While a backlash against globalization has been gathering steam for a while, trade has so far held up well. But with US President Donald Trump imposing sweeping tariffs on trade partners, which are moving to retaliate, this might be about to change, with dire consequences for developing-economy growth and decarbonization.
BEIJING – The 2020s are shaping up to be a lost decade, at best, for economic growth. This will be particularly bad for emerging markets and developing economies (EMDEs) in the short term, but it will leave us all worse off, not least by undermining the global fight against climate change. The parallels with the 1930s – when the world also faced a major economic shock, intensifying protectionism, growing nationalism, and the weakening of multilateralism – make the situation appear all the more ominous. Then, like now, geopolitics was king.
A backlash against globalization has been gathering steam for a while. But trade has so far held up well, maintaining a steady share of global GDP since the start of the decade. While global value chains (GVCs) have become longer, they have not yet been fundamentally altered. But with sweeping tariffs on trade partners and corresponding retaliatory measures, further fragmentation of trade and investment flows is practically a foregone conclusion.
EMDEs, which are already under considerable stress, are especially vulnerable. Scars from the COVID-19 pandemic are still hampering growth; global interest rates are falling more slowly than expected; and the US dollar is strengthening. For many developing countries, the costs of debt service have reached untenable levels. Meanwhile, these countries are often bearing the brunt of a rapidly worsening climate crisis that they did not create.
Now, EMDEs are bracing themselves for further turbulence. While shifts in GVCs and financial flows create opportunities for some countries, a full-scale trade war and tighter restrictions on cross-border investment would harm almost everyone. After all, EMDEs rely heavily on access to foreign capital and technology for both growth and decarbonization.
As shown by recent Asian Infrastructure Investment Bank research, global trade in low-carbon technologies (LCTs) has increased rapidly in recent years. But most of this trade is happening among advanced economies, which are exporting few LCTs to their developing counterparts. To be sure, LCT trade is also rising among EMDEs, with China as the primary source of the technologies. But this is insufficient to support growth and decarbonization. At the same time, trade restrictions on LCTs are increasingly impacting not only China but also a broader range of EMDEs, restricting their access to crucial export markets.
While some developing countries are incorporating LCT production into their growth models, this effort cannot succeed without greater access to foreign technologies and much more foreign capital. Likewise, EMDEs – which are critical to the global net-zero transition – will struggle to decarbonize their industries if they cannot take advantage of the newest innovations. Insufficient progress on decarbonization could jeopardize their long-term access to important export markets, including the European Union, which is already implementing a Carbon Border Adjustment Mechanism.
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Further GVC disruptions could undermine decarbonization efforts in other ways. For starters, value chains function essentially as governance arrangements, with lead firms establishing and enforcing standards across the production and distribution process. It is by reducing emissions at every step of that process that GVCs’ overall carbon footprint is reduced. If these arrangements are weakened, so is decarbonization.
Moreover, EMDEs will have a far stronger incentive to decarbonize if they see opportunities to attract foreign investment in green industries, such as renewable energy and low-carbon transport, which can create jobs and boost growth. The geopolitically motivated suppression of value chains implies that these opportunities will be significantly reduced.
In recent decades, EMDEs have drastically expanded their role in GVCs. (While China has led the way, particularly in producing intermediate goods, it is hardly alone.) But when the COVID-19 pandemic caused major trade disruptions, the more recent entrants to GVCs were the first to be forced to exit. A new trade shock, caused by a wave of tit-for-tat tariffs, could have a similar effect.
But this time, the consequences could be longer-lasting. As soon as trade returned to normal after the pandemic shock, developing economies rushed to rejoin GVCs. While trade had been temporarily disrupted, the trust on which GVCs depend remained intact. That trust may not survive a trade war, meaning that recovering from the coming disruption might prove far more difficult.
Unlike the 1930s, this lost decade might not generate a severe economic depression or a world war (or so we hope). But it will almost certainly bring weaker growth and set back the fight against climate change. And it is EMDEs that will pay the highest price.
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The US administration’s plan to impose “reciprocal” import tariffs could severely curtail key Indian exports, including chemicals, metals, auto parts, and pharmaceuticals, leading to job losses and undermining fiscal stability. India has little choice but to lower its own tariffs while negotiating improved access to the US market.
urges policymakers to brace for the impact – known and unknown – of the US administration’s trade policies.
