Real income of global economy could drop 5% due to geopolitical fragmentation: WTO senior economist

Participants pose on stage during the 2024 Global Economy and Financial Stability Conference at The Plaza Seoul hotel, Tuesday. From left in the front row are World Bank Trade Group Director Daria Taglioni, George Washington University professor Danny Leipziger, First Vice Minister of Economy and Finance Kim Beom-seok, Bank of Korea Gov. Rhee Chang-yong, Korea Development Institute President Cho Dong-chul, Reinventing Bretton Woods Committee Director Marc Uzan and Center for Global Development Professor Emeritus Masood Ahmed. Courtesy of Bank of Korea

Ralph Ossa, chief economist and director of the economic research and statistics division at the World Trade Organization, speaks during the 2024 Global Economy and Financial Stability Conference at The Plaza Seoul hotel, Wednesday. Courtesy of Bank of Korea

The global economy could experience a real income drop of 5 percent, strained by escalating geopolitical fragmentation including the Russia-Ukraine war, a senior economist at the international trade rules implementation and oversight body said Wednesday.

Also troubling is a slowdown in the growth of European economies, a short-term factor influenced by structural factors alongside U.S. macroeconomic developments.

“In the worst case scenario, the global economy will see a 5 percent decrease in real income due to rising geopolitical tensions,” said Ralph Ossa, chief economist and director of the economic research and statistics division at the World Trade Organization (WTO).

The comments were made during the 2024 Global Economy and Financial Stability Conference at The Plaza Seoul hotel. Organized by the Ministry of Economy and Finance, the Bank of Korea, the Korea Development Institute and the Reinventing Bretton Woods Committee, the two-day event began Tuesday.

He stressed the need to distinguish between short-term cyclical risks and long-term structural risks.

“Short-term risks include the macroeconomic conditions we are broadly watching. We will be able to assess the economic conditions in the U.S. after the labor statistics are released this week.”

Of more immediate concern is Europe’s growth.

Forecasts from April predicted a growth of 2.6 percent this year and 3.3 percent next year, according to Ossa. The figures are subject to a slight downgrade in the October forecast, reflecting cyclical factors.

“Growth in Europe is concerning,” he said.

“In the long run, the main concern is rising geopolitical tensions, which I already described that we are starting to see. But beyond these economic costs, we need to make sure we have resilient supply chains to have a sustainable economy and that we make progress. I very much hope that geopolitical conflicts become somewhat contained.”

Ossa said Korea has experienced digitally delivered services exports increasing in size and significance in the country’s trade profile.

“An interesting change we have observed that many might not be fully aware of is the growing significance of the service sector in Korea’s trade,” he said.

The services exports as a share of the country’s trade have doubled from the pre-pandemic period, a major trade positive for the export-dependent economy.

“Comparing the trade before and after the COVID-19 pandemic, Korea’s services exports nearly doubled, most of which was business-related," he said. "This is an indication of Korea’s efforts toward and success in the diversification of its trade portfolio.”

The global economy remains highly resilient, as evidenced by a significant portion of global trade quickly rebounding post-pandemic.

About three-quarters of global trade bounced back since the onset of lockdowns, illustrating the resilience of the global economy.

“The global health crisis of the COVID-19 pandemic sparked significant supply chain disruptions, but global trade has since recovered quickly,” he said.

As challenging as the drawn-out U.S.-China trade feud may be, opportunities abound for the Korean economy, in his view.

“U.S.-China conflict is of great concern to Korea, especially given its exports of semiconductors. The concerns and risks are obvious,” he said.

However, a session during the conference touched on a growing trend whereby many countries are diversifying their supply partners beyond China, as best encapsulated by the “China plus one” strategy.

“Many economies can diversify their purchase sources away from China with the so-called 'China plus one' strategy," Ossa noted.

"Korea can be considered a ‘plus one’ country. Korea can benefit tremendously from this to move away from manufacturing to help services exports increase rapidly, including digitally transmitted services.”

He defended the role of the WTO in trade oversight, implementation and dispute resolution — three key functions of the global body under threat due to the spread of protectionism and supply chain complications.

“Despite U.S.-China tensions, 75 percent of trade is conducted under the WTO rule," he said. "The organization is under pressure, but the multinational trading system is the only way forward.”