WEF Day 2 report: The danger of decoupling

Robust global trade and investment is credited with lifting millions of people around the world out of poverty and tripling the global economy over the last the three decades. However, recent crises, including the pandemic and the war in Ukraine have exposed vulnerabilities in the global trade architecture. There are concerns that growing political tensions could also interfere with the free flow of capital and investment and compromise trade and economic growth.

A session on Day 2 of the World Economic Forum in Davos sought to address these concerns and propose ways in which global trade and investment can be harnessed to sustain growth, poverty reduction and the continued rise in living standards.

The panel comprised Alexander De Croo, prime minister of Belgium; Laurence Fink, chairman and chief executive of asset manager BlackRock, Ngozi Okonjo-Iweala, director-general of the World Trade Organisation (WTO) and Robert Habeck, vice-chancellor and federal minister for economic affairs and climate action of Germany.

‘Decoupling could lead to loss of 5% of global GDP’

The panel shared their concerns about the prospects of decoupling in global trade and investment. According to Okonjo-Iweala, simulations carried out by the World Trade Organisation showed that decoupling could lead to the loss of 5% in global gross domestic product, worse than was lost after the financial crash in 2008.

Fink observed that the risk of decoupling has risen because of national security concerns that have been exacerbated by recent events. Countries have been moved to attach national security considerations to trade and economics, which does not augur well for trade and the benefits that can be derived from it.

“If we want to have a world where we are lifting millions form poverty; where price stability is important, then we are going to have to work in in a globalised world.” he emphasised.

One of the underlining vulnerabilities that have been exposed by the recent crises is the concentration of resources and manufacturing in only a few countries. De Croo pointed to Europe’s dependence on Russia for energy, on the US for its security and on China for technology.

Recent legislation on semiconductors in the US and the European Union, he said, are positive steps to diversify production and secure global supply of that essential technology. Panellists however cautioned that the return of industrial policy should not mean a race to the bottom with countries using their power and subsides to take business away from others.

Panel expresses optimism

In spite of these challenges, however, the panel was optimistic about the future of global trade. Fink reminded the audience that the world is in a stage of transition and those are usually painful periods. He called for a bigger role for the private sector, which in collaboration with governments, can provide the infrastructure that will be critical to the future of trade. 

Habeck said that the new trade architecture must now take account of climate and social issues. The WTO and other multilateral institutions must be strengthened and supported to play a key role in designing the new trade architecture and the values that will underpin it, he added. 

Okonjo-Iweala appealed for developing countries to be given utmost consideration in trade arrangements, observing that many of them have resources and capacities that can be harnessed in resolving challenges such as climate change. She supported the calls for more multilateralism, which she said is essential for solving global problems, adding “if we want to recover and we want to recover strongly, then we need trade”.