While it appears unlikely that US GDP will contract in the first quarter, the economy could enter recession territory in the second or third quarter of 2025. If a recession does materialize, its magnitude and duration would depend largely on factors that remain impossible to predict – notably, tariffs and geopolitics.
catalogues several indicators suggesting that the world's largest economy is headed for a slump.
Less than two months into his second presidency, Donald Trump has imposed sweeping tariffs on America’s three largest trading partners, with much more to come. This strategy not only lacks any credible theoretical foundations; it is putting the US on a path toward irrevocable economic and geopolitical decline.
BEIJING – The 2020s are shaping up to be a lost decade, at best, for economic growth. This will be particularly bad for emerging markets and developing economies (EMDEs) in the short term, but it will leave us all worse off, not least by undermining the global fight against climate change. The parallels with the 1930s – when the world also faced a major economic shock, intensifying protectionism, growing nationalism, and the weakening of multilateralism – make the situation appear all the more ominous. Then, like now, geopolitics was king.
A backlash against globalization has been gathering steam for a while. But trade has so far held up well, maintaining a steady share of global GDP since the start of the decade. While global value chains (GVCs) have become longer, they have not yet been fundamentally altered. But with sweeping tariffs on trade partners and corresponding retaliatory measures, further fragmentation of trade and investment flows is practically a foregone conclusion.
EMDEs, which are already under considerable stress, are especially vulnerable. Scars from the COVID-19 pandemic are still hampering growth; global interest rates are falling more slowly than expected; and the US dollar is strengthening. For many developing countries, the costs of debt service have reached untenable levels. Meanwhile, these countries are often bearing the brunt of a rapidly worsening climate crisis that they did not create.
Now, EMDEs are bracing themselves for further turbulence. While shifts in GVCs and financial flows create opportunities for some countries, a full-scale trade war and tighter restrictions on cross-border investment would harm almost everyone. After all, EMDEs rely heavily on access to foreign capital and technology for both growth and decarbonization.
As shown by recent Asian Infrastructure Investment Bank research, global trade in low-carbon technologies (LCTs) has increased rapidly in recent years. But most of this trade is happening among advanced economies, which are exporting few LCTs to their developing counterparts. To be sure, LCT trade is also rising among EMDEs, with China as the primary source of the technologies. But this is insufficient to support growth and decarbonization. At the same time, trade restrictions on LCTs are increasingly impacting not only China but also a broader range of EMDEs, restricting their access to crucial export markets.
While some developing countries are incorporating LCT production into their growth models, this effort cannot succeed without greater access to foreign technologies and much more foreign capital. Likewise, EMDEs – which are critical to the global net-zero transition – will struggle to decarbonize their industries if they cannot take advantage of the newest innovations. Insufficient progress on decarbonization could jeopardize their long-term access to important export markets, including the European Union, which is already implementing a Carbon Border Adjustment Mechanism.
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At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
Further GVC disruptions could undermine decarbonization efforts in other ways. For starters, value chains function essentially as governance arrangements, with lead firms establishing and enforcing standards across the production and distribution process. It is by reducing emissions at every step of that process that GVCs’ overall carbon footprint is reduced. If these arrangements are weakened, so is decarbonization.
Moreover, EMDEs will have a far stronger incentive to decarbonize if they see opportunities to attract foreign investment in green industries, such as renewable energy and low-carbon transport, which can create jobs and boost growth. The geopolitically motivated suppression of value chains implies that these opportunities will be significantly reduced.
In recent decades, EMDEs have drastically expanded their role in GVCs. (While China has led the way, particularly in producing intermediate goods, it is hardly alone.) But when the COVID-19 pandemic caused major trade disruptions, the more recent entrants to GVCs were the first to be forced to exit. A new trade shock, caused by a wave of tit-for-tat tariffs, could have a similar effect.
But this time, the consequences could be longer-lasting. As soon as trade returned to normal after the pandemic shock, developing economies rushed to rejoin GVCs. While trade had been temporarily disrupted, the trust on which GVCs depend remained intact. That trust may not survive a trade war, meaning that recovering from the coming disruption might prove far more difficult.
Unlike the 1930s, this lost decade might not generate a severe economic depression or a world war (or so we hope). But it will almost certainly bring weaker growth and set back the fight against climate change. And it is EMDEs that will pay the highest price.