TWN Info Service on WTO and Trade Issues (Apr22/08)
13 April 2022
Third World Network

Ukraine crisis dealing a severe blow to global economy, says WTO
Published in SUNS #9555 dated 13 April 2022

Geneva, 12 Apr (Kanaga Raja) – The war in Ukraine has created a humanitarian crisis of immense proportions and has also dealt a severe blow to the global economy, according to the World Trade Organization (WTO).

In a Secretariat Note analyzing the crisis in Ukraine, the WTO said that the brunt of the suffering and destruction are being felt by the people of Ukraine themselves but the costs in terms of reduced trade and output are likely to be felt by people around the world through higher food and energy prices and reduced availability of goods exported by Russia and Ukraine.

“Poorer countries are at high risk from the war, since they tend to spend a larger fraction of their incomes on food compared to richer countries. This could impact political stability,” said the WTO.

Using a global economic simulation model, WTO Secretariat staff project that the crisis and related policies could lower global GDP growth by 0.7-1.3 percentage points, bringing growth to somewhere between 3.1 per cent and 3.7 per cent.

The simulation model also projects that global trade growth this year could be cut almost in half, from the 4.7 per cent the WTO forecasted last October to between 2.4 per cent and 3 per cent, said the WTO.

[In a separate trade forecast released on 12 April, the WTO projected merchandise trade volume growth of 3.0 per cent in 2022 – down from its previous forecast of 4.7 per cent – and 3.4 per cent in 2023, on account of the war in Ukraine.]

According to the Secretariat Note on the crisis in Ukraine, GDP forecasts for 2022 are certain to be downgraded in light of the Russia-Ukraine war.

“Output in the war zone will be directly reduced, while economic sanctions will impose costs on both Russia and its trading partners,” it said.

Higher prices for food and energy will depress real incomes and reduce consumption and investment worldwide, which will, in turn, lower global import demand, it added.

A handful of food and energy exporters may benefit from these price movements, but for most countries and for the global economy they are a net negative, said the Secretariat Note.

It said the IMF’s most recent forecast from last January predicted that global GDP would increase by 4.4 per cent at purchasing power parity in 2022, but a recent estimate from Capital Economics on 16 March had global output growing just 3.2 per cent this year.

Some regions will be more strongly affected by the war than others. Europe, being the main destination region for both Russian and Ukrainian exports, is likely to experience the brunt of the economic impact, it added.

The WTO said reduced shipments of grains and other foodstuffs will also boost prices of agricultural goods, with negative consequences for food security in poorer regions.

“Beyond these first-order effects, economic sanctions could cause major economies to move toward “decoupling” based on geopolitical considerations, with the goal of achieving greater self-sufficiency in production and trade.”

This second-order effect would ultimately be a lose-lose proposition, as it would lower long-run economic growth by restricting competition and stifling innovation, the WTO cautioned.

It noted that Russia and Ukraine play a relatively minor role in the global economy, with exceptions in certain key sectors. Russia’s share in world merchandise exports in 2021 was 2.2 per cent, while its share in world GDP was 1.7 per cent.

Meanwhile, Ukraine accounted for 0.3 per cent of world exports and 0.2 per cent of world GDP. Both countries trade predominantly with Europe and Asia, it said.

Russia and Ukraine are both large agricultural exporters, especially of grains (wheat, maize, barley) and sunflower products, said the Secretariat Note.

“Exports from Black Sea ports have been severely disrupted. Africa and the Middle East are the most vulnerable regions, as they import over 50 per cent of their cereal needs from Ukraine and/or Russia,” it added.

“In total, 35 countries in Africa import food and 22 import fertilizer from Ukraine, Russia or both. Some depend heavily on both countries for key staples such as wheat.”

The WTO said Ukraine’s ports are closed due to the war, preventing existing grain supplies from being exported, and in the absence of a swift ceasefire that permits farmers to return to fields, the disruption to spring sowing will lower future production significantly.

It said that current price hikes (25-30 per cent for wheat, 35 per cent for soybeans) will hurt net food importing countries, particularly low-income ones. Food and energy account for a large share of the consumption basket of developing economies, and in particular poorer households within them.

“The current crisis is likely to exacerbate international food insecurity at a time when food prices are already historically high due to the COVID-19 pandemic and other factors.”

