Trade finds a way to find a way

You can’t read about globalization these days without hearing of its ultimate demise. Terms, like decoupling, deglobalization, geo-economic fragmentation, and reshoring are ubiquitous. The flattened world of the early 21^st century, which brought new players into the global production chain and led to an explosion of wealth among the new middle class, is dead. In its place, the world will be cut into two distinct trading blocs: A United States-dominated western bloc and a China-led southern bloc—leading to global gross domestic product (GDP) losses of anywhere between 2% and 9%. Or so the story goes. But, does trade truly come to a halt in a more polarized world?

For more than two decades, China has been a powerhouse in international trade. The country’s rise to economic prominence began with the launch of market-oriented economic reforms in 1978. Its entry into the World Trade Organization (WTO), in 2001, gave it access to dynamic consumer markets in Europe and the U.S. In turn, China’s growing middle class, cost competitiveness, and large population led many multinational enterprises (MNEs) to move their operations there. A flood of investment helped China become a manufacturing dynamo, boosting exports by an average of 15% a year between 2001 and 2017. As exports surged, China’s economy grew further, making it the second-largest economy in the world, after only the U.S.

But as the Top 2 economies vied for dominance in a range of theatres, geopolitical tensions grew. China’s failure to fully adhere to all WTO principles led the U.S. administration to impose tariffs on certain Chinese products. As a result, U.S. merchandise imports from China, which increased by an average of 13% per year between 2001 and 2017, grew by only 1.2% between 2018 and 2022.

In 2023, Chinese exports to the U.S. contracted by 20%, after facing additional tariffs. More recently, the European Union and Canada imposed tariffs of their own on Chinese electric vehicles (EVs), and the United Kingdom may follow suit.

The latest round of retaliatory measures has only added to concerns around deglobalization. But despite ongoing geopolitical antagonism and increased trade barriers, global trade has been resilient. Diversification of supply chains and the strategic relocation of manufacturing operations have allowed trade to continue expanding. Companies have sought avenues to de-risk their processes and reduce dependency on any single country. These strategies have led a reorientation of traditional global trade links rather than a complete severing of those links.

Given Mexico’s membership in the Canada-United States-Mexico Agreement (CUSMA), that country has now become a springboard for Chinese exports into the Americas. Mexico’s imports of iron and steel from China surged by almost 300% in 2023, versus 2019. In May, its exports of iron and steel pipes to the U.S. were up by 842% compared to September 2023. Chinese EVs are also finding their way into Mexico, with the country having now displaced China as the largest goods exporter to the U.S. and setting off alarms in Washington on the eve of the CUSMA review. 

Shifting global trade patterns are also evident in foreign direct investment (FDI) flows, with countries such as India, Vietnam, Mexico, Singapore and Ireland attracting interest, as MNEs expand their presence abroad. Notably, Chinese investment into Vietnam surged from a mere 1% of the country’s inward FDI in 2010 to 18% in 2023, significantly boosting Vietnam’s manufacturing and export capacity. Consequently, Vietnam’s export share to the U.S. rose from slightly less than 20% to 27% over that same time. And, so, while China’s trade surplus with the U.S. fell by more than US$100 billion last year, Chinese value-add continued to find its way into the U.S. via other third countries, like Vietnam, Thailand, India, Cambodia, Malaysia and South Korea.

The bottom line?

While popular opinion suggests a decline in co-operative trade, the reality is more nuanced. Trade barriers have indeed tripled since 2019, but world trade volumes increased by an average of 4% per year between 2019-2023.

Companies thrive by producing at the lowest cost and selling at the highest price, and that seldom occurs in the same market. As long as one company benefits from sourcing its factors of production at a lower cost, others must follow, or risk losing competitiveness.

The strategic relocation of manufacturing operations has allowed global trade to remain resilient. As geopolitical frictions persist, these trends are likely to continue to shape the future of global trade, leading to a more fragmented but still interconnected global economy.

This week, special thanks to Prince Owusu, senior economist in our Economic and Political Intelligence Centre.

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