Geopolitical tensions are putting global trade and investments under significant pressure, adding to existing health and climate shocks and concerns over the social and environmental costs of trade.
The challenge: global trade is straining under geopolitical pressure
The global economic outlook is already fragile, with the countries of the Global South most at risk. The World Bank expects a decade of historically low growth, with global gross domestic product (GDP) growth hovering just above 2 per cent. Yet, if, in addition, the world economy decouples into two distinct blocs, the World Trade Organisation estimates that global GDP would decline by at least 5 per cent. In that case, some developing economies would face double-digit welfare losses. Those dependent on foreign direct investment (FDI) would be particularly hard hit, losing out on the positive technology and innovation spillovers from trade that boosted productivity and living standards elsewhere in the world.
Large emerging economies, however, are poised to be the engines of global growth. According to the International Monetary Fund (IMF), about 50 per cent of global growth from the next two years will come from just two of these countries alone: India and China. The rest of Asia-Pacific will contribute another 20-25 per cent of global growth. It is clear that, in order to ensure that the gains from this growth are widely shared, the interests of emerging economies must be preserved in the global trading system.
The last few years have demonstrated the high cost of geopolitical tensions for business, governments and households. Russia’s invasion of Ukraine caused enormous human suffering but also massive disruptions of global food and energy flows, fuelling inflation worldwide. Most recently, the armed conflict between Hamas and Israel has, in addition to the devastating human toll, added concerns to an already fragile global economic outlook.
Increased strategic competition has also led to tariffs and export restrictions on products considered relevant to national security – from rare earths to advanced semiconductors.
This geopolitical-driven protectionism threatens to limit the gains of globalisation. It is important to remember that the past decades of economic integration have made everyone wealthier, healthier and better educated. The IMF estimates that 1.3 billion people have been lifted out of extreme poverty since the end of the Cold War.
A world divided into geoeconomic blocs with diminishing commercial ties threatens to halt that march to prosperity. When politicians talk of “derisking” and economic security, some hope it will make supply chains more resilient through “reshoring”, “nearshoring” or “friendshoring”. Other businesses, however, will consider geopolitical tensions the biggest threat to their growth and their countries’ growth. If efforts at “resilience” restructure supply chains to source inputs from countries that are geographically closer – rather than from those that are more efficient – then the sourcing country will in fact be left more vulnerable to economic shocks, not less.
Given these risks, why has deglobalisation taken hold despite the widespread benefits trade has delivered? The basic challenge is that those gains have been distributed unevenly within and between countries. Further, geopolitical rivalry has eroded the trust that holds the global trade system together. If the world, especially the Global South, is to return to the high-growth path and increasing prosperity that globalisation can deliver, then this trust needs to be restored through a new trade agenda.
A new approach: expanding and rebalancing the trade agenda
Leaders need to work towards re-globalisation, not deglobalisation. It is possible to ensure that the prosperity trade generates is just and inclusive and delivers on both national and global priorities – including legitimate security concerns. International trade would then be infused with a stabilising sense of common purpose.
Strengthening and rebalancing the trade system requires expanding the trade agenda, not limiting it. The broader the benefits delivered by trade, the more firmly it will be aligned with national and global priorities. Trade that is designed to deliver on globally shared priorities as defined by the Sustainable Development Goals will gain the trust of governments and citizens and be “fenced off” from geopolitical rivalry rather than disrupted for near term political wins.
Towards more trust in trade
To rebuild a stabilising sense of common benefit and trust in the multilateral trade system, the global trade agenda needs to be expanded and rebalanced.
Achieving an expanded trade agenda should entail the following:
Making sure trade works for the climate and social inclusion: The most ambitious step forward for trade in recent years is the African Continental Free Trade Area Agreement (ACFTA), which aims to create a single market for goods and services on the continent and facilitate the free movement of people. However, a key and novel feature in the agreement is the Protocol on Investment, designed to support the continent’s green transition by promoting investment in green sectors, encouraging incentives for low-carbon investments, facilitating technology transfer and developing green investment standards. The protocol also includes commitments against a “race to the bottom” on environment, labour and consumer standards to attract foreign investment. The lessons from ACFTA need to be incorporated into the broader trade agenda: green investment is a necessary accompaniment to closer integration.
Developing supporting national policies: An expanded international trade agenda must be mirrored by governments adopting more inclusive national policies that aim for trade to work for all. The concerns of those sections of national workforces that believe trade is not working for them need to be addressed through national policies, not through constricting trade. National governments must work harder to enable the economic benefits from international trade to be fairly distributed in society – through efficient labour markets, updated social safety nets and equality of opportunity, among other mechanisms. Only national policies that make trade work for all will ensure public trust in the benefits of international trade.
Embracing, but ring-fencing, national security: It is at times of crisis that timeless principles are important. An important policy principle is that any trade-restrictive retaliatory measures be focused, proportionate and time-bound. Given the tense geopolitical environment, this principle should always be applied to restrictions imposed in the name of national security. Before imposing such restrictions, businesses should be consulted on how best to achieve governments’ ends, and the principles themselves should be periodically revisited to ensure their clarity and fairness.
Achieving a rebalanced trade agenda should entail the following:
Closing geographic divides: To rebuild global trust in the benefits of the multilateral trade system, it is of paramount importance that the Global South – and particularly least-developed countries – are not cut out of the growth and development pathways that participation in international trade provides. Mechanisms must be in place to ensure they are able to take advantage of new opportunities created by shifts in global value chains. The multilateral trade system can only stay relevant to the needs of the developing world by adequately addressing the specific challenges they face in adapting to rapid changes in the global economic environment.
Developing inclusive trade mechanisms: Multiple stakeholder voices are needed to ensure that multilateral trade policies prioritise the sustainable development of countries with the least economic power. These countries have limited ability, currently, to influence global decision-making. More public-private consultations centred on the Global South are needed. States must strive to keep communication channels with business and trading partners open around any national measures under consideration to minimise unintended consequences and improve transparency, certainty and mutual trust.
Economic interdependence carries by its very nature a risk that states weaponise their trade relationship to force another state to make a policy change. However, the level and complexity of interdependence today – not the least among the world’s largest economies – means that any retreat into competing trade blocs would have enormous negative consequences. To increase the trust in the global trade system and stay focused on the opportunities that come with economic interdependence, it is necessary to expand and rebalance trade, preventing any country from getting an advantage by deliberately disrupting it.
This article was first published on the World Economic Forum (WEF) as part of its White Paper on ‘Shaping Cooperation in a Fragmenting World’, and it has been reproduced with consent.