What are the ‘health conditions’ of international trade? Since the outbreak of the war in Ukraine, the future of globalisation has been debated. The conflict sparked an economic shock, with energy prices skyrocketing and 'bottlenecks' emerging along some key supply chains related to agricultural commodities. The dialogue between non-western powers, as opposed to typically Euro-Atlantic for a, such as G7 and NATO, suddenly turned tense. All of this has led many to wonder whether the economic system that had prevailed after the end of the Cold War, based on highly interdependent and globalised production chains, was on the verge of imploding. Yet, if solely trade flow figures are analysed, it appears that – all things considered - globalisation is still in good shape.
How do things really stand? Are we heading towards irreversible fractures leading to an ever-increasing trade regionalisation? Are we rather redefining the current trade relations in a context that will remain centred on globalization? Where does multilateralism – with the World Trade Organization at its core – fit within this picture?
The trade has already pulled the brakes
Before trying to explore the future developments of globalisation, one should look at the current performance of international trade. After the shock induced by the pandemic, international trade recovered steadily. Yet, in the first half of 2022, the impressive rebound in the total value of world trade in goods and services ($7.7 trillion in the first quarter) was not matched in real terms by a growth in trade volumes. This divergence is explained by the rally in commodity prices, and both UNCTAD and the WTO agree on the concrete risk of a loss of momentum in the growth of trade flows from now on, given the deterioration in global GDP growth and geopolitical frictions. In such scenario, the unblocking of the Black Sea maritime route agreed at the beginning of August by Ukraine and Russia provided some relief and – at least in these first few weeks – helped to lower tensions, reducing the risks of trade fragmentation and above all, fears of a global food crisis.
However, such a deal could not avoid a drastic reduction in global trade. In April, the WTO had already drastically cut trade growth forecasts from 4.7% to 3%, in anticipation of the October review. These forecasts were recently revised upwards (the final figure is expected to be +3.5%), though expectations for 2023 remained low, with the Geneva-based organisation estimating a lackluster 1% increase in trade against the 3.4% estimated in April. Europe will suffer the most, although this comes as no surprise: no other region has been so badly affected by the economic consequences of the conflict in Ukraine, because of high inflation and energy prices.
The scenario described by the WTO largely overlaps with the one outlined – just a few days later – by the International Monetary Fund in its latest World Economic Outlook, forecasting growth for international trade by 2.5% next year. Despite being substantially in line with the slowdown in global GDP growth, this figure represents a worrying 'litmus test' of the critical situation faced by the economy: during the booming years, trade flows used to grow at a higher rate than GDP, thus pushing up both demand and supply.
According to the latest IMF report on the external sector, the widening global current account balance (sum of all national surpluses and deficits) also raised from 3% of world GDP in 2020 to 3.5% in 2021, after years of decline. This means that trade growth occurred asymmetrically between countries, increasing macroeconomic imbalances, the risk of trade tensions and the adoption of protectionist measures, with significant effects on exchange rates and capital flows.
Everything considered, the risks of a further trade reduction around the corner should not be underestimated. New lockdowns in China could put supply chains under further stress and, again, the economic slowdown and high inflation could depress demand in the West, causing a falloff in trade. In short, there is no lack of risks of further fragmentation of the trade system, despite the positive performance of recent years, net of the double shock represented by the pandemic and the war in Ukraine.
A widening crack?
Undeniably, today's world is not the same as twenty years ago. There is no longer a single economic superpower and the weight of global economy is distributed more evenly among different regions. If we look at the distribution of global GDP (measured in Purchasing Power Parity), global economy appears to be structured around three major blocs: China, accounting for 18.8% (East Asia for 26.5%); the US, for 16% (North America for 28%); the EU, for 18% (Europe for 25%). In real terms, therefore, China’s overtaking of the US seems to have already taken place, although in nominal terms the US is still leading with 24.5%, followed by China with 18%.