The WTO said according to the Food and Agriculture Organization of the United Nations (FAO), low-income food deficit countries already saw their food bill rise by 20 per cent in 2021, a US$120 billion increase including US$52 billion for sub-Saharan Africa.

The cost of providing food aid to people affected by the crisis and natural disasters has increased with the price of food, and the World Food Programme has appealed for additional financial support, it noted.

It said that other crops such as corn and barley are predominantly used for animal feed, and so have less immediate food security implications.

However, higher prices for these grains would eventually lead to higher livestock and meat prices in rich countries.

“There could be further spill-over effects in other animal and vegetable products, possibly even beer,” it added.

Prices will also increase for crops that are not exported by Russia and Ukraine but that can serve as substitutes, as countries attempt to fill the gap in cereal imports with alternatives, said the Secretariat Note.

“The price of rice has increased by 12 per cent since the beginning of the year while the price of oats has risen by 8 per cent.”

This effect on the broader agricultural sector is aggravated as the price of fertilizer is also surging because Russia is the largest supplier with a market share of around 15 per cent, it added.

“Russia has announced that it will suspend fertilizer exports, but it is not clear whether the ban covers all countries or just those actively opposing the war in Ukraine. Reduced availability of fertilizers would impact farmers through smaller crop yields and lower quality output, not just in Ukraine but worldwide.”

According to the Secretariat Note, importantly, fertilizer prices in early 2022 were already high, the result of high energy prices (natural gas in particular plays a pivotal role in the production of nitrogenous fertilizers) and supply chain disruptions (including export restrictions by some key exporters).

High food prices will further be reinforced by rising energy prices, which raise transport costs. The price of Brent crude oil rose from around US$78 per barrel at the start of 2022 to US$130 per barrel on 8 March before falling back to US$110 per barrel in mid-March, it said.

Russia accounts for 9.4 per cent of world trade in fuels, including a 20 per cent share of world natural gas exports. Several European countries stand out as being highly dependent on Russian fuel exports, including Finland (63 per cent) and Turkey (35 per cent).

Large European economies are exposed to a lesser yet still significant degree: Italy, 22 per cent; Germany, 17 per cent; France, 12 per cent; and the United Kingdom, 12 per cent.

In sum, disruptions of food markets are already having a significant impact on global food security, particularly through prices for grains and oilseeds, said the WTO.

“As seen with the Arab Spring and food riots elsewhere, food price increases can create deeper political instability. The supply situation will need to be monitored carefully to avoid a wider tragedy,” it added.

In addition to the agricultural and energy sectors, Russia and Ukraine also provide certain key inputs to industrial value chains, said the Secretariat Note.

Russia accounts for 4.6 per cent of global iron and steel exports. Ukraine is responsible for 2.2 per cent of steel shipments globally, but they are more dominant in some markets.

“Trade between Russia and Ukraine had already fallen significantly since 2014, as Ukraine shifted to European value chains in sectors such as energy, agriculture, aviation and automobiles.”

Value chain integration makes both Ukraine and its trading partners vulnerable to shocks. Most Ukrainian factories have shut down since the start of the crisis and pre-crisis transportation has been disrupted, said the WTO.

It said while the ensuing interruption in the supply of inputs from Ukraine has led to a temporary idling of several car plants in Germany, it is likely that manufacturers can adapt relatively quickly by shifting production to plants outside the affected region.

The WTO said that the situation is likely different for raw materials exports and, in particular, metals (palladium, rhodium) or chemical gases (neon, krypton) used in the automotive and semiconductor industries.

Russia is the largest producer of palladium, supplying 26 per cent of global import demand in 2019, with higher shares in the United States (43 per cent), Japan (45 per cent) and the Republic of Korea (38 per cent).

Other automobile producing countries are also exposed, including China (29 per cent) and Germany (26 per cent).

“Russia is also a key producer of rhodium, meeting 7 per cent of global demand with high shares for Italy (34 per cent), the Republic of Korea (23 per cent) and Switzerland (20 per cent).”

Ukraine supplies more than 90 per cent of US semiconductor-grade neon, critical for lasers used in chip-making. The gas, a by-product of Russian steel manufacturing, is purified in Ukraine, said the WTO.

