From Chris Hattingh, Head of Policy Analysis, Centre for Risk Analysis.
THE increased use of tariffs, trade interventions, and various non-tariff trade barriers (NTBs) such as overly bureaucratic border and port operations, pose a significant risk to global economic growth – especially for more developing economies, such as South Africa’s.
The increased use of such instruments increases the costs of labour, goods, components, materials, and services. In the current global investment risk-off environment, additional barriers to the flow of goods, services, and human capital will most harshly affect countries that desperately more investment for business activity, infrastructure builds, and job creation (own analysis).
A Bloomberg Economics analysis of UN foreign-direct investment data points to a world reorganising into rival — though still linked — blocs that reflect UN votes on Russia’s invasion of Ukraine. Of the $1.2 trillion in greenfield FDI invested in 2022, close to $180 billion shifted across geopolitical blocs from countries that declined to condemn Russia’s invasion to those that did.
Charting a Course Through Rough Seas: How Emerging Markets Can Navigate Tougher External Conditions, Keynote Address by First Deputy Managing Director Gita Gopinath at the South African Reserve Bank Biennial Conference (1 September 2023) highlighted the following:
- Rise of geoeconomic fragmentation; an increase in policy actions around the world that, if continued, pose a serious threat to global prosperity.
- Trade restrictions; almost 3,000 restrictions were imposed in 2022—nearly 3 times the number imposed in 2019. Foreign direct investment is now increasingly driven by geopolitical preference rather than geographic distance;
- An increasingly fragmented world;
- Impact of trade fragmentation – most Emerging Markets will lose out — including South Africa, with a hit of 5% of GDP. Other EMs could face output losses of over 10%;
- FDI fragmentation would add to these costs, and because FDI from advanced economies offers access to better technologies and know-how, EMs would be hit hardest;
- Fragmentation also makes the world more vulnerable to shocks, as it leaves countries with fewer trading partners;
- Countries are also turning inwards and engaging in large-scale industrial policies. In 2023 alone, the number of such measures that also restrict trade has increased nearly sixfold;
- EMs have also increased the use of protectionist industrial policies though with less reliance on subsidies. Recent examples of large-scale industrial policies include the US CHIPS and
- Science Act and the Inflation Reduction Act, the EU Green Deal Industrial Plan, and China’s longstanding industrial policies in strategic sectors;
- Such policies can heavily influence the direction and volatility of global trade and capital flows.
