Will international trade become less inter-national?

International trade, economics, and supply chain management are tightly interwoven topics. While supply chain management focuses on elements like service levels, inventory, and logistics, at the macro-level, all these components collectively form the heartbeat of the global economy. Observing the sum of these components at a global scale is bound to bring a realization that the currently world around us may be changing more swiftly and more structurally than the changes you are observing inside your own organization. And you’d better be aware of them.

Just last Friday, China's restrictions on exporting graphite went into effect, potentially impacting 65% of the global supply. This follows earlier trade measures targeting other essential earth metals mined in China, crucial for the high-tech industry and the energy transition. These restrictions are responses to measures taken by the US and its allies to limit China's access to critical advanced chip and AI technology. Moreover, they build upon other China-US trade barriers installed during the Trump presidency, which Biden has maintained.

The era of relatively easy global trading seems to be mostly behind us, with various forms of protectionism on the rise. Simultaneously, the desire for companies to have more diverse and resilient supply chains has grown since the Covid-19 pandemic. Related to the first point is also access to natural (rare-earth) resources that power the energy transition as well as cheap energy itself. These are three major drivers that will substantially change the composition and flows of global trade.

Despite news headlines suggesting doomsday scenarios ("globalization is dead"), it's essential to remind ourselves that international trade has always been changing. Companies, as they always have, will adapt to create efficiency and effectiveness in their operations. While there's debate about whether international trade has reached its all-time peak and is in decline, the IMF (June 2023) indicates that there is still no conclusive evidence of deglobalization. Global trade growth slowed after the global financial crisis in 2008–09 and declined sharply during the pandemic in 2020. However, since then, trade has rebounded to the highest value ever.

One concerning aspect driven by current geopolitical sentiment is the potential segmentation of global trade into two (or more) disconnected trading blocks. On one side are Western-influenced economies, and on the other side are China-Russia-influenced economies. History has shown that decoupled trade blocks arising from geopolitical tensions can lead to armed interventions “to safeguard national interests”.

Amid public and political sentiments blaming (hyper)globalization for declining wealth, there's a growing tendency among politicians to apply further trade restrictions. Both trading camps are simultaneously taking measures to grow independence from the other.

Economists, faced with their basic trade theories being heavily critiqued, have responded by investigating claims that globalization has deprived many of their wealth and well-being. Studies have concluded that while the average person globally is better off than in previous decades, many workers in advanced economies are doing worse off than their parents. The issue is not global trade itself but stems from the uneven distribution of the wealth created. Basic economics teach us that greater trade barriers lead to higher prices, resulting in lower real wages. While globalization may have contributed to more spatial inequality, protectionism is not the cure; it will likely exacerbate the problem.

This lesson calls for decisive and creative actions by politicians. They need to be honest and clear about what happened and take steps to redistribute wealth to those at risk of falling aside. This doesn't necessarily entail radical socialist policies but involves shaping longer-term visions for nations, states, and geographical zones to create meaningful and rewarding jobs, fostering thriving and sustainable economies.

US and China Trade Influence

Evolution of the world's 25 top trading nations

Sources: