The Chief Economist at the Asian Infrastructure Investment Bank (AIIB), Erik Berglof, claims that the surge of protectionist trade policies unleashed by the United States has caused greater economic instability worldwide than the Covid-19 pandemic or the global financial crisis of 2008.
“Unprecedented” policy instability is weighing hard on investment, trade, and growth, especially for emerging countries like India, according to Berglof in an exclusive interview with The Times of India.
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“The amount of uncertainty that we are seeing on a global—and national—level is tremendous,” Berglof said. Sadly, one of the countries most impacted by it is India. Even more unpredictable policies are in place now than they were during the global financial crisis or COVID-19.
Berglof asserts that governments and businesses alike have found it difficult to adjust to the ongoing changes in US trade and tariff laws. Trade agreements are being reviewed, investment decisions are being postponed, and pressure is continuously mounting on global supply chains.
Berglof warned that while some clarity is beginning to emerge regarding additional tariff measures, the entire impact of the trade dispute between the United States and China remains unclear. He stated that it is extremely difficult to forecast the future of the US-China relationship. “But it is certain that the world’s total tariff levels will rise significantly.”
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The trade war between the United States and China, which started as a disagreement about intellectual property and trade imbalances, has since grown into a more extensive economic rivalry that has an impact around the globe.
In recent years, China has responded with its own tariffs in response to the United States’ broad taxes on Chinese exports valued at hundreds of billions of dollars. Due to this tit-for-tat escalation, multinational corporations have been compelled to reconsider their supply chain strategy, raise manufacturing prices, and disrupt global trade flows.
Berglof explained that investors and policymakers are now unsure of the regulations governing the international trading system due to the climate about economic nationalism. He declared, “We are about to enter a period where long-standing norms of open trade are breaking down.” “That is causing far more instability than conventional economic shocks have.”
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Berglof noted that China was more equipped to handle these difficulties than many other nations, even in spite of the trade obstacles.
“China has been fortifying its position in strategic industries for years and anticipated these policy shocks,” he said. A large portion of the tariff impact has been absorbed by Beijing thanks to its emphasis on innovative manufacturing, renewable energy, and technical self-reliance.
The “China Plus One” strategy, a risk-diversification tactic wherein businesses shift some of their output from China to other nations, especially in Asia, has also been adopted by global firms.
Berglof clarified, “Instead of completely replacing China, we’re still talking more about adding countries to the value chain.” From a Chinese point of view, this is doable. They are still wary, but they aren’t completely leaving global production networks.
India’s Opportunity in Shifting Supply Chains
India, which is quickly becoming a significant industrial hub, has benefited greatly from this diversification.
Berglof claims that “India has already begun to benefit from the global shift in supply chains.” The growth of Foxconn’s production in India and Apple are two examples of how the nation is drawing in new investments.
He emphasised that trade battles are not the only cause of these changes, though. Instead than being direct reactions to US trade policy, he continued, “many of these actions are a part of companies’ long-term strategic plans.”
Berglof maintained that in order for India to reach its full potential, it needs to increase its involvement in regional value chains and deepen its economic integration with Asia. “India is a sizable and quickly expanding market,” he stated. “But in order to reap the full benefits, it needs to expand its openings and encourage its businesses to work together in the area.”
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The Case for Greater Trade Openness
Berglof emphasised that although India has good cause to safeguard some delicate industries, including agriculture, more open trade and regional collaboration are necessary for long-term progress.
He asserted that the extent to which India can profit from the realignment of global supply chains will depend on its capacity to further integrate into Asian and global industrial networks. “India has the potential to become a major force in the regional economy by liberalising trade and establishing a more stable regulatory framework.”
According to him, further integration would help India’s manufacturing sector become more resilient, innovative, and job-driven, assisting in the country’s shift from a service-led to a more balanced, export-driven economy.
Global Value Chains Remain Resilient
Berglof believes that global value chains (GVCs), the intricate network of worldwide production and trade, are resilient and unlikely to vanish anytime soon, despite the pervasive discourse of “de-globalization.”
“Almost half of global trade is accounted for by these global value chains,” he said. “They have a strong hold and will continue to influence investment and production around the world for decades.”
According to Berglof, the fundamental idea of cross-border industrial collaboration does not change, even though supply chains may develop to incorporate more regional hubs and contingency plans. He went on to say, “India has a huge opportunity.” “India is capable of developing its own value chains and incorporating them into the larger Asian ecosystem.”
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Berglof warned that one of the biggest risks to the stability of the world economy today is protectionism and trade wars. The current unrest is political and structural in nature, as opposed to previous crises that were brought on by financial excesses or pandemics.
“There is a lot more unpredictability now than there was during the pandemic or the 2008 crisis,” he said. We were aware of the issues at the time and knew how to resolve them. Conflicting national policies, which are far more difficult to overcome, are the source of today’s problem.
He issued a warning that decades of progress towards globalisation and shared prosperity could be undermined by a fragmented trade system as nations act more independently through export restrictions, tariffs, and industry subsidies.
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India’s Balancing Act: Protection and Integration
India’s future requires striking a careful balance between promoting greater international cooperation and safeguarding its own industry.
“India must protect some industries, but not at the price of losing out on opportunities around the world,” Berglof stated. “India can prosper in this uncertain environment by implementing a strategic approach that promotes innovation, fosters regional collaboration, and makes infrastructure investments.”
Additionally, he underlined the significance of policy predictability. Consistency is important to investors. India will become a more desirable location for manufacturing if its trade policies are more secure and open.
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The Post-Tariff World: A Test for Globalization
As the globe adjusts to a new era of economic nationalism, Berglof’s core point is still relevant: the biggest threat to global economy today is the uncertainty brought on by protectionist measures.
With the ongoing US-China rivalry and growing trade barriers in Europe and emerging Asia, the world economy is going through a time of unprecedented volatility. However, there are plenty of chances for nations that are prepared to adjust amidst this upheaval.
India will need to embrace commercial openness, strengthen regional links, and use its expanding market to draw in long-term investment if it is to succeed.
According to Berglof, “the global economy isn’t de-globalizing.” It is changing. And countries like India that successfully adopt this new system would come out stronger.
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Conclusion:
Many economic shocks have occurred throughout history, ranging from pandemics to financial meltdowns, but the present wave of uncertainty brought on by tariffs is unprecedented in its scope and unpredictability.
Businesses and investors must negotiate a world characterised by reorganising trade blocs and changing alliances as countries reassess their policies. However, there is room for change amid this complexity.
India and other developing nations may be able to transform the unrest of today into the prosperity of tomorrow if they can successfully balance independence with international collaboration.
“The biggest worldwide economic risk of our time is the uncertainty unleashed by protectionism,” according to Berglof. However, nations can still use it as a potent opportunity if they use integration, transparency, and astute planning.