The world economy is clearly splitting into two distinct blocs two years after Russia invaded Ukraine, and the multilateral trade agreements that have supported trade for almost 30 years are in jeopardy.

Sanctions, trade restrictions, and indications of a growing rift between nations supporting Russia and those supporting Ukraine are the results of growing geopolitical tensions, particularly in the Middle East, and worries about economic security.

The World Trade Organisation has warned that a complete split into two rival blocs would cause the global economy to contract by 5%, with developing nations bearing the brunt. Next week, the WTO will hold its biennial ministerial session to discuss global trade regulations.

In this worst-case scenario, multilateral agreements would be disregarded as the United States, China, and their allies fought in a bipolar trade war and each bloc created its own rules.
Although we haven’t reached that stage yet, WTO economists have demonstrated that the two blocs are disintegrating as a result of Russia’s invasion in February 2022.

“We find early evidence of a trend towards a stronger alignment between trade flows and geopolitical affinities since the onset of the war in Ukraine,” they said in a report.

“Our findings point to the first signs of fragmentation in global trade.”

Based on disparate United Nations voting patterns—including, but not limited to, resolutions about the conflict in Ukraine—they divided the world. To mitigate the effects of sanctions and the war itself, they omit Belarus, Russia, and Ukraine.

According to their findings, the growth of trade in products has been 4% slower between the blocs than it has within them.

Though the economists did not evaluate whether nations are returning portions of value chains back to their own territory, they did observe indications of “friend-shoring” but no evidence of widespread near-shoring, with no uptick in trade within regions. U.S. Treasury Secretary Janet Yellen and others have coined the phrase “friend-shoring” to urge nations to shift their production chains from China to market-oriented democracies like India. 

When the WTO economists focus only on the United States and China, they discover that the conflict in Ukraine has exacerbated trade tensions that had escalated when former US President Donald Trump placed tariffs on nearly two-thirds of Chinese goods imports.

Ironically, trade flows reached a new high in 2022 as Beijing’s demand for American energy and agriculture products increased and U.S. consumer goods saw a surge in demand from Beijing. Nonetheless, WTO data indicates that each nation’s bilateral commerce has decreased in comparison to its goods trade with other countries.

It comes to the conclusion that bilateral trade decreased by 31% starting in July 2018 due to the initial spike in trade tensions and the war in Ukraine that followed.

Negative projections for the growth of the global goods trade, especially for the previous year, are partially due to geopolitical concerns. The World Bank estimates the result at 0.2%, the lowest growth rate in the previous 50 years outside of global recessions. The WTO has stated that it will lower its 0.8% estimate.

Ayhan Kose, the deputy chief economist at the World Bank, told Reuters that this weakening was happening in the context of significant shifts in trade policy that followed an earlier embrace of trade integration.

“That era basically disappeared. Now we have a new era characterised by countries not signing agreements… And then if you look at the number of trade restrictions introduced worldwide, that number has sky-rocketed.”

Global Trade Alert, a Swiss-based monitoring service, has discovered a significant accumulation of distortive policies since the beginning of 2020, ranging from Argentina’s intention to boost soy export taxes to India’s heightened import duties on palm oil and governmental assistance from the United States for the onshoring of semiconductor supply chains.

Furthermore, even if laws have occasionally loosened previous import and export restrictions, they have not kept up with the surge in subsidies, which generally make domestic products appear more affordable than imported ones.

In order to prepare for the shift to a green economy and to support local companies more and more, countries are frantically trying to obtain vital raw resources like cobalt and lithium.

Global Trade Alert observes a similar increase in subsidies in the food, pharmaceutical, and global value chain industries. According to its data, not only are more steps being taken, but more countries are doing so as well.

Trade barriers and distortions undermine international agreements that encourage free trade and place limits on how much a nation can spend in subsidies and other forms of assistance for its own industries. They also signal a move towards protectionism.

According to the Institute of International Finance, there are concerns associated with global debt and increased government spending to lessen the negative effects of expanding trade barriers and geopolitical conflicts on supply chains.

WTO Director-General Ngozi Okonjo-Iweala, who will preside over the organization’s sessions in Abu Dhabi on February 26–29, highlights the negative effects of fragmentation and promotes “re-globalization,” a return to multilateralism that may increase global GDP by almost 3%.

The best that could be hoped for, especially for trade-dependent Europe, according to Georg Riekeles, associate director of the European Policy Centre think tank, was a transition to a new equilibrium that preserved open trade, at least with friendly partners.

“A retreat of globalisation due to more caution over China and over disruptions to value chains, such as the Red Sea, could be compensated by greater diversification and open trade elsewhere,” he said.

(Adapted from Ruters.com)