6 things to know about international trade this month

One of the overarching themes of the World Economic Forum’s Annual Meeting at Davos in January was trade and how it may fare in the face of a “polycrisis”, which is raising talk of a reversal of globalization – or a “Great Fracture”, as UN Secretary-General António Guterres has dubbed it.

Several speakers said that multilateralism and cooperation remain effective tools for prosperity, including boosting the green economy. Global economic fragmentation and trends such as “friendshoring” – relocating supply chains within a group of countries with shared values – will be expensive because they will lead to inefficiencies and duplication, and therefore to inflation, the speakers said. The world decoupling into two blocks could reduce real GDP by 5%.

"Despite all the problems with the global commons we face today, we can't solve them without multilateralism, cooperation and trade,” said World Trade Organization Director-General Ngozi Okonjo-Iweala. “We should not throw out the baby with the bathwater.”

However, there was acknowledgement that as globalization evolves amid shifting geopolitical, demographic and environmental realities, it must become more sensitive to labour issues and inequality, as well as environmental and national security concerns, with a singular focus on the least-cost model making way for one that caters for environmental and social constraints, and legitimate interests of national security.

US Trade Representative Katherine Tai is calling for “inclusive prosperity” to be the guiding principle behind a new approach to trade. “Let us not, in the new version of globalization, lose sight of who we want to benefit from our vision and from the economic opportunity that we want to create,” she told Davos. “Let us not lose sight of the people that comprise our economies, who are not just consumers, but also workers, family members, community members.”

A set of four initiatives that intend to help make trade greener, more efficient and more inclusive were highlighted at Davos.

The Global Alliance for Trade Facilitation promotes technology to reduce trade bureaucracy and boost cross-border investment. It already operates in 30 countries and has saved beneficiary countries nearly $60 million. The US Agency for International Development announced further support for the alliance at Davos, including incentives for private-sector investment and partnerships that deliver development, humanitarian and commercial gains.

A three-year pilot partnership between the Forum and the United Arab Emirates will use cutting-edge “tradetech” – Fourth Industrial Revolution technologies such as blockchain – to track shipments more efficiently. It will also trial using AI algorithms to optimize processes from the filing of paperwork to the loading and offloading of container ships.

The Draft Investment Facilitation for Development Agreement aims to attract investment to underdeveloped and developing nations by improving the investment and business climates of those countries. South Korea’s Trade Minister Ahn Dukgeon says the agreement, which sits under the auspices of the World Trade Organization, is expected to be completed in the first half of this year.

The Coalition of Trade Ministers on Climate aims to put climate action at the heart of trade and trade policies. Led by trade ministers from Ecuador, the EU, Kenya and New Zealand, it will also provide high-level political direction to bolster inclusive international cooperation on sustainable development. “I am convinced that the Coalition is the appropriate collective and coordinated global response to fight against climate change and including its nexus on trade dimensions,” said Ecuador’s Trade Minister Julio José Prado.

The push for a greener world has also sparked fears of a green trade war between the US and EU.

The US Inflation Reduction Act (IRA) is offering $370 billion in subsidies and tax breaks to boost domestic manufacturing in clean tech, renewable power and related industries. This has led to claims of companies considering relocating to make the most of the incentives.

The EU has responded by saying it will alter its state aid rules, at least temporarily. The “competitiveness of Europe” is at stake because of factors including the IRA, European Commission Executive Vice-President Margrethe Vestager says. Brussels is considering setting up a “collective European fund” to help countries in a “fair and equal way”, she explained in a letter sent to ministers and seen by The Financial Times.

European Commission president Ursula von der Leyen says the EU does “not want to compete on subsidies, but on quality”, with any funds or other support being targeted at particular areas.

German Chancellor Olaf Scholz believes a trade war can be avoided, saying that talks are happening with US officials to try and prevent US regulations around locally manufactured material discriminating against European companies.

Research by McKinsey shows that importing countries regularly rely on three or fewer nations for supply of a given resource or manufactured good. In fact, this is the case across 40% of all global trade.

Roughly three-quarters of this trade concentration is not down to only a few economies exporting a certain product, but is the result of deliberate choices, the research shows. “In 30% of global trade, individual countries source a product from only a few nations, even when global supply options are diversified,” it says.

This issue is most noticeable in foodstuffs – 15 economies account for 90% of global wheat trade, but most countries buy from just two or three countries. Mining and electronics also have highly concentrated trade.

While a degree of trade concentration is normal, McKinsey points out that many large economies have not worked to diversify their import sources in recent years. It says the global shocks of the last year means governments now need to rethink their global trade relationships to boost their resilience.

Developments at some of the world’s biggest ports point to two key trends when it comes to the future of global trade, according to The Economist. “It will be more high-tech – and more Asian.”

It says that port operators are using tech to increase their handling capabilities, because they cannot increase their footprint due to either space constraints or environmental concerns. The innovations include using robotics to allow much higher container stacking (columns of 11, rather than 6), as well as deploying driverless vehicles and using unmanned cranes monitored by drones.

Tuas Mega Port in Singapore will have many of these features, and will be the world’s largest container port when it is completed in 2040, The Economist notes. It also points out that the International Monetary Fund sees in particular South-East Asia (ASEAN) as having the world’s fastest-growing bloc by volumes shipped over the next five years. This bloc is made up of the continent’s five biggest economies: Indonesia, Malaysia, Singapore, the Philippines and Thailand.

Brazil and Argentina are in early talks to establish a common currency to boost bilateral trade, in order to reduce their reliance on the US dollar. It would not replace their existing currencies, Brazilian President Luiz Inacio Lula da Silva says.

Argentina's economy is facing a series of challenges – the government is battling to replenish foreign currency reserves while also grappling with an inflation rate of close to 100% last year. Brazil's Finance Executive Secretary, Gabriel Galipolo, told Reuters that the common currency would come alongside extra credit to support exports to Argentina through Brazilian banks. Brazil's government would also offer guarantees to banks that help provide financing, while Argentina, a major grains exporter, would have to provide collateral via hard assets like grains, gas or oil.

The currency, which Brazil suggests calling the “sur” – meaning south in Spanish – could eventually be offered to other countries in Latin America. “It would be a study of mechanisms for trade integration,” Argentina’s Economy Minister, Sergio Massa, told The Financial Times. “I don’t want to create any false expectations… it’s the first step on a long road which Latin America must travel.”

We must explore ways to apply technology to improve trade in goods and services, says the World Economic Forum’s Head of Sustainable Trade, Kimberley Botwright. She says that while sceptics might argue that no amount of technology can address the major geopolitical risks facing trade and investment, tech has already been a massive trade accelerator.

How can we stem the tide of global fragmentation? Most critically, we must find meaningful solutions to address the overlapping global resource crises in energy and food, as well as a stark economic outlook, says World Economic Forum Managing Director Mirek Dušek.

The Association of Southeast Asian Nations (ASEAN) trade bloc is feeling optimistic about 2023, with positive economic trends and forecasts, and promising numbers on foreign direct investment and trade with the United States, writes World Economic Forum Digital Editor Spencer Feingold.