Although trade is still expected to grow in 2023, the outlook is worse than 2022. The global economy is still facing multiple headwinds, including the war in Ukraine and the perpetual US-China tensions.

The WTO initially estimated that global merchandise trade would grow by 3.4% in 2023. This has been revised down by 2.4 percentage points accounting for both demand and supply side shocks [1].

While trade is currently operating in a disrupted environment, there are several trends that businesses need to be mindful of in order to insulate themselves from future shocks and to take advantage of available growth opportunities. This article explores the five key trends in trade to look out for in 2023.

Fragmentation will remain a persistent threat

The previous decade’s work of bringing the world closer together through trade liberalisation will remain under threat in 2023. Nowhere is this more obvious than at the WTO. While the Twelfth WTO Ministerial Conference produced some positive outcomes—including an agreement on fisheries subsidies and the decision on the E-commerce moratorium—many pertinent issues were left unaddressed, most notable of is the continued dysfunction of the Appellate Body, responsible for final rulings on disputes. Multilateral discussions, therefore, will bear little fruit in 2023.

Breakdowns or a lack of progress at the multilateral level suggest wider inter-state tensions, most notably, the severing of ties between Russia and the West, and the breakdown in relations between China and the US. As part of the Growth Amid Uncertainty research project, Economist Impact modelling on the effects of increased global fragmentation revealed reductions in GDP, exports, imports and investment were likely  across the board for the “Western” bloc and the China-Russia bloc.

Geopolitical trade tensions will endure in 2023. Businesses will need to continue to navigate this fragmented and disrupted global trading environment through effective scenario planning.

National security will be a top priority

Linked to further fragmentation, governments will increasingly intervene in sectors they deem of national importance.

China’s “made in China” policy aims to make the country a leader in ten high-tech industries. Economist Intelligence Unit conducted a review of these industries including electric vehicles, next-generation information technology and emerging bio-medicine. To enhance competitiveness, China is pursuing policies that undermine established international trade rules such as intellectual property acquisition and government subsidies.

In response to China’s attempt to undercut competing foreign businesses, the US is also pursuing policies at odds with established international trade practices in an effort to enhance their national security and boost the competitiveness of strategic sectors including semiconductors, batteries and quantum computing. One policy is the significant US government funding to be given, directly or indirectly, to private companies in 2023—predominantly stemming from the CHIPS and Science Act and the Inflation Reduction Act. In response, the EU is also considering providing support to strategic sectors, such as electric vehicles, to ensure their domestic production remains competitive on the world stage.

State-sponsored subsidies is only one policy nations are employing to protect domestic industry. Export restrictions are another.  Throughout 2023 such state intervention will only intensify, leading to further divisions internationally. This intervention will not affect all sectors equally. Those deemed of national importance, such as high-end technologies, health and pharma, defence and automotives will be the primary targets of intervention. Businesses within these sectors need to be mindful of current and future policy shifts and factor these into their strategic plans.

An alternative trade forum in The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP)

While the multilateral trading system has many limitations, national governments are still working to provide further opportunities for business in the form of new trade agreements. With fewer parties involved in these agreements than the multilateral trading system, they provide governments with an alternative, albeit smaller opportunity, to liberalise trade further.

The trade agreement that will garner the most attention in 2023 will be CPTPP. Currently in effect for nine countries and signed, but not ratified, by two more, it includes states with varying regulatory systems and economic strengths [2]. The rules and regulations included are relatively up to date. Its 11 members also account for 13% of total GDP, or 15% of world trade [3], providing an attractive option for countries wanting to strengthen global trade ties.

Already the UK, China, Taiwan and Ecuador have applied to join the trade bloc, while other countries including South Korea are considering applying. Once the UK accedes (expected in 2023), China may be next. Bringing them into the fold may help curb some of the damaging trade policies they have promoted in recent years, such as forced technology transfers.

In 2023, it is expected that more countries will consider joining the agreement. The most notable would be the US. It now has a split legislative branch, so President Biden would have to make concessions to push through his administration's remaining agenda. As such, pro-trade Republicans have an increased chance of the US moving back towards traditional trade agreements—including the CPTPP—which are not a priority for President Biden. Already Republicans on the House Ways and Means Committee have called for deeper economic engagement than offered in IPEF [4].

