Global Trade Will Never Look The Same

Global trade is going to look like you’ve never seen it before.

And for that you can blame the rise in economic nationalism, a recent report states.

“[A]nimosity between China and the West are fanning the flames of economic nationalism,” states the report from London-based consulting firm Capital Economics. In turn, the authors believe the global trade system we’ve have since around 1945 is now “fracturing” and will lead to two main trade blocs.

That will likely be a substantial blow the prosperity we’ve all enjoyed since the end of WWII. Since the defeat of the Axis powers in 1945 volume of global trade has consistently increased decade after decade. The last surge began when China joined the World Trade Organization (WTO) in December 2001.

Its a longstanding view of most free market economists that free trade is a good thing as it allows increased and more efficient global output. Free trade means no tariffs, quotas or non-tariff barriers to foreign imports.

We sort of arrived during the first decade of the 21st century. Average tariffs fell to 2.6% in 2017 down from 8.6% in 1994. With that decline trade grew reaching a peak at just above 60% of global GDP in 2008, its hovered just below that and then started falling off a cliff after 2018, according to World Bank data.

And now we are in a new era. At least that’s what the capital Economics report suggests.

Capital believes the pandemic and the war in Ukraine have exacerbated the issue, with countries looking to protectionism (a.k.a. putting up trade barriers) as their own industries suffer from the dire impact of the shaky global economy.

The result will be two broad trading blocs. First, and largest will be the U.S, its allies, and friends. The other will be China, its allies and friends.

Such change will reduce productivity growth, and increase inflation, the report states. Movement of workers with special abilities will likely be reduced between the two areas and as a result innovation and economic progress will slow.

“[G]eopolitical considerations [will] play a greater role in decisions over the allocation of resources,” the report states. Put another way, bare knuckle capitalism will die as the state increasingly intervenes in the markets.

If that alone doesn’t sound bad enough, there’s more.

Technology and pharma companies will suffer greatly from trade restrictions and so see their profits growth get crimped. That’s particulary bad for Europe and the U.S. because these are two sectors that have produced great gains over the past couple of decades.

Thje good news for those in the U.S. bloc will fare far better than those in China. The report explains it this way:

• “[T]he China-led bloc is dominated by China itself, making adaption harder and therefore increasing the potential economic hit. This is embedded in our view that China’s growth rate will slow to 2% by the end of this decade.”

For China a 2% growth rate is the equivalent of a collapsing economy in the west.

The U.S. will be more adaptable due to its far reaching trade relationships with leading economics, such as those in Western Europe, Japan, and South Korea.

There is an ominous end to the report’s introduction, the report states as follows:

• “As long as a crisis is avoided and fracturing leads only to a partial roll-back of prior decades of integration, economies and financial markets will adapt gradually to the new environment. But there are less benign possibilities worth considering too.” My emphasis.

Put simply, if cool heads don’t prevail a two-tier trade system might look like heaven compared to an utter economic breakdown across the world.

Let’s hope it doesn’t come to that.