How the war in Ukraine is reshaping world trade and investment
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. Although the world’s poor—who spend a large part of their incomes on life’s necessities—are the most vulnerable, no country, region, or industry is left untouched by these disruptions.
A new World Bank report -- The Impact of the War in Ukraine on Global Trade and Investment -- shows that world trade will drop by one percent, lowering global GDP by just under one percent. Manufacturing exporters such as Vietnam, Thailand, and Mexico see a sharp decline, especially in energy intensive sectors. Net exporters of crops, including Turkey, Brazil, and India, and of fossil fuels, such as Nigeria and countries in the Middle East, see a surge in their exports, attenuating the negative effects of the war. The economic shock waves are moving through five channels: commodity markets, logistics networks, supply chains, foreign direct investment (FDI), and sectors such as tourism.
The war comes at a difficult moment for the world economy. The recovery from the pandemic-induced recession has been slowing as new coronavirus variants emerged sand governments reined in spending. Rising inflation has prompted the Federal Reserve and other major central banks to raise interest rates. Disruptions in world trade and investment will curb growth in developing countries and add to price pressures.
Food and energy
. Many countries around the world are heavily dependent on these flows. The Republic of Congo, for example, relies on imports from the Black Sea region for 67 percent of the wheat it consumes.
. Our simulation generates a 7 percent increase in the price of crude oil, which in turn raises the costs of transportation and production in manufacturing, leading to a drop in exports (Figure 1). Higher prices for natural gas, a key ingredient for ammonia fertilizer, will push up costs for farmers and reduce crop yields, further exacerbating food shortages.
Figure 1: Change in exports relative to reference year as a share of real GDP
Source: Chepeliev et al. (2022).
Trade-policy interventions risk making a bad situation worse (Figure 2). Export restrictions further reduce global supply, while import liberalization measures and subsidies increase demand. Since the beginning of the war in late February, 67 new trade policies have been imposed or announced. Export restrictions alone have added seven percentage points to the price of wheat and risk igniting a tit-for-tat escalation.
Figure 2: International wheat prices and trade policy measures
Source: Ruta et al. (2022).
Input shortages and other disruptions
. Russia’s connections to European ports have been cut, and commodity exports to other destinations have been constrained. Ukraine’s Black Sea ports have been blockaded or occupied, leaving the country few routes for its commodity exports. Air freight between Europe and Asia must now be rerouted to avoid Russian airspace. Rail transit through Russia is slowing due to checks for sanctions compliance, and further rounds of sanctions could risk halting rail transit entirely.
Disruptions to global and regional supply chains have caused input shortages and price hikes. Ukraine is a key supplier of inputs, including ignition cables for autos, neon gas for semiconductors, and iron ore for steel mills. Companies making transport equipment, machinery, electronics, and food products are especially reliant on Russian metals, chemicals, fertilizers, and other commodities.
Russia and Ukraine aren’t major players in the world’s FDI networks, but the war will nevertheless have an impact on some countries and industries. Armenia, Moldova, and the Kyrgyz Republic depend heavily on Russian investment. And European countries including Finland, Germany, and Norway have major stakes in Russia’s energy sector.
Tourism will also suffer, especially in developing countries. Georgia and Montenegro are highly dependent on Russian and Ukrainian visitors. A decline in global tourism will at least temporarily stall the industry’s post-pandemic recovery, as scheduled flights are disrupted and consumers reassess their travel plans.
What are the war’s likely long-term effects?
Some fear that the war will lead to a corrosion of globalization – the engine of growth and development for the past 30 years. Our analysis shows that firms will re-assess geopolitical risks and may move production away from countries they see as riskier, possibly reshaping global value chains to some extent. But given the capital in place, the cost of searching for alternatives, and wage differentials across countries, this process is likely to be gradual rather than sudden. And it will not result in a reversal of globalization unless it is supported by pronounced government intervention.
The big unknown and risk comes from policies aiming at fragmenting the trade system rather than defusing tensions and strengthening global value chains against future disruptions.
Join the Conversation
Thanks Michele for this model. I think it would be interesting to separate the price increases due to a drop in real supply and the ones due to the market power of the actors. The wheat supply has not disappeared, there are 20m tons sitting in Ukraine, but the four ABCD traders (mostly American) do not have any incentive to find a logistic solution, since their prices are up (as they do in all turmoil), and they are posting record profits. There is a clear conflict of interest of these traders, the largest GVCs (that by the way continue operating in Ukraine and Russia) and consumer welfare.
"Some fear that the war will lead to a corrosion of globalization – the engine of growth and development for the past 30 years. OUR ANALYSIS SHOWS that firms will re-assess geopolitical risks and may move production away from countries they see as riskier, possibly reshaping global value chains to some extent."
With all due respect, there is no tool with which you can perform an "analysis" of what this war can lead to. You can at best have a hunch, and hopefully yours is the right one. But when one adds to the picture the way China is (ab)using its position of major supplier and inescapable link of many essential value chains, it is pretty obvious that "globalization" as welcomed and worshiped by many people (including myself) 15-20 years ago is dead and buried. We're therefore in the process of coining yet another oxymoron ("strategic autonomy"), just as we did in the past, when WTO's promises dwindled and the term "open regionalism" came to the fore.
It's very understandable
Following the 2008 bubble burst on financial institutions in the Atlantic and Western Europe, it was in 2009, that then French President, Nicolas Sarkozy, called for the G7 to relook at the Capitalist model and “revise” it? Perhaps that exercise would have produced “humane” outcomes and changed the thinking of global leaders to shift focus to real problems with that system that’s now impacting the ecology, always hurt the poor, and precipitated the war in Ukraine due to growing concerns of unequal power and economic imbalances. Wars become ‘naturalized’’ means to shift power imbalances! Just like natural disasters result from imbalances in overuse of natural resources.
The Ukrainian military and political leadership had been able turn the tide around and inflict devastating strategic losses on the Russian military. The Ukrainian military was able to quickly acquire the knowledge and expertise of the NATO & Western military equipment & weaponry in a very short timeframe and effectively use it against the Russian forces. The results are impressive and visible: Within days the Ukrainians will be able to take over Lyman and further penetrate the Lugansk/Donbass southern frontlines. Strategically this is a very important move. However, will Putin who feels cornered with his military failures use the tactical (smaller scale) nuclear weapons to change the course of the war? With the sham referendums it feels like Putin is all in… In addition, with forced mobilization of Russians it feels like Putin is playing this game with the usual Russian military playbook he utilized in Georgia, Chechnya and Syria: win the war by spilling more civilian blood & terror
Hopefully, there will be a set of common rules for the whole world, in which each law is applied equally to all members. Those who commit crimes against humanity must be punished, those who do things for humanity must enjoy the results they deserve. In this way, our next generations will understand what is a good action and what is a bad without getting it wrong. For example, while the whole world is opposed to racism and it seems that some countries also have some laws against racism, suddenly a law is invented very quickly by these country, that is the law of confiscation and destruction of property of a few individuals of Russian nationality and wealth. Please everyone, is this a racist act or is this an opportunistic law to steal these people's property?
See I know that there is a huge problem but i think we all know the facts and data and we have also predicted that what can be happen in future but we have to think about the solution also like what can be the solution to start the trade again i will say that Russia and Ukraine can have a treaty for now that no soldiers will stop the goods trucks or ships they can check them but can not shoot or stop them and USA should also take there sanctions back and they can also sign a treaty and to do that USA can ask for some wealth like some billion dollar so because of that atleast the inflation and lack of resources can be controlled on some percentage!