The World Bank has raised concerns over potential new U.S. trade policies and their adverse effects on global economic growth. In its latest Global Economic Prospects report, the Bank projected global growth would remain stagnant at 2.7% through 2024, 2025, and 2026. The report underscores the fragility of the current economic climate, highlighting the weakest long-term growth outlook for developing economies since the year 2000.

This grim projection comes amid mounting trade tensions as the incoming U.S. administration under President-elect Donald Trump signals its intent to impose sweeping tariffs on imports. The proposed measures include a 10% tariff on global imports, punitive 25% duties on Canadian and Mexican imports, and a staggering 60% tariff on Chinese goods.

Impact of Proposed U.S. Tariffs

The World Bank’s analysis indicates that such broad-based tariffs, coupled with retaliatory measures by trading partners, could significantly reduce global economic growth.

• A 10-percentage point increase in U.S. tariffs could reduce global growth by 0.2 percentage points.
• Retaliatory tariffs imposed by trading partners could deepen the impact, further lowering growth by an additional 0.1 percentage point.
• U.S. gross domestic product (GDP) could shrink by 0.4% under these conditions, with retaliatory measures potentially amplifying the contraction to 0.9%.

The Bank for International Settlements has also warned of escalating “frictions and fragmentation” in global trade, calling the prospect of a broad-based trade war a “tangible risk scenario.”

The Ripple Effect on Developing Economies

Developing economies, already grappling with weak investment, high debt burdens, and the rising costs of climate change, stand to be disproportionately affected by these policies. According to the World Bank:

• Economic growth in developing nations is expected to hover at just 4% in 2025 and 2026, well below pre-pandemic averages.
• Foreign direct investment into these regions has plummeted to nearly half the levels seen in the early 2000s.
• Global trade restrictions are now five times higher than the average between 2010 and 2019, compounding the challenges for emerging markets.

“The next 25 years will be a tougher slog for developing economies than the last 25,” said Indermit Gill, Chief Economist at the World Bank. He emphasized the need for domestic reforms to stimulate investment and deepen trade relationships.

Diverging Growth Patterns

The widening gap between developed and developing economies remains a critical concern.

• While advanced economies show signs of stabilization, the World Bank estimates that overall output in emerging markets and developing economies will remain more than 5% below pre-pandemic trends by 2026.
• Average per capita growth rates in developing nations, excluding China and India, have been lagging behind those in wealthier countries since 2014.

In the 2000s, developing countries enjoyed nearly 6% annual growth. This dropped to 5.1% in the 2010s and has fallen to an average of 3.5% in the 2020s.

Key Risk Factors

The report identifies several headwinds that could undermine growth further:

1. Trade Tensions: Escalating tariffs and retaliatory measures threaten to distort trade flows and dampen investment.
2. High Policy Uncertainty: Uncertainty over future monetary and fiscal policies is eroding investor confidence and constraining capital flows.
3. Persistent Inflation: Sustained inflationary pressures may delay anticipated interest rate cuts, tightening global financial conditions.
4. Climate Change Costs: Rising costs associated with mitigating and adapting to climate change are placing additional strain on developing economies.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), echoed these concerns last week, cautioning that developing economies could face serious challenges over the next two years.

Global Trade Outlook

Despite a slight uptick in global trade growth to an average of 3.1% in 2025-2026, it is expected to remain well below pre-pandemic levels. This is partly due to the increasing prevalence of trade-distorting measures, which the World Bank notes are being implemented primarily by advanced economies.

“The current trajectory of global trade is concerning,” the report stated. “Without meaningful reforms, trade growth is unlikely to regain its historical momentum.”

U.S. Domestic Considerations

Interestingly, the report also highlights potential positive spillovers for the U.S. economy, should domestic tax cuts be extended in 2026. Such measures could boost U.S. GDP growth by 0.4 percentage points, though global benefits are expected to be minimal.

Policy Recommendations

To mitigate these risks, the World Bank has outlined several key policy recommendations:

1. Trade Policy Reforms: Governments must prioritize reducing trade barriers and promoting multilateral cooperation to ensure smoother trade flows.
2. Structural Reforms in Developing Economies: Developing nations should adopt policies to attract foreign investment, improve infrastructure, and boost productivity.
3. Climate Change Mitigation: Collaborative efforts to address climate change must be intensified, with an emphasis on sustainable development.
4. Monetary and Fiscal Policy Coordination: Policymakers must balance inflation control measures with growth-stimulating initiatives.

Looking Ahead

The global economy faces a precarious period as geopolitical tensions, economic fragmentation, and structural vulnerabilities weigh on growth prospects. Developing economies, in particular, are navigating an increasingly challenging landscape.

As the U.S. prepares to implement its proposed trade policies, the potential for widespread disruption to global trade and investment remains high. Policymakers worldwide will need to act decisively to foster greater economic stability, ensuring that the gains of globalization are not eroded by protectionism and short-termism.

The next several years will be critical in determining whether the global economy can navigate these challenges effectively or succumb to further fragmentation and slowdown.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

17^th January, 2024