Free Trade To Decide Future of World Economy
Business Today|August 23, 2020
Free Trade To Decide Future of World Economy
In An Interdependent World, All Countries Need To Do Well
Viral Acharya, Former Deputy Governor, RBI
Healthcare is the most important macroeconomic indicator across the world right now. A large-scale global delivery of Covid vaccine seems a bit too optimistic over the next 12 months. It means that a very sharp, quick global economic rebound is unlikely. In the first quarter of the pandemic, the GDP of the United States contracted 9-10 per cent, or about 33 per cent on an annualised basis. This is true even in Germany, though it is likely to have a swifter rebound because its health curve is under control. China, another bellwether, is in a much better shape. In fact, its economic recovery sounds best because they were able to contain the virus.

Both globally as well as domestically for India, growth is highly interdependent across regions. You can't have a small pocket of the world or a small pocket of India fine on the health curve and expect a huge revival of the economy. You need different parts of the growth engine to be in sync with each other as growth in modern economy is so much dependent on growth based on trade and services. And trade and services can grow in a healthy manner only if different parts of the world are all doing well.

China Factor It's not just the emergence of the pandemic. The emergence of something close to what looks like a cold war with China is also on the horizon, potentially making it harder for the global economy to recover. China might be best positioned health curve wise, but the China-centric global supply chain can get disrupted by the cold war with huge implications for other countries. It can be damaging for the immediate to medium term prospects of countries that have the capacity to replace the supply chains, and the ones that do not have such abilities. The countries that do not have the capacity to replace the supply chains domestically will continue the imports irrespective of the rising costs. It will impact consumption due to the increase in the cost of imported goods, as well as inflation. For developed economies, the rising cost of goods that are replaced can add to debt problems since they have already embarked upon very heavy fiscal expansion programmes, like the Covid support, in the order of 10 to 20 per cent of their GDP.

The higher cost (due to supply chain disruptions) will lead to further debts and if their growth paths don't recover, some of them will start facing debt sustainability questions. Therefore, the growth headwinds coming from tariff wars are likely to make it difficult for these economies to deal with their fiscal excesses.


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August 23, 2020