The Chart: how global trade disruption is fueling economic uncertainty

Globalization and interconnectedness mean political uncertainty poses a greater threat to the global economy – with US trade policy increasingly significant.

Global economic policy uncertainty has increased sharply since the start of the year. The Global Economic Policy Uncertainty index tracks coverage of policy uncertainty in the national press across 20 countries. It’s a measure that tends to spike at times of global political or economic unrest.

Following two decades of rapid globalization and increasing interconnectedness, the global economy appears more exposed to incidents of policy uncertainty in different parts of the world. Recent bouts of political uncertainty, polarization
and rising protectionism have led to a sharp rise in the index, which currently lies well above its long-term average.

One of the main drivers of current rising levels of economic policy uncertainty has been changing trade policy in the US, as illustrated by the subindex of US trade policy uncertainty, which is currently at a near-record peak.

Trade tensions

This is significant because rising policy uncertainty can act as a drag on growth by deterring private investment and raising the possibility of slower reform or significant change to government policy objectives. 

In its latest assessment of the health of the global economy (October 2018), the International Monetary Fund warned: “Escalating trade tensions and the shift away from a multilateral rules-based trading system are the main risks to the global economy.”

Rising trade tensions and policy uncertainty could also make markets reassess fundamentals and risks, affecting financial markets and asset prices. For example, recent policy uncertainty in Turkey has had a material impact on its economy, while many economists have downgraded growth forecasts for economies that trade extensively with the US.

Tax implications

Such uncertainty has implications for tax and finance functions. As well as weakening growth conditions, uncertainty makes planning harder and creates operational challenges in areas such as transfer pricing, for example. More specifically, recent trade disputes and the potential for further rises in tariffs impose a direct cost on business.

According to the EY Annual International Tax Conference Survey 2018, nearly three-quarters of tax professionals report that current global trade and tariff policies are already having at least some material impact on their business and supply chains.