Disruptions in the supply of these inputs could hit car producers at a time when the industry is just recovering from a shortage of semiconductors, it cautioned.

The WTO said financial sanctions, such as blocking Russian use of foreign exchange reserves and disconnecting certain Russian banks from the SWIFT settlement system, have already produced a sharp depreciation of the rouble, reducing its purchasing power.

“Many international firms are retreating from the Russian market, while bans on trading in Russian sovereign debt have left the country isolated from international capital markets.”

A number of countries have started to implement bans on Russian oil and gas exports. The ultimate impact of these measures is unclear, given the fungible nature of these commodities in global markets, said the WTO.

“They may lead to a reshuffling of supplies in the short run, with a limited impact on global output. Over the long term, reduced energy exports from Russia could be offset by oil production in other countries and greater reliance on renewable energy,” it added.

With regard to commercial sanctions, the WTO said a number of countries have proposed removing Russia’s most-favoured-nation (MFN) status.

“It is not yet clear what this would mean in terms of applied tariff rates levied at the border. Currently, the United States only applies a “general” non-MFN duty rate to the Democratic People’s Republic of Korea, at 37 per cent (against an average MFN rate of 4 per cent),” it added.

EFFECTS OF UKRAINE CRISIS

According to the Secretariat Note, WTO economists have run simulations assessing the global economic and trade effects of the crisis and sanctions as well as possible longer-term effects.

It said five scenarios were explored: (1) direct effects of the war on Ukraine itself; (2) impact of various sanctions on Russia; (3) impact of a reduction in aggregate demand around the world; (4) possible imposition of export restrictions on wheat and cereals; and (5) long-term impact of a possible disintegration of the global economy into two blocs (“decoupling”).

The simulations suggest that the economies involved will experience much larger impacts than the rest of the world as a result of destroyed infrastructure (Ukraine), reduced production and transport disruptions (Russia, Ukraine), as well as macroeconomic, financial and trade impacts of sanctions (Russia), said the WTO.

There are potential longer-run challenges to global growth and cooperation, as there is an increased potential for the world to “decouple” – break more clearly into competing spheres with much less economic and political cooperation resulting in lower long-term growth, it added.

It said that direct effects of the crisis and related sanctions may reduce global GDP growth by up to 0.7 percentage points.

“These effects could be almost twice as large (reduction of GDP growth by 1.3 percentage points) once aggregate demand effects are taken into account, through reduced consumption and investment stemming from increased uncertainty and consumer price inflation (food and energy).”

This would bring down global GDP growth to somewhere between 3.1 per cent and 3.7 per cent, compared to the IMF’s original prediction of 4.4 per cent for 2022, said the WTO.

According to the Secretariat Note, in the simulation, the reduction of global trade (up to 2.2 per cent) would be larger than that of GDP because sanctions are directly targeted at international flows, and because relative price changes (international prices rising faster than domestic ones) may lead to some reallocation of consumption away from traded manufactured goods towards services.

As a result, this would mean that the WTO trade forecast from last October of 4.7 per cent growth in merchandise trade volumes for 2022 could be cut almost in half to an approximate 2.4-3 per cent, the WTO said.

According to the Secretariat Note, some other key results from the simulations are as follows:

* Projections for Ukraine indicate that its GDP could decline by as much as 25 per cent compared to the pre-crisis outlook, depending on the extent of war-time destruction. For Russia, the sanctions already in place look set to shrink GDP by about 5 per cent this year;

* Sanctions also come at a cost to those putting them in place. As a result, the European Union is projected to face GDP reductions of about 1.5 per cent and other Western countries of around 1 per cent;

* Even countries and regions not directly involved (i.e. not part of the war or imposing sanctions) could see their GDP reduced by 1-1.3 per cent (e.g. via increases in the risk premium and a reduction in business and consumer confidence);

* Given the importance of Russia and Ukraine as food exporters, the specific analysis of wheat shows that various export restrictions are projected to have an important effect on the global market, but in particular in certain importing regions, with countries in sub-Saharan Africa possibly facing up to 50-85 per cent higher prices. A further cascading of export restrictions is projected to massively amplify such price volatility; and

* In case of a longer-term disintegration of the global economy into two economic blocs (“decoupling”), global GDP would suffer by about 5 per cent in the long run, with larger losses being incurred by emerging economies.