Greater cooperation to build a more inclusive, sustainable and resilient trade system can help drive economic growth at a time when many countries are already in or entering an economic downturn.
How successfully China navigates the reversal of its zero-COVID policy and the country’s economic reopening may be the most consequential determinant – and source of uncertainty – for the global economy and trade in 2023. Interconnected global crises – the scarring economic impacts of the pandemic and uneven recovery, compounded by high inflation, debt distress as well as energy and food insecurity following Russia’s invasion of Ukraine – are likely to cast a long shadow over international trade. There is a significant risk that the Russia–Ukraine war could escalate, and that US–China strategic competition will increase.
But even if these risks do not materialize, 2023 will likely see a continuation of three major shifts in global trade:
First, an increasing confluence of national security and economics will intensify the geopolitical aspects of trade. Second, efforts to reconfigure supply chains will continue to prioritize (at least in rhetoric) shifts from dependence to diversification. And third, while globalization will not go into reverse, it will continue to change in nature through the emphasis on greater regional links amid the formation of blocs for critical and sensitive sectors of the economy. However, full-scale decoupling from China is neither achievable nor desirable for the G7 and like-minded countries.
For the G7, under Japan’s presidency, responding to economic coercion that Beijing has applied to some trading partners and addressing concerns regarding China’s non-market economy policies and practices will be a major focus in 2023.
Global trade cooperation at the WTO will remain highly challenging, and is unlikely to deliver any breakthrough achievements ahead of the 13th ministerial conference in February 2024. Plurilateral negotiations among a sub-group of WTO members – most importantly talks on e-commerce – stand a better chance of success by the end of this year.
There is a risk that ‘greening’ trade will become another geopolitical flashpoint.
In this new era of reglobalization – the term that best applies to the current context – the transitions to digital and green economies are major drivers of international trade policy. The threat to supply chains from extreme weather events provides particular impetus to act on greening trade policy. While climate change is usually seen as an area for international cooperation, it is also emerging as a source of international competition, with countries offering incentives to boost domestic clean energy industries. Unfair trade practices and discriminatory provisions are usually raised as issues as regards China, but the recent tensions over the US’s Inflation Reduction Act and mixed international reactions to the EU’s CBAM plans have highlighted that protectionism is also a concern among like-minded partners. There is a risk that ‘greening’ trade will become another geopolitical flashpoint.
Not all aspects of reglobalization will be desirable, but a reglobalized world is certainly preferable to a deglobalized one. Reglobalization offers the opportunity to build resilient supply chains and harness the twin transitions to green and digital economies. Giving up on global trade is not the answer.
To shape the future of global trade and reglobalization – and encourage its benefits while mitigating risks – a new model is needed. Such an approach should continue efforts to find multilateral solutions – but where that is not possible, plurilateral, sectoral and bilateral agreements can offer a path to agreeing new rules in areas such as digital trade. Strengthening regional economic integration can help build greater resilience. With growing geopolitical friction augmenting the downside risks for global trade, international cooperation is imperative – but ever more challenging to achieve. Newer platforms – such as the TTC and IPEF – as well as established forums – such as the G7 and G20 – provide opportunities to cooperate on shared ambitions and to defuse tensions. And better linking up different policy areas – trade and climate or trade and health, for example – is essential to addressing some of the most important global challenges without serving as protectionism in disguise.
At a time of major economic headwinds and increased geopolitical rivalry, a trade agenda for a reglobalized world that balances cooperation and competition is crucial for economic prosperity, security and sustainability in 2023 and beyond.
