The global trade landscape saw positive growth in the first quarter of 2023, as both goods and services trade rebounded from the downturn experienced in the previous year, according to the June 2023 UNCTAD Global Trade Update. Yet while trade volumes and values increased during this period, the forecast for the second quarter of 2023 suggests a slowdown and a challenging outlook for the rest of the year.

After a decline in the second half of 2022, trade in goods made a strong recovery in Q1 2023, adding approximately $100 billion compared with Q4 2022. This growth was primarily driven by a revival of economic activity in China and increased trade in road vehicles and pharmaceuticals. Similarly, the trade in the services sector displayed resilience throughout 2022 and experienced 2.8% growth in Q1 2023, partly attributed to the ongoing rebound in tourism and travel following the Covid-19 pandemic.

Various negative factors contribute to this outlook, including geopolitical tensions, the war in Ukraine, weakening global economy, potential rise in trade restrictive measures, slowing industrial output, inflationary pressures, and concerns of debt sustainability.

Mixed trade growth

On a yearly basis, both imports and exports of developing countries experienced an average growth rate of 6%. However, excluding East Asian economies, the growth rate for developing countries reached approximately 14%. While most regions displayed positive trade growth on a yearly basis, trade growth in East Asia remained below average. On a quarter-over-quarter basis, Q1 2023 saw a decline in trade values in most regions, except for the Pacific region, North America, and Africa. Notably, intra-regional trade in Africa outperformed other regions, showing a 3% increase.

During 2022 and Q1 2023, the geographical proximity of international trade remained relatively stable, indicating a lack of significant nearshoring or far-shoring trends. However, there was an increase in the political proximity of trade, suggesting a shift towards prioritising countries that share similar political values, described as ‘friend-shoring’ by UNCTAD.

The war in Ukraine, the US-China trade decoupling, and Brexit played significant roles in shaping these bilateral trade trends.

The International Monetary Fund has warned of the risks of ‘friend-shoring’. Pinelopi K Goldberg, Elihu Professor of Economics and Global Affairs and an affiliate of the Economic Growth Center at Yale University, and Tristan Reed, an economist with the World Bank’s Development Research Group, said that while trading exclusively with “friendly” countries may imply greater resilience to geopolitical risks—at least in the near term—the concept of friendship is itself subject to “constant change”. It may, they said, lead to less resilience to other types of shocks, such as the recent health shock.

Added to which, restricted trade could lead to greater inequality within countries. “Greater trade barriers lead to higher prices, which mean lower real wages,” they said. “Globalisation may have contributed to more spatial inequality, but protectionism is not the cure: it will likely make the problem worse. Across countries, there is a risk of increased global inequality.”

Geoeconomic fragmentation could, they said, lead to more trade between high-income economies that are “friends”. Increasing emphasis on environmental and labour standards in trade agreements would raise entry barriers for very poor countries that find it difficult to meet these requirements. “Without access to lucrative foreign markets, there is no clear path for poverty reduction and development in such economies.”

Energy’s role

UNCTAD’s Global Trade Update noted that the energy sector has had a notable impact on global trade trends over the past year, with higher energy prices leading to increased trade values. Other sectors that experienced trade growth included agri-food products, apparel, chemicals, and road vehicles. Conversely, trade declined in the office and communication equipment as well as the transport sectors. In Q1 2023, the energy sector and office and communication equipment saw a reversal in trade values, while sectors like metals, chemicals, minerals, pharmaceuticals, and motor vehicles witnessed increased trade.

The IMF economists have, meanwhile, looked in more detail at globalisation’s impact on trade.

When measured in US dollars, global trade growth slowed after the global financial crisis in 2008–09 and declined sharply at the onset of the pandemic in 2020. But since then, trade has rebounded to the highest value ever.”

They added: “As a share of GDP, global trade has fallen modestly, driven mostly by China—which for years has pursued a ‘dual circulation’ strategy of prioritising domestic consumption while remaining open to international trade and investment—and India.”

Their analysis revealed a decline in global trade as a percentage of GDP, mainly due to China and India’s shift in priorities. These countries have experienced an end to the exceptional export booms they previously enjoyed, along with a decrease in imports of intermediate goods compared with previous years.

However, the economists emphasised that “as a share of GDP, imports of intermediates by the rest of the world are still growing”. This highlights that despite the decline in trade as a percentage of GDP in some countries, the rest of the world continues to experience growth in both imports and exports of intermediates.
Source: Baltic Exchange