War in Ukraine threatens global trade recovery

The trade agency points to other factors also affecting the sector, including the latest COVID-19 quarantines in China, which are disrupting seaborne trade just when supply chain pressures seemed to be easing.

The war in Ukraine has threatened supply chains impacting food prices, and other goods. The effects will be felt across the globe, the World Trade Organisation (WTO) said on Tuesday.

World merchandise trade volume is expected to grow by only 3 per cent this year, down from a previous forecast of 4.7 per cent, and 3.4 per cent in 2023, although these figures could be revised given the uncertainty surrounding the conflict.

The Russian invasion began on 24 February and the Organisation said the most immediate consequence of the war has been a sharp rise in commodity prices.

Both Russia and Ukraine are key suppliers of essential goods such as food, energy and fertilisers, supplies of which are now threatened.

Grain shipments through Black Sea ports have also been halted, with potentially dire consequences, especially for poorer countries.

"Smaller supplies and higher food prices mean that the world's poorest people could be forced to go without. This cannot be allowed to happen," said Ngozi Okonjo-Iweala, director-general of the WTO.

The war comes as other factors are affecting world trade, including the latest COVID-19 blockades in China that are again disrupting maritime trade just when supply chain pressures seemed to be easing.

Ngozi Okonjo-Iweala urged governments to work with multilateral organisations such as the WTO to facilitate trade.

"In a crisis, more trade is needed to ensure stable and equitable access to necessities. Restricting trade will threaten the well-being of families and businesses and make it more difficult to build a lasting economic recovery from the COVID-19 pandemic," she said.

Given the paucity of data on the economic impact of the conflict, economists have had to rely on simulations for their assumptions about global gross domestic product (GDP) growth through 2023.

Those estimates capture the direct effects of the war, including the destruction of infrastructure and increased trade costs; the impact of Russian sanctions, including the blocking of Russian banks from the SWIFT international banking payments system; and reduced aggregate demand in the rest of the world, due in part to growing uncertainty.

The Trade Organisation said world GDP at market exchange rates should rise by 2.8 per cent this year, or 1.3 percentage points below the previous forecast.

Output growth should rise to 3.2 per cent in 2023, "assuming persistent geopolitical and economic uncertainty", which is close to the 3.0 per cent average rate for the 2010-2019 period.

In the Commonwealth of Independent States (CIS) region, created after the dissolution of the Soviet Union in 1991 and excluding Ukraine, GDP is expected to fall by 7.9 per cent, leading to a 12 per cent decline in imports.

However, exports should increase by almost 5 per cent, as other countries continue to rely on Russian energy.

"Should the situation change, we could see further export volume growth in other fuel-producing regions,'' the WTO said.

Given current GDP assumptions, the agency has projected that merchandise trade volume growth this year could be as low as 0.5 per cent or as high as 5.5 per cent. The figures will be updated in October or earlier, if deemed necessary.

The volume of world merchandise trade grew about twice as fast as world GDP in the two decades before the global financial crisis of 2007-2008. The ratio fell to around 1:1 on average in the wake of the crisis.

If the current forecast holds, there will be no fundamental change in the relationship between trade and output.

"Risks to the forecast are mixed and difficult to assess objectively," the agency said. "There is some upside potential if the war in Ukraine ends sooner than expected, but substantial downside risks could emerge if fighting persists for too long or if the conflict escalates."

World fuel prices were already rising before the war. Last month, the benchmark crude oil price was $118 per barrel, up 38% from January and more than 80% year-on-year. Daily prices have moderated recently, from a peak of $128 per barrel on 8 March to $104 on 1 April.

Unlike oil prices, the cost of natural gas has varied considerably across regions. In Europe, where many countries still rely on Russian supplies, the price rose 45 per cent between January and March, to $41 per million British thermal units (Btu). The price has remained relatively low in the United States, at about $4.9.

The trade agency said higher oil prices may reduce real incomes and import demand worldwide, while higher natural gas prices would likely have a greater impact in Europe.

The trade forecast was published together with the annual trade statistics for merchandise and commercial services.

The volume of merchandise trade, measured by the average of exports and imports, increased by 9.8 per cent in 2021, and the value grew by 26 per cent to $22.4 trillion.

Trade in services, which includes the transport sector and covers container shipping and the passenger airline industry, also increased by 15 per cent in 2021, reaching $5.7 trillion.

Although trade in the travel sector was positive overall, the figures remained weak, as COVID-19 restrictions were only partially eased during the year.

The World Trade Organisation said that Western sanctions on Russian companies and individuals are likely to have a strong effect on commercial services.

"Before the pandemic, travel, tourism and air transport services were Russia's most traded services, accounting for 46% of its exports and 36% of its imports. These services, already hard hit by the pandemic, may be strongly affected by economic sanctions," the agency said.