Major concerns in global economics: Firms in a tough global environment

Source: This post major concerns in global economics has been created, based on the article “Firms in a tough global environment” published in “Business standard” on 1st April 2024.

UPSC Syllabus Topic: GS Paper 3- Economy-Effects of liberalization on the economy

News: Global economic integration previously spurred growth, but now, trends towards de-integration are impacting the economy. These include changes in trade rules, environmental taxes, shifts in China’s economy, and various government actions, all are affecting the world economy and business strategies. Major concerns in global economics

How is the third globalization different from the early one?

Economic Engagement: Third globalization involves more restricted economic engagement for countries misaligned in foreign policy and military affairs. Earlier, global access was more open, regardless of such alignments.

Case of Russia and China: The belief that integrating countries like Russia and China into globalization would lead them to freedom didn’t hold; they now face restrictions due to differing policies.

Capital Destruction: This phase involves tangible and intangible capital destruction, like factory closures in China and oil extraction issues in Siberia, impacting global GDP.

What are the major concerns in global economics?

Carbon-Border Taxes Impacting Global Production:

Carbon-border taxes, like the European Carbon Border Adjustment Mechanism, aim to equalize the cost of production inside and outside Europe. These taxes are not protectionist but ensure fair competition and are similar to VAT on imports.

The shift towards renewable energy, especially in China (33% renewables), affects countries like India with less developed energy policies.

Nationalistic Policies:

Since 2013, under President Xi Jinping, China has seen centralized power, nationalism, and hostility towards foreigners. Their economy, previously boosted by credit, infrastructure, and construction, is struggling.

China’s attempt to subsidize exports conflicts with global trade rules and impacts other economies.

Unsystematic Movements in Trade Policy:

The erratic and unpredictable changes in trade policies by various countries have disrupted global trade norms established by agreements like GATT/WTO. An example is the looming threat to international digital service trade agreements, influenced by shifting political climates and elections.

What is the situation of Indian Internationalization?

Indian internationalization has faced challenges, with modest growth in foreign direct investment (FDI) and exports in the last decade.

From 2012 to 2022, total exports grew by about 3% per year in real dollars.

Services exports have been a strong component, showing significant success.

Government policies have been somewhat positive, like reducing import duties for phone parts and electric vehicles, benefiting companies like Apple, Xiaomi, and Tesla.

However, the overall strategy lacks focus, leading to underperformance in international markets compared to potential.

Indian firms are increasingly integrating into the global economy through exports and FDI.

Way forward

There is a need to be more proactive in understanding and adapting to the economic and political landscape. In the era of the third globalization, diversification and envisioning potential risks are crucial for firm survival. Understanding the implications of carbon-border taxes, Chinese subsidies, and the unpredictable nature of global trade policies is vital.

Question for practice:

Examine the impacts of nationalistic policies, unsystematic trade movements, and the rise of carbon-border taxes on the current global economic landscape.