Protectionism: Trade restrictions reach an all-time high
The number of unilateral restrictions imposed by countries on cross-border trade and investment has grown massively over the past decade, reversing the general trend of liberalisation seen during most of the 20th century.
In 2022, new restrictions on goods, services and investment jumped 14% from the previous year, reaching more than 2600, according to Global Trade Alert data analysed by the IMF. This was more than six times higher than in 2013. Restrictions on investment experienced the greatest increase, reaching 239 last year — more than four times that imposed in 2021.
During the Covid-19 pandemic, many countries restricted exports of medical goods like vaccines and foodstuffs. More recently, Russia’s war in Ukraine and competition between the US and its allies with China has fomented further protectionism. Trade restrictions, such as tariffs and export bans, have also proliferated in sectors including commodities and semiconductors, which are often viewed as central to national security.
This risk with these economic protectionist actions is a bifurcation of global trade, which could lead to increased costs for multinationals and a loss of gross domestic product (GDP). Experts worry about “geoeconomic fragmentation”, which would be if the world split into two exclusive trading blocs — one aligned to the US and EU, and another aligned with China and Russia.
In a recent Finance and Development (F&D) article, IMF economists Marijn Bolhius, Jiaqian Chen and Benjamin Kett estimate that this hypothetical geoeconomic fragmentation scenario would lead to a permanent loss of global GDP of 2.3%.
“The most worrying downside risk of fragmentation in global trade is a further escalation of current tensions to the extent that countries could start to form blocs that stop trading with other countries and force third parties to choose sides,” explain the IMF economists.
Under this scenario, low-income countries would lose out the most, with a permanent GDP loss of more than 4%. The IMF economists say that low-income countries and emerging markets “would get caught in the crossfire”, losing access to key imports and export markets.
“This would exacerbate hardship in the [sub-Saharan Africa] region,” they said, noting the world’s poorest region was at most risk from fragmentation of trade into two exclusive blocs.
Even under a less severe “strategic decoupling” scenario, global output is estimated to permanently shrink by 0.3%. This would involve a heightening of existing sanctions and trade policies, where there is an elimination of all trade between Russia and the US/EU, as well as an eradication of trade in high-tech sectors between China and the US/EU.
For multinational companies operating in many different jurisdictions, trade fragmentation presents significant risks. If this rising protectionist trend continues, the IMF economists warn it could lead to “increased costs for international firms that either have to pay tariffs on their imported inputs or source from alternative, more expensive suppliers”.
“It could also reduce their access to sales in foreign markets, or make their products less competitive due to additional tariff costs,” they added.
Foreign direct investment (FDI) is likely to be affected by this geoeconomic fragmentation also. An IMF paper using fDi Markets data found that FDI flows are being increasingly directed to geopolitically aligned countries rather than those that are geographically close. The authors of the F&D article note that geoeconomic fragmentation “could hinder cross-border capital flows” thereby reducing countries’ options for external financing and impeding their economic development.
“A retrenchment in FDI flows is likely to increase capital misallocation, as well as reduce multinational company linkages and technology spillovers,” noted the IMF economists.
