The International Monetary Fund (IMF) said trade policy uncertainty is reducing investment and economic output and increasing unemployment in debt-ridden emerging economies like Nigeria.
This was revealed in a recent IMF blog post that looked at the potential consequences of dissolving global trade ties.
The Washington-based multilateral lender said even without real restrictions, trade-related political uncertainty can worsen economic activity, forcing businesses to halt hiring and investment even as new businesses may decide to postpone the entering a market.
Implications of a trade policy shock: The IMF highlighted the implications of a trade policy shock and added that not everyone is equally vulnerable. Part of the IMF message read:
- “Our analysis shows that a typical shock to trade policy uncertainty, such as the escalation of US-China tensions in 2018, reduces investment by around 3.5% after two years. It also decreases the gross domestic product by 0.4% and increases the unemployment rate by 1 percentage point. However, not everyone is equally vulnerable.
- “The effects on investment are even greater for emerging markets and more open economies, as well as for highly indebted companies. Corporate debt has risen dramatically in Asia since the global financial crisis – it has risen further in the wake of the pandemic – suggesting that greater trade policy uncertainty could prove particularly damaging for the region.
Tips for decision makers: The bank said policymakers must act to avoid negative effects and ensure trade remains an engine of growth. The IMF said:
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- “Rolling back harmful trade restrictions and reducing uncertainty through clear communication of policy objectives should be a priority. Complementing regional agreements with reforms at the multilateral level, while restoring a fully functioning World Trade Organization dispute settlement system, can not only mitigate the potential negative effects of discriminatory policies on other trading partners, but also help resolve some of the underlying sources of tension.