Introduction and Summary
International trade and investment is a crucial channel through which economies and individual businesses specialize, innovate, become more productive, and grow incomes, output and employment while also containing input costs and inflationary pressures through competitive supply.
Today, several factors are combining to dim prospects for trade and investment, posing new challenges for the global and domestic economies and for businesses that have global reach and potential.
- COVID's impact on both supply and demand continues, with further waves of infection still likely and policy responses and consequences largely unpredictable.
- The Russia-Ukraine war, and sanctions in response, are also likely to have ongoing impact on energy, commodity and product prices and availability, and on transport globally.
- Trade relations between the United States and China remain subject to extra tariffs and restrictions affecting certain goods and investment and even more importantly to intense geopolitical rivalry.
- U.S. trade politics heading into mid-term elections are characterized by broad protectionist sentiment.
- The World Trade Organization (WTO) multilateral framework is not keeping pace with a changing world, driving many countries to forge new rules within regional and plurilateral initiatives that in turn are fragmenting the rule book.
- Increased attention to energy transition and decarbonization and more generally to environment, social, and governance (ESG) considerations can introduce new cross-border challenges, for example carbon border adjustments to align with a domestic carbon price and multi-jurisdictional anti-corruption investigations.
- Close to home, relations among Canada, the United States and Mexico under the Canada-U.S.- Mexico Agreement (CUSMA) are increasingly contentious.
This volatile, disrupted, and highly uncertain international economic environment will require agility and foresight by both governments and firms to anticipate and adjust on an ongoing basis to changing patterns of trade and investment and to evolving supply chain configurations.
Specifically, firms must stay alert to rapid and frequent changes in trade and investment rules and regulatory requirements, including sanctions, border controls, and financial records where they do business. A forward scan on both emerging risks and opportunities should be undertaken regularly.
The Near-Term Prospects
Despite the recovery of activity from COVID lockdowns in most regions of the world, prospects for global trade and investment are dimmed by a number of factors, and worsened by the war in Ukraine. After trade in both goods and services rebounded in the fourth quarter of 2021, in April the WTO projected only a 3.0% growth in the volume of merchandise trade for 2022, well below its previous forecast of 4.7%. While cross-border investment returned to pre-COVID levels last year, and while international project finance in infrastructure is providing some momentum, the United Nations Conference on Trade and Development (UNCTAD) projected even before the war that underlying growth in international investment will be relatively muted.
The diminished near-term prospects for trade and investment are explained principally by supply-side factors. As this economic outlook highlights, the global economy is currently characterized by supply shocks, with political and economic causes and consequences combining to complicate relations between countries and trading blocs and regions. As Bank of Canada Senior Deputy Governor Carolyn Rogers said in early May:
"What started as narrowly focused problems in a few key products-like computer chips-has spread to a wide range of goods. The invasion of Ukraine intensified supply chain problems and pushed up commodity prices and inflation worldwide. And large parts of China are now under a renewed lockdown, causing further supply issues, transportation backlogs, and uncertainty."1
Higher costs and accelerating inflation in turn are depressing confidence and slowing demand, further depressing trade and investment.
The effects of global developments on trade and investment, as well as on the configuration of supply chains, merit ongoing attention on the part of governments and businesses. Immediately, this includes assessing the ongoing effects of COVID, the Russia-Ukraine war, the responses of governments, relations between Western economies and China, trade policy and politics in the United States and Mexico, and weaknesses or gaps in multilateral rules-based frameworks and the fragmentation of the trade and investment rule book. Attention must also be paid to other factors, such as environment policy and labour standards, that may carry greater impact in the medium term.
These factors are reviewed hereafter.
The Factors Weighing on Trade and Investment
A. COVID
The virus has kept workers at home, away from factories, offices, ports, customs, or other places of work, stemming production and transportation by road, rail, air, and ship, and contributing to shortages in the supply of various goods, with widespread secondary effects. In what has been described as COVID's "economic contagion,"2 disruptions worked their way through supply chains. Manufacturing sectors in less-affected economies found it more difficult, and more costly, to source necessary inputs from harder-hit countries, and consequently from each other. The automotive sector was among the hardest hit by the breakdown of supply chains: beyond labour constraints, manufacturers and component producers have been particularly affected by a shortage of semiconductor chips, in turn caused by both supply bottlenecks and a surge in demand for personal computers and other consumer electronics. With renewed surges of virus variants, recent shutdowns in several key markets have affected production, transport, and consumption. For example, the busiest container port of Shanghai, through which over 10% of Chinese trade normally flows, has only recently reopened for business-an expected surge in shipments could add to backlogs at west coast ports in the United States and Canada.
Government responses to COVID, such as import or export restrictions, have exacerbated the adverse impact of the pandemic on supply of, and access to, goods and services across borders, with significant consequences in industries such as pharmaceutical products and medical equipment and supplies, as well as food and agricultural products.
Demand has also been a channel of COVID-induced economic contagion. Although growth of global demand in the latter half of 2021 and the start of 2022 was robust, inflation fears are now contributing to a continuing drop in consumer sentiment.3 The recent shutdowns of activity in China have also reduced demand and thus the global market for exports of goods.
B. The Russia-Ukraine War
The horrific military conflict triggered by Russian aggression against Ukraine is accompanied by significant economic warfare and trade consequences. The markets for energy, agriculture, and minerals sectors have been most directly disrupted. As elaborated in a separate companion paper to this economic outlook: Commodity Markets, impacts on prices, and on patterns of supply and demand of oil and gas, food commodities, fertilizers, and critical minerals have been severe- the European Bank for Reconstruction and Development estimates that 17% of the world's calories are now land-locked. Destruction of roads and bridges, and military operations at key ports, have aggravated supply constraints in sometimes already tight markets. Third country actions have further added to market stress. For example, in the name of its own food security, India has banned all wheat exports, and China has ordered its firms to stop selling fertilizer abroad to preserve supply at home. The rapidly rising prices and shortages globally are reducing food security and nutrition in poorer countries and causing hardship for farmers dependent on imported feedstock and/or fertilizer.4
Footnotes
1. "The Bank of Canada, A Matter of Trust", speech by Carolyn Rogers - Senior Deputy Governor, Bank of Canada to the Women in Capital Markets conference, May 3, 2022 The Bank of Canada: A matter of trust - Bank of Canada
2. Baldwin and Freeman, The COVID concussion and supply-chain contagion waves | VOX, CEPR Policy Portal (voxeu.org)
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