Page 9 - bne magazine February 2024_20240206

bne February 2024 Companies & Markets I 9
That is going to come with a cost. The IMF calculates that the EU’s openness increased real incomes by 7.75% as of 2020, putting an additional €1.2 trillion into the EU’s collective pocket, and 87% of the EU’s exporting companies sell outside the EU.
EU trade exposure to GEF
Just how severe these costs are going to be remains the object of study and the estimated impacts on global and European GDP vary widely, depending on the channels and the fragmentation scenarios considered, the IMF reports.
In one of its own studies in 2023, the IMF found that if the world were to splinter into US- and China-centred blocs, but with other large countries and regions remaining non-aligned (and hence able to trade with both blocs), long-term global output would decrease by 2%, with China suffering more than the West because it is more dependent on foreign investment.
At first glance the EU does not appear very exposed to
trade problems caused by the new restrictions. Half of EU members' exports go to other EU members. Another quarter of EU exports (3% of EU GDP) go to non-EU members that voted in favour of the 2022 UN resolution condemning the invasion of Ukraine. However, these figures only represent direct trade between two countries. What Russia has done, and China is increasingly doing, is create long “daisy chains” of intermediaries to hide the ultimate location of a trade deal.
As has been widely reported, trade between the EU and countries such as Kyrgyzstan have soared by hundreds of percent as sanctioned goods are rerouted via Russia-friendly countries.
The IMF points out that the trade fragmentation dangers
to the EU is largely concentrated in goods and especially in strategic inputs like energy and minerals. The EU’s service trade is heavily concentrated in trade with other EU members and so is not at risk. The story is the same with the EU’s reliance on the financial sector.
The EU’s exposure to FDI fragmentation was already falling after the 2017 debt crisis and here too the EU has low
EURO trade vs Russia invasion Ukraine UN votes import export IMF
exposure. Moreover, the EU’s outward FDI to Russia has been halted since the start of the war in Ukraine.
Energy is more difficult and where the EU is most exposed to fragmentation. Prior to the invasion Russia provided about one-fifth of EU gas in 2020; however, after a difficult 2022, the EU has successfully diversified its energy imports, albeit at a very high cost that has already caused the start
of deindustrialisation in countries such as Germany. Somewhere between a tenth and a quarter of energy- intensive companies in Germany are now planning to move operations to other countries with lower energy costs.
“Trade between the EU and countries such as Kyrgyzstan or Estonia have soared by hundreds of percent as sanctioned goods are rerouted via Russia-friendly countries”
The IMF paper runs through many scenarios. One of the worst cases would be if the major blocks adopt autarky and cut the West off completely from their minerals, energy and food. In this case the damage to the resource-deficient EU would be large, whereas the US, which is largely self- sufficient in all the most important inputs, would not be badly affected.
A more likely scenario is if the higher energy costs in Europe become permanent, where the EU is also a big loser.
“These persistent – and in the case of gas – differentiated increases in fossil fuel prices are found to permanently reduce EU value-added by about 4% per year,” says the IMF. “Global energy exporters gain, while energy importers lose from the energy shock. Russia, in particular, benefits from the increase in energy prices that more than offsets the fall in its energy exports.”
“The EU suffers the largest decline in value added on drops in energy-intensive manufacturing, but also services, reflecting both the sizable services-input into manufacturing and less spending on services (the largest sector in the economy) induced by the fall in income,” the IMF says. “Non-energy- intensive manufacturing increases modestly on average on the fall in the real exchange rate, while mining and extraction respond positively to higher prices. Variation within the EU is sizable, with more fossil-fuel intensive countries (including in CEE) generally among the most affected. Services in Greece are found to be heavily affected, likely reflecting the importance of commodity shipping in its GDP.”
Sources: IMF Direction Trade Statistics and IMF staff calculations.
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