authority of the US Congress is curbed by the WTO when it comes to trade disputes.
There is now an attempt to salvage the situation with Canada and the European Union agreeing to use the arbitration process of the World Trade Organisation to replicate the appellate authority manned by former WTO judges. The success of this depends on more countries walking the same route so that at least a good number of global trading nations accounting for a sizeable portion of global trade come under the new arrangement.
