With the global economy slowing, and several economies already in or heading into recession in 2023, there is a risk that economic stagnation will be prolonged and have lasting implications for global trade. At the same time, recent positive data from major economies suggests that prospects for global growth may improve.
Notwithstanding the recent fall in gas prices, the high costs of energy stemming from Russia’s war on Ukraine will continue to subdue spending by households and raise costs for businesses – especially those based in Europe – thus dampening demand for imports. Higher interest rates – and particularly the effects of tighter monetary policy in the US – will impact global trade via two channels. First, higher interest rates reduce domestic borrowing and spending and thus import demand. Second, with the US Federal Reserve expected to continue monetary tightening (albeit raising interest rates at a slower pace than in 2022) and with the dollar remaining a ‘safe haven’ amid economic and geopolitical uncertainty, the dollar will likely remain strong in 2023 but will edge back from its 2022 high. Given that 40 per cent of global merchandise exports are invoiced in US dollars (a figure much larger than the share of exports, at around 10 per cent, that are destined for the US), the presence of a strong dollar in effect ‘exports’ inflation to the rest of the global economy. The implications of this will be particularly challenging for low- and middle-income countries, which will incur even higher costs for imports of food and fertilizers and face growing risks of debt distress.
At the same time, how China pursues the easing of COVID-19 restrictions and tackles recurring outbreaks will have ripple effects for production networks internationally. Weaker global demand will likely stifle the outlook for Chinese exports and accelerate China’s efforts towards reducing the role of foreign trade in the economy. But if domestic consumption is boosted following the end of China’s ‘zero-COVID’ policy, growth in the world’s second largest economy could rebound in 2023.
Deepening tensions between the US and China, as well as an escalation of the Russia–Ukraine war, pose downside risks to the global economy and trade. The former include intensified US controls on exports to China and investment screening – particularly as regards sensitive technologies – and geopolitical risks related to Taiwan.
Transatlantic ties have come under pressure concerning how best to deal with China, and more recently also over the US’s green energy and industrial policy. The US’s Inflation Reduction Act – which provides for investment of an unprecedented $369 billion in American climate and clean energy efforts – has sparked concerns in Europe about industrial competitiveness. Nonetheless, as discussed later in this paper, closer US–EU cooperation will likely prevail over any friction in 2023.
Despite the generally gloomy outlook, there is potentially one more positive shift: the supply-chain disruptions of 2020–22 will likely ease this year. Port congestions in the US and China have mostly been resolved, and shipping costs have come down to pre-pandemic levels. However, supply chains – particularly for critical goods – are still subject to numerous risks, including trends towards ‘decoupling’ as well as potential disruptions stemming from natural and human-caused disasters. Extreme weather events are perhaps the biggest threat for supply chains in 2023 and the coming years.
Deepening tensions between the US and China, as well as an escalation of the Russia–Ukraine war, pose downside risks to the global economy and trade.
The World Trade Organization (WTO) anticipates that global merchandise trade volumes will grow by 1 per cent in 2023. This is significantly below the volume of merchandise trade growth during 2022, estimated at 3.5 per cent. There will be regional differences. Both the Middle East and Africa will likely see small declines in merchandise exports in 2023 (following record export growth in 2022), but these regions’ demand for merchandise imports is expected to remain strong, with import volumes projected to grow by 5.7 per cent in each.
Russia’s overall trade in goods and services fell sharply in 2022. While exports by Russia are expected to continue to decline in 2023, the country’s imports could be higher than in 2022. As Western countries have worked to isolate the Russian economy, Russia is increasingly trading with India and China. Meanwhile, Europe is replacing Russian energy with liquefied natural gas (LNG) from the US – although at a higher cost and in volumes that do not offset the entire shortfall. The current upheavals in global energy trade will have lasting implications, potentially hastening the transition to a more sustainable energy system.
The WTO does not forecast trade in services. But given the multiple pressures on the global economy, the uptick in trade for services that was seen during 2022 – particularly the rebound in travel and transport services following the easing of pandemic-related restrictions in many countries – is unlikely to continue in 2023. However, the long-term future of trade is likely to be in services and not goods. The advance of digital technologies and the digitalization of trade processes have profound implications for the ‘scale, scope and speed of trade’. New technologies also increasingly blur the distinction between goods and services.
The structural forces shaping global trade and globalization in 2023 and beyond are examined in the remainder of this paper.
