Low-carbon transition reshapes global trade and current accounts
A Banque de France study explores how low-carbon transition policies will reshape global trade and current accounts. Advanced economies could see improved trade balances, while fossil fuel exporters face deterioration, with investment financing as a critical factor.
Global trade shifts with fossil fuel decline
The low-carbon transition is projected to reduce global trade, primarily due to an expected decline in fossil fuel imports.
This shift could lead to an improvement in the trade balances of advanced countries, which are net importers, at the expense of fossil fuel exporters.
According to the NGFS NDC scenario, global fossil fuel consumption is expected to decline by 15 percent by 2050 relative to a baseline.
This scenario projects a 1.2 percentage point of GDP decline in the Middle East's trade surplus by 2050, while the euro area's current account balance could increase by 0.5 percentage point of GDP.
The United States, however, is an exception, with its current account potentially worsening due to increased net interest payments driven by carbon pricing-induced inflation.
Financing green investments: The twin deficit risk
Achieving carbon neutrality by 2050 requires substantial green investment, estimated at 3-4 percent of GDP annually in Europe.
Public investment could account for 20-50 percent of this during an interim period, representing 0.6 to 2 percentage points of GDP per year.
The financing of these investments is crucial.
An increase in unfunded public deficits in advanced countries could lead to a deterioration in their current account balances.
Simulations for Europe illustrate that increased public investment without associated financing worsens the current account, reflecting the balance between investment and total savings.
Investment funded by domestic private savings would have a neutral effect.
A complex balancing act
This study highlights the intricate interplay of trade, finance, and policy in the low-carbon transition.
It underscores the critical role of public finance strategies in shaping external balances during this profound economic shift.
Ultimately, a balanced global transition hinges on effective capital redirection and fiscal prudence.