The International Monetary Fund (IMF) has stated that trade policy uncertainty reduces investment and economic output and raises unemployment in indebted emerging economies like Nigeria.
This was disclosed in a recent IMF blog post that examined the potential consequences of dissolving global trade links.
The Washington-based multilateral lender said even without actual restrictions, policy uncertainty related to trade can worsen economic activity, causing firms to pause hiring and investment even as new firms may decide to postpone entry into 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 post said:
- “Our analysis shows that a typical shock to trade policy uncertainty, like the 2018 buildup of US-China tensions, reduces investment by about 3.5% after two years. It also decreases gross domestic product by 0.4% and raises the unemployment rate by 1 percentage point. Not everyone is equally vulnerable, however.”
- “The effects on investment are even larger for emerging markets and more open economies, and firms with high debt. Corporate debt has increased significantly in Asia since the global financial crisis—spiking further in the wake of the pandemic—suggesting that higher trade policy uncertainty could prove to be especially damaging for the region.”
Advice for policymakers: The bank stated that policymakers need to act to avoid the adverse effects and ensure that trade remains an engine of growth. The IMF said:
- “Rolling back damaging trade restrictions and reducing uncertainty via clear communication of policy objectives should be a priority. Complementing regional agreements with reforms at the multilateral level, while also restoring a fully functional World Trade Organization dispute settlement system can, not only mitigate potential negative impacts of discriminatory policies on other trading partners but also help resolve some of the underlying sources of tensions.”