COVID-19 will continue to be present and fashion the way we live and conduct business for the foreseeable future. In 2021, many believed it would be the year of recovery, after vaccines started to become approved and rolled out late 2020/early 2021. However, the emergence of COVID-19’s Omicron variant, in late 2021, became the predominant cause of COVID-19 infections across the world within a few months, and delayed any plans that people had to return to any kind of “normality”. As the virus creatively reinvents itself through new variants, it continues to cause economic challenges and lead to trade disruptions, becoming a major ‘stress test’ of the world trading system.
Inflation, supply chains and debt will be great concerns in 2022. Despite challenges in supply chain disruptions, growth is expected to range between 4.3 per cent and 5.4 per cent, pushed on one side by a cooling down of consumer spending on durable goods, combined with a shift towards more sustainable patterns, and on another side buoyed by less acute input shortages, and reduced shipping congestions. All of this will fuel inflation tendencies and force many businesses to rethink global production networks.
Figure 1. GDP growth projections in 2022 in percent
Source: IMF WEO, Jan 2022
The pandemic did not stop countries from continuing to negotiate and implement trade agreements. On November 16, 2021, two years after exploratory discussions, Canada met virtually with ASEAN Economic Ministers and announced that they had agreed to proceed with negotiations toward a comprehensive Canada-ASEAN FTA. In October 2021, following the signature by Canada, Chile and New Zealand in 2020, Mexico signed on to the Global Trade and Gender Agreement, the first-ever instrument to provide focus on gender-related provisions in trade. Negotiations continued and concluded for potential deals between Chile-India, Chile-Republic of Korea, Mercosur-Singapore, the Pacific Alliance (Canada, Australia, New Zealand and Singapore), etc.
We expect the UK to intensify trade negotiations. Following Brexit and the quick roll-over of the previously concluded FTAs under the EU, the UK concluded major agreements with Japan, Australia, New Zealand, Canada, Mexico and Singapore (a digital trade agreement in addition to the current FTA). We expect a lot of movement in this area in 2022, particularly regarding the start of the negotiations over a future UK-India FTA, possible UK accession to the CPTPP and a UK-Gulf Co-operation Council FTA.
Figure 2. UK FTA status at end of 2021
Source: IEC Trade Insights
2021 also saw progress on the mega-regional trade deals, such as the Regional Comprehensive Economic Partnership (RCEP). RCEP came into force in 2021 but its implementation will take years, yet holds great promise due to the sheer size of its economies and the simplified rules proposed. RCEP will bring together 15 East Asian and Pacific countries of varying economic sizes and stages of development. Australia, Brunei Darussalam, Cambodia, China, Indonesia, Japan, Republic of Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. On January 1, 2021, free trading officially commenced under the African Continental Free Trade Area (AfCFTA) , an agreement with 54 parties, a market of approximately 1.2 billion people and a USD 2.6 trillion economy. Negotiations on pending issues continued. The RCEP received the required ratification by early December 2021 to take effect on January 1, 2022, for the first ten ratifying countries, and it entered into force on January 1, 2022.
Figure 3. Share of World GDP of Selected major FTAs
Source: Proshare Research; UNCTAD
Although not all countries managed to reach successful cooperation, trade wars are still looming. Trade tensions continued to be in the spotlight in 2021, particularly between the US and China and the US and the EU. On the EU-US side, both parties seemed to have come to terms with most issues, including the Section 232 steel and aluminium tariffs and the Boeing-Airbus dispute. The US and the EU also established the Trade and Technology Council (TTC) as a platform for addressing priority areas in the bilateral relationship, including technology standards, secure supply chains, information communications technology, services security and export controls. In 2022, we look forward to seeing the combined efforts by the two superpowers towards greater cooperation around supply chains, particularly around semiconductor production.
Whilst the tensions between the US and the EU appear to be resolved, the same cannot be said about the US-China trade war. A review of US trade policy toward China by the Biden Administration has been conducted since early 2021, with no results being released yet. Additionally, as the Economic And Trade Agreement (Phase One) ended in 2021, China was found to fall short of its pledged USD 200 billion in additional purchases, which gives the US the right under the agreement to reinstate or increase duties by nearly USD 300 billion in imports. 2022 will likely see particular efforts by the US Trade Representative to press for deeper issues in the negotiations of the Phase Two agreement, such as enforceable mechanisms to limit or eliminate Chinese subsidies to key industrial sectors, which were estimated to be over USD 33 billion in 2020 in areas including semiconductors and pharmaceuticals.
Meanwhile, the WTO’s 12th Ministerial Conference continues to drag on. The WTO planned to hold its 12th Ministerial Conference (MC12) in Kazakhstan first in June 2021, then postponed until December and then pushed into 2022 due to the pandemic. Among the key topics for discussion in the MC12 are fisheries subsidies, pandemic response, as well as WTO reform. Given the heterogeneity of the WTO membership and the increasing breadth and depth of trade-related disciplines, the WTO reform might need to accommodate variable geometry.
Some progress was made in reaching a multilateral framework to combat climate change, respond to pandemics and global rules on taxation: the G20 Rome summit and the 26th Conference of Parties (COP26) took place, achieving meaningful results. The 2021 G20 Rome summit reached commitments, through the G20 Rome Leaders’ Declaration, on health (access to COVID-19 vaccines in low- and middle-income countries and the G20 Joint Finance-Health Task Force), environment (the goal of limiting global warming to 1.5°C compared to pre-industrial levels; net-zero greenhouse gas emissions or carbon neutrality by or around mid-century); sustainable finance and international taxation (developed countries’ commitment to jointly mobilise USD 100 billion per year for climate finance; new rules for a more stable and fairer international tax system, including a 15% global minimum corporate tax, by 2023). The COP26, on the other hand, saw further commitment to attain net-zero carbon emissions by 2050 at the latest, with the establishment of a USD 130 trillion fund of green finance for the net-zero economy, the new International Sustainability Standards Board (ISSB) to develop a global baseline for disclosure standards on climate and other environmental, social and governance (ESG) matters.
However, implementation remains weak: the G20 was criticised for the lack of concrete steps for implementation, especially for tackling COVID-19 recovery and climate crisis, whilst COP26 did not reach an agreement on the 1.5°C targets and failed to secure the USD 100 billion climate finance by 2020 as promised at COP15. In any case, the race to net zero by 2050 has begun. Unilaterally, many countries are looking into Carbon border adjustment measures (CBAM) and Carbon Emission Trading (CET). How will this affect trade? We can expect to see greener, more sustainable trade, but if not careful, also major stumbling blocks due to the differentiated environment-related standards and measures to trade. We hope to see more concrete and meaningful commitments in COP27, which will take place in Egypt in November 2022.
Overall, 2022 will still be marked by a significant business uncertainty, dominated by COVID-19, the evolution of the number of infected persons, and the approach of countries towards the pandemic – the UK, for example, has lifted all movement restrictions and mask requirements, aiming to adapt to the “new normality”. At International Economics Consulting, we specialise in supporting companies to navigate such uncertainty. From finding new export opportunities to identifying new suppliers, we are here to make sure that your business adapts to the ever-changing world.
Paul Baker is the founder and CEO of IEC. He is a consultant for various governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. Paul is an expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s TradeTech Working Group on AI, IOT, Blockchain and Digital Identities for trade, and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence tools. He is also a member of the UK’s All Party Parliamentary Committee on Trade.