This raises questions about the future of globalisation as opposed to increasing regionalisation. Is globalisation ending or just changing? The previous section illustrated how war is contributing to a trade slowdown. Is this trend likely to increase the mutual decoupling between China and the West?
In the short term, it looks hardly so. If we look at the EU, China is worth over 10% of exports and 22% of imports. The costs of market fragmentation would then be very high, leading to a slowdown in trade and a paralysis – again – along the main manufacturing supply chains. European economies would also lose crucial inputs.
However, should the division (and competition) between blocs intensify, such a pessimistic scenario might turn increasingly more likely in the medium and long term. The China-led bloc could, indeed, absorb into its geo-economic orbit both Russia (whose weight is about ten times lighter, in terms of population and GDP, compared to Beijing), as well as the other South-East Asian countries.
Moscow might well be the weakest link in this repositioning. Before the war, the EU accounted for over 35% of Russia's trade. Hence, in the event of further sanctions and a break in economic relations with the West, Moscow can rely on China only (if the 'limitless friendship' signed at the beginning of 2022 continues). Accelerating a trend already observed, Russia may increasingly turn to China as a trading partner. Although the two countries are very different, they share several important economic complementarities. Russia could support Chinese growth through an abundant supply of fuels, agricultural and other raw materials, while China can provide labour, technology and consumer goods and services. Both can finally benefit from each other's large markets, although any comparisons between the two countries should be made cautiously: China is ten times larger than the Russian Federation in terms of demographic and economic weight.
Towards a different globalisation
The most likely scenario in the medium term is a decoupling limited to strategic industries, characterised by high technology intensity and heavy reliance on semiconductors – an already emerging trend, as the recent export restrictions introduced by the United States have shown.
China aspires to technological leadership and made the first move (the ‘Made in China 2025’ plan, launched in 2015, aims to reduce technological dependence on foreign countries by 30%). Yet, the West reacted by launching its own plans: in July 2022, the US introduced the CHIPS and Science Act, with a public funding of $53bn, with the objective of strengthening the US semiconductor industry. In January 2022, on the other hand, the EU launched the European Chips Act, putting €15bn on the table and trying to attract €43bn in additional private investment. Despite Brussels aims at doubling its global market share before 2030, bringing it from 10% to 20%, it is hard to say whether such resources would prove enough.
So, is the hypothesis of decoupling between the West and China realistic? It is important to think not only in terms of final products, but rather to consider the whole supply chain holistically, knowing that fragmentation and reorganisation will not come as a ‘free meal’. For example, global demand of rare earths or critical minerals is set to grow by more than 500% by 2050, the International Energy Agency said. China holds a ‘golden share’ in their production, holding 35% of global nickel refining capacity, between 50-70% of lithium and cobalt and over 90% of rare earths.
Furthermore, geopolitical divisions could widen if multilateral negotiations at the WTO level are not revived. Earlier this year, the 12th Ministerial Conference achieved some progress in a limited number of areas (such as fishery subsidies, electronic transmissions and Intellectual Property rights). However, it is not enough to relaunch the role of an organisation whose effectiveness is still hampered by vetoes like the one kept by the US as to the renewal of the Trade Appellate Body. This means that States will likely continue to make use of Preferential Trade Agreements (at bilateral or multilateral level), although such deals are a sort of double-edge sword, as they support trade liberalisation while contributing to increase systemic fragmentation.
In conclusion, it looks like we are moving towards a more fragmented globalisation. Still, this process will take its time and it will not affect all the trade flows. In the near future, the shortening of some production chains could contribute to further inflation, due to a trade-off between suppliers that are closer and considered more reliable, though more expensive. Moreover, the worsening economic situation, especially in the West, combined with a further escalation of geopolitical tensions, could contribute to push trade flows downwards. In the medium to long term, a world divided into blocs cannot therefore be ruled out. Yet, the current level of economic interdependence is inescapable by all major players, therefore the most likely scenario (in a world where these players do behave rationally) is that globalisation will continue for a long time to come, albeit in a new form.