Economic Development

Resisting fragmentation, restoring trust

June 27, 2022

Global

Resisting fragmentation, restoring trust

June 27, 2022

Global
John Ferguson

Head of globalisation, trade and finance

John is the head of Economist Impact’s globalisation, trade and finance practice. He is responsible for leading and developing the practice across different geographies and sectors, including both public and private organisations. As the global economy is being transformed by multiple forces including geopolitics, technological progress and climate change, the practice works with clients to navigate these structural shifts. A frequent public speaker, his delivery style helps to provide context to many global issues in an insightful and accessible way, supported by his 15 years in policy and economic analysis. Most recently, as Director of Macroeconomics, he was responsible for guiding The EIU’s global economic analysis across 200 countries. Prior to this, he was Director of Country Analysis and Global Forecasting. John holds a Master’s degree in International Economics from Sussex University where he specialised in macroeconomics and trade, and an Honours degree in Psychology from the Australian National University. Areas of expertise: globalisation, trade and finance; macroeconomics; geopolitics and international relations; The economics of climate change; developing economies; foreign direct investment and supply chains

A critical global trade week

Economist Impact’s Global Trade week couldn’t have come at a more critical time. There are immense challenges facing the global economy. Among the most pressing issues is the struggle to avoid a global food crisis, a threat that emerged from the war in Ukraine. Amid high food and energy prices that have pushed up inflation worldwide, the spectre of recession looms over key markets as major central banks respond by lifting interest rates. Global trade has also taken a hit. The World Trade Organisation (WTO) has downgraded its estimates for trade growth in 2022 from 4.7% to 3%. Within this context, policymakers need to restore trust in the system if we are to avoid the fragmentation of global trade and rebuild globalisation more inclusively and sustainably.  

Export restrictions intensify short-term challenges from the war in Ukraine

The effects of the war in Ukraine will be a consistent theme at Global Trade Week. With the imposition of western sanctions on Russia’s economy and blockages at Ukrainian ports, commodity supply chains have to adjust to a lack of regional inputs. Known as the world's breadbasket, exports of wheat, barley and fertilisers have all declined since the start of the war. The lack of supply, combined with price increases for these commodities, will create significant pressures on food systems in the least secure countries. It is vital that commodities produced in other parts of the world fills the gap as much as possible. Unfortunately, the initial response is not encouraging—23 countries have imposed export restrictions on food supplies. If the worst-case scenario of a global food crisis is to be avoided, these restrictions must end now. 

Rebuilding trust is the key to avoiding the perils of friendshoring

Global trade is at risk of becoming fragmented along geopolitical boundaries as western sanctions on Russia’s economy likely to be in place for many years. Therefore, businesses will have to grapple with the risk of separate supply chains that depend on the trading relationship of the main markets in the chain. Known as friendshoring, this would see companies align their investment and supply chains with the political preferences of destination markets. Supply chains are already shifting to account for the challenges in the global economy. Research in 2021 from Economist Impact found that almost half of companies had diversified their supply chains as a risk-management strategy. Moreover, companies were also building inventories in their supply chains as they move from  just-in-time models to  just-in-case approaches. These challenges could cause the global trading system to fragment even further. In such a world, all countries would be poorer. 

Progress on services and digital trade can work against the trends toward fragmentation. The WTO has recently agreed on a deal that covers 90% of global services and should benefit all parties to the agreement. Small businesses, in particular, should benefit from the increased transparency related to licencing, standards and other administrative areas. Meanwhile, digital trade will also underpin services trade and many other aspects of economic activity. While global rules are yet to be established, the foundations of digital trade rules are being laid with the 2021 Digital Economy Partnership Agreement (DEPA) between New Zealand, Singapore and Chile. DEPA covers areas such as digital identity, e-payments, emerging technologies and data innovation. By construction, DEPA was designed in modules to enable sections of the agreement to be incorporated into future agreements. This approach should support the adoption of these norms in other markets, encouraging data flows and creating more business opportunities. 

A consistently collaborative approach is required

Trade and investment will be critical if we achieve an inclusive, sustainable global economy. Rebuilding trust and sharing trade benefits more widely will be necessary to avoid the pull toward fragmentation. There is still a need to find the right balance between international rules and domestic policy that allows countries to have space for their preferences. This is true at the agreement level and for specific areas with an agreement. There is more discussion of guardrails or guidelines in trade policy that are meant to create domestic policy space. At the same time, the use of plurilateral agreements enables like-minded countries to find agreement. Events such as a Global Trade Week and multilateral platforms will need to find this balance to ensure that trade flows continue and the benefits of trade are shared as widely as possible. 

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