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After the boom

What next for international trade flows?

Testing times. It has been said that uncertainty is the only certainty, and that rings true in today’s economic environment. Although freight rates are down nearly 70% from their pandemic peak and shortages of critical inputs are abating, exporters and importers are not immune to the broader economic challenges facing many businesses around the world today.

What next? Overall, the WTO now expects global goods trade growth to slow sharply in 2023 (1% vs. 3.4% previously forecast) given the deteriorating global economic outlook, and there is a risk that businesses could get caught up in further disruption related to geopolitical tensions.

Gas risks. At the time of writing, EU gas storage levels were over 93% and there is some evidence of industry (and households) already curtailing their energy use, with EU natural gas consumption down 7% so far this year. Given around 25% of the EU’s net domestic energy is used to produce exports, there is a risk that further demand reduction or potential energy blackouts could lead key manufacturing plants to idle some production this winter, and thus impact global supply chains.

Geopolitics. The EU’s ban on Russian seaborne crude oil exports will kick in from 5 December, while G7 economies are aiming to impose a price cap on these products by that time, both of which could distort trade flows. The future of the Russia-Ukraine grain export deal is also uncertain. Elsewhere in the world, the US has implemented sweeping new export controls on selling chips (including on foreign items that use US software) to mainland China. But this could hurt American businesses given China accounts for nearly 20% of US chip exports, and there is a risk that China may consider imposing its own measures.

Trade evolves. Alongside short-term pressures, it’s important to step back and acknowledge how supply chains for key sectors have evolved over the past 20 years. Recent discussions have often focused on “deglobalisation”, a trend which risks exacerbating inflationary pressures. However, some markets could benefit from the ongoing rejigging of production chains. For example, Cambodia, Vietnam and Bangladesh are forecast to see export growth of over 7% on average over 2022-27, according to IMF data. Regional trade initiatives may also help to facilitate these shifts, with Malaysia and Chile having recently approved the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – a welcome sign that trade liberalisation is still alive and kicking in some parts of the world.

First published 26th October 2022.

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