Enhanced resilience will be top of businesses’ agendas

In a fragmented trading system, businesses will focus on increasing resilience. Previously businesses only had to factor in the best price, best quality and fastest delivery when procuring goods or services. Now they have to incorporate non-economic factors into their scenario planning; the primary one being resilience.

This will result in businesses sacrificing profitability in the immediate term in favour of longevity. To develop more resilience, businesses will have to build in both demand and supply side strategies. On the demand side, these will likely include identifying and exporting to new markets, launching new products and increasing the value-add of products through the use of services. On the supply side, there will be an uptick in the use of digital tools for inventory management, enhanced co-ordination with suppliers, and standardising inputs to increase substitutability [5].

Opportunities for emerging markets will be available for the taking

As trade fragmentation continues, economically dominant countries and regions will look to pull developing countries into their sphere of influence. The reasons will be three-fold: to gather support on the international stage as fragmentation looms; to open up viable export markets; and to ensure that imports of energy and critical minerals remain available.

Nations will increasingly look to shore up their support, not only on the world stage, but also to ensure their exporters have secure markets to send their goods to. There are many emerging economies in Africa and Latin America that will witness an increased demand for goods and services. Growth rates in a number of African countries are expected to be higher than the global average of 1.4%. According to The Economist, numerous African and Latin American countries feature in the top ten countries with the highest growth rates for 2023—including Guyana (30%), Libya (15%), Venezuela (9.3%), Rwanda (7.1%), Ivory Coast (7.0%), Senegal (7.0%), Kenya (5.0%) and Paraguay (4.1%).

Growth rates aren’t the only factor, as these economies will continue to be affected by shocks. But what they do indicate is that numerous countries within these regions will not suffer major economic downturns, and therefore, growing consumer spending is likely to remain.

As developed nations transition to renewable technologies to decarbonise, their reliance on critical minerals will only increase. Both Africa and Latin America are fundamental in the supply of  critical raw materials such as nickel, cobalt and lithium. Strengthening relations and supply chains with resource-rich areas will be a priority for countries and regions manufacturing clean technologies, such as China, the EU and US.

Forging closer ties with these resource-rich areas is already underway, with President Biden having hosted a US-Africa Leaders’ Summit late in 2022. And Katherine Tai, the US Trade Representative, stated the US is thinking “strategically about fostering supply chains” [6]. China is also attempting to make further strategic inroads, not least by rolling out its Belt and Road Initiative to include Latin America which was not part of the original initiative plans. The US is in the best position to benefit most from the supply-chain shifts to Latin America because of the increasing trend towards nearshoring and regionalisation.

Demand and trade for these minerals will go beyond Earth's limits. Several critical minerals, such as palladium and tungsten are found on asteroids. These are crucial for several sectors including green technologies, medicines and the aerospace industry.  Expect space, therefore, to become a greater strategic issue in the coming year.

The way ahead

Geopolitics will define the trade landscape in 2023—more so than economics, which has been the predominant driver in past years. This will lead to more trade restrictiveness, particularly for the major trading powers of China, the EU and the US. Countries that manage to remain neutral—as India is doing—will likely flourish and businesses within such countries will correspondingly benefit.

[1] https://www.wto.org/english/news_e/pres22_e/pr909_e.htm#:~:text=The%20new%20WTO%20forecast%20estimates,than%20what%20was%20previously%20projected.
[2] https://crsreports.congress.gov/product/pdf/IF/IF12078
[3] https://www.chathamhouse.org/2021/03/why-joining-cptpp-smart-move-uk
[4] https://gop-waysandmeans.house.gov/brady-and-smith-indo-pacific-economic-framework-presents-strong-opportunity-isnt-nearly-ambitious-enough/
[5] For more information visit Economist Impacts article on ‘FDI in 2023’
[6] https://www.politico.com/newsletters/weekly-trade/2022/12/05/what-to-expect-from-todays-ttc-meeting-00072129