SYLLABUS
GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Context: According to the latest Trade and Development Report 2025 On the brink, Financial backbone of global trade is increasingly fragile due to climate shocks, currency volatility and tightening liquidity.
Key Findings of the Report
- Trade Growth and Development
- It projects global growth at 2.3% in 2025, below recession thresholds, due to subdued demand, trade shocks, and uncertainty impacting developing countries.
- Early 2025 goods trade grew 4% from pre-tariff stockpiling and AI investments, but underlying rate is 2.5-3% with 40% freight rate drop by March.
- Over 90% of trade relies on finance like letters of credit and guarantees, shifting focus from logistics to volatile balance sheets.
- Climate Vulnerabilities in Trade Finance:
- Climate shocks (storms, heatwaves, droughts) raise insurance costs, tighten bank risk models, and shrink export guarantees, hitting agriculture and commodities.
- Developing economies face currency volatility, dollar shortages, and fewer banks in Africa, South Asia, Latin America, forming a feedback loop of weakened finance, curbed exports, slower growth, and higher risks.
- Creates global divide strong-reserve nations sustain trade; vulnerable ones endure rising costs, marginalization, and barriers to green upgrades and low-carbon value chains.
- Debt and Developing Economy Pressures:
- Thirty-five of the sixty-eight low-income countries are already in debt distress, and high borrowing costs along with capital flight toward advanced economies intensify their weak growth performance.
- Policy uncertainty continues to delay investments, and the fading effects of earlier front-loaded monetary tightening push small firms and low-income countries into greater strain through 2026.
- Climate-finance constraints further erode these countries’ creditworthiness at a time when secure access to trade is essential.
- South-South Trade Resilience:
- The region accounts for one-third of global trade, and it outperforms by leveraging strong intra-regional ties in East and Southeast Asia that promote diversification and value-added exports.
- The region effectively cushions external shocks by rerouting shipments and deepening value-chain integration, which protects it from volatility originating in advanced Northern economies.
Key Policy Recommendations
- Countries strengthen financial security for climate-vulnerable economies:
- Expanded public trade-finance guarantees for climate-vulnerable economies
- Multilateral development banks to provide counter-cyclical liquidity for trade
- Implement currency de-risking mechanisms and create regional dollar-alternative payment platforms.
- Global rules to ensure green standards do not become new barriers to trade.
- Governments actively reorient fiscal priorities toward development and resilience:
- Redirect spending from military sectors to infrastructure and social protection.
- Enhance domestic revenue mobilisation, economic diversification, and macroeconomic stability.
- Promote inclusive multilateralism that corrects global financial asymmetries and addresses climate vulnerabilities.
- States ensure stronger policy coherence for long-term development:
- Align fiscal, monetary, and industrial policies to support sustained growth.
- Adopt integrated strategies that enable fragile economies to pursue stable, long-term development pathways.
About Trade and Development Report
- The Trade and Development Report is published by the United Nations Conference on Trade and Development (UNCTAD).
- The Trade and Development Report was launched in 1981. It is issued every year for the annual session of the Trade and Development Board.
- The Report analyses current economic trends and major policy issues of international concern and makes suggestions for addressing these issues at various levels.
- The series is intended for economists, policy makers, academics and all those involved in economic and trade research and analysis.
Sources:
Down To Earth
Unctad