KEY FINDINGS
● The geopolitical landscape is changing along with a rise in TPU (trade policy uncertainty) in recent years. Businesses need to factor this uncertainty into business planning as these trends are likely to continue. The global economy has undergone significant changes in the past decade, such as Brexit, the US–China trade war, covid-19 and the war in Ukraine. These have had a vast impact on the global trading system, with the effects likely to last for many years. Businesses can build their resilience by taking account of these changes and planning accordingly.
● Historically, TPU has been shown to reduce exports, investment and capital as businesses lack the predictability and stability of markets. Demonstrating the significance for companies operating in the global economy, studies on the effect of TPU show broad implications for trade and trading relationships. Economist Impact modelling advances this by showing how potential future geopolitical events could affect these factors. A reduction in these areas will have a knock-on effect on businesses through a change in productivity and employment levels.
● Evidence suggests that businesses are able to alleviate the effects of TPU by having just one additional country in their export basket. Uncertainty can have an immense effect on commerce as around 70% of trade today takes place in global value chains (GVCs). As so much production happens within supply chains, a further consequence of TPU is that it can damage the export margins of intermediate goods more than finished goods. It is therefore important to diversify supply chains in terms of partner countries since this ensures that businesses are more insulated from the effects of TPU and rising tariffs.
● Exporters are more productive than non-exporters, and this productivity premium rises the longer that companies have been exporting. Top exporting firms are more productive than the average exporting firms, while firms that have recently started exporting are more productive than those solely focused on their domestic market.
● Businesses that feel more confident in the trade policy of their key markets are more likely to increase participation in the global trading system, leading to further growth. Due to the significant integration of global supply chains, any changes in trade policy impact all involved. Strengthening links between trading partners helps remove TPU by increasing the predictability and stability of trading relationships. Economist Impact modelling shows that a decrease in TPU through greater liberalisation and more predictable trade rules increases GDP for all countries involved. If the US joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), GDP for all countries involved would increase by US$129bn. Therefore, increasing the security and stability of global supply chains is linked to increased economic gain for those involved.
● Economist Impact’s modelling shows that greater trade liberalisation is linked to an increase in GDP, imports and exports, making business growth more attainable. GDP increases through a rise in consumption practices would create additional consumers and, potentially, markets for businesses. Such growth helps build market confidence, which affords businesses the opportunity to make additional investments and to streamline business practices, providing even further opportunities.
● The fragmentation of the global trading system significantly reduces growth and opportunity for businesses. TPU significantly reduces the number of opportunities for businesses to source goods and services and to export their products. Economist Impact modelling shows that if the world split into three factions (a Russia–China-friendly bloc, a Western-style bloc, and a neutral bloc), there would be a reduction of a little over US$1trn for the Western and Eastern groups. So, while nations may see this as beneficial based on the securitisation of supply chains, it reduces the growth of economies and opportunities for businesses.
● The fragmentation of the global trading system can increase the effects of intra-region TPU shocks. In a fragmented world companies would be less likely to diversify outside of their trading blocs due to the increased trade barriers. Less diversification would then lead to more insular companies. The effect would be that TPU shocks within these “friendly” groupings would have far greater consequences due to the lack of diversification in markets outside of their region. The consequences would be particularly acute for small-to-medium-sized businesses as they have access to fewer resources than larger firms.
● Fragmentation would require companies to restructure their supply chains to account for the prohibitive trade barriers from unfriendly trading blocs or nations. Fragmentation can increase intra-region trading, with Economist Impact modelling showing that China’s trade with Russia would increase by just over US$46bn were the world to be broken up into three trade blocs. However, the benefit of increased intra-region trading more than completely reversed by the decline in inter-region trading. Economist Impact modelling shows this as China’s lost trade with the EU and US totals just over US$584bn in the fragmented scenario. Moreover, access to raw materials or intermediate inputs may be non-existent or rare within friendly trading blocs. This issue could leave businesses with the choice of paying high prices to import such goods or deciding to restructure their business practices. All of which leads to increased costs for business and a decline in GDP for nations.
● To help ensure prosperity, businesses need to thoroughly understand the trade landscape and geopolitics in order to weather the consistent shocks to global economies. Ensuring effective scenario planning to account for uncertainty is central to this. While most shocks cannot be predicted with certainty, some signs could indicate what is to come and which scenarios businesses should plan for. Adjusting practices and policies and factoring in geopolitical trends can minimise the risk of a given shock to trade policy. Including these factors when scenario planning is vital to ensure prosperity and longevity for companies.
● Economist Impact has modelled two scenarios which demonstrate the impact of reduced and increased TPU. Businesses should include these factors in their scenario planning. The first, “optimistic”, scenario involves the strengthening of trade ties with nations around the world and includes the US joining the CPTPP; the EU and China building on the Comprehensive Agreement on Investment and further reducing trade barriers through greater liberalisation; and the UK and India signing a free trade agreement (FTA). The second, “pessimistic”, scenario involves the splitting of the global trading system into three blocs: a Russia–China-friendly bloc; a Western-style bloc; and a neutral bloc.
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