A year of dodging trade catastrophe, but risks are looming. (Same as last year)

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And so another year of Trade Secrets draws to an end. I’m back with the first newsletter of 2024 on January 8 and the first column on January 11. Today, I do the Janus thing and look back at the year that’s coming to a close and the one to come.

Reviewing my end-year pieces in years gone past, there’s a clear pattern. Globalisation repeatedly defied all the threats I’d warned about the previous year, and yet somehow it still seemed easier to detail risks for the 12 months ahead than to point at specific causes for optimism. Nonetheless — happily vindicating my longstanding instinct — globalisation has kept chugging along. Next year genuinely does seem to pose the biggest hazard to open trade in a long time (the possible election of Donald Trump), but then we’ve said that about other things before. Charted Waters is on electric vehicles, a subject we all know a lot more about than we did this time last year. A very happy holidays/merry Christmas/cool Yule/blissful break from reading Trade Secrets to you all.

Globalisation in the year gone by

Trade itself basically did fine in 2023. Goods trade slowed during a downturn in global gross domestic product. That’s what it does. The World Trade Organization revised down its growth estimate for trade in goods in 2023 in October but thinks it will recover next year. The apparent soft economic landing in the US and the turn of the interest-rate cycle across a lot of countries is really good news for trade in the short- to medium-term.

Meanwhile, services trade (though note these are value not volume data and affected by exchange rate movements) is also doing OK.

Global foreign direct investment recovered in the first half of 2023, albeit not completely from the big drop in 2022. There’s a really big fall-off in FDI into China, but no reason that other countries can’t scoop it up.

Indeed, the value networks in goods trade that have been built up since the cold war are being rejigged but not (yet) degraded. A bunch of low- and middle-income countries (Vietnam, Mexico, India, Bangladesh) are nipping in to interpolate themselves between China and the US or trying to snaffle some of the low-cost manufacturing. 

Geopolitics isn’t destroying trade. This isn’t a new cold war. It just isn’t. There’s a bit of evidence that value networks are becoming stronger between strategic allies, but the world economy isn’t splitting into blocs. To generate any significant trade or macroeconomic effects you have to assume really extreme and unrealistic degrees of political fragmentation. And the Gaza situation won’t directly affect global trade unless it spreads to more countries or the shipping disruptions (see below) are prolonged.

Attempts to control commodity exports (countries’ own and their adversaries’) aren’t really working. The G7 cap on Russian oil prices has been in place for a year but is by now essentially having no effect. Tech sanctions are more important, but news from Huawei suggests China can get round at least some US bans on chip technology.

Meanwhile there’s heightened rhetoric about the Global South, a term whose prominence continues to grow despite my best efforts, but most developing and emerging economies are showing entirely understandable opportunism in not definitively joining either the US or China’s camp.

Trade policy is unimpressive but not generally malign. As the WTO director-general reported to ambassadors recently, the number of trade restrictions remains at a high level but more liberalising than restricting measures are being added. However, there haven’t been many impressive deals getting done among the big powers. The US has been flailing about with its “Indo-Pacific Economic Framework”, which hilariously manages to be domestically controversial while largely devoid of content, and is otherwise averse to trade deals. The EU has so far failed to get the trade deal with Mercosur sorted and is busy with unilateral, I mean autonomous, instruments such as its carbon border mechanism, and irritating low and middle-income countries by doing so.

Globalisation in the year to come

The biggest danger to the world trading system is pretty obvious: Donald Trump. It’s bad enough that a second term of Trump as president would most likely see a resumption of trade wars that were both aggressive and hugely uncertain. (Will China be an enemy, or a friend of convenience? Will Mexico now be a full-on adversary because of immigration and stealing American jobs? Will the US just cut funding for the green transition and impose even higher tariffs instead?)

It’s also that if Trump pulls out of supporting Ukraine, handing Russia partial or total victory, it will create a very serious problem for the EU and will encourage pro-Putin forces inside Europe. And while governments have generally given up on the idea that America will anchor an open global economy and multilateral trading system, a US actually sliding towards autocracy would be a very different thing. In other words, we really could finally see an impact of geopolitics on globalisation.

Rebel attacks and climate change are threatening supply chains. This time it could be real. The big crunch in ports and shipping during Covid — or more accurately when the Covid lockdowns were lifting — was a surge in demand, not any major structural problem with supply.

But what we’ve seen over the past few days, with Iran-backed Houthi rebels from Yemen attacking ships in the straits between the Red Sea and the Gulf of Aden and the world’s biggest freight carriers suspending operations there, will be very serious if it’s prolonged. A long-term disruption to Suez Canal traffic (as opposed to the Ever Given ship that got stuck in 2021, which had no long-term impact at all) won’t be pretty.

Together with the world’s other great shipping canal, Panama, being severely affected by drought, the supply shock to freight might finally have arrived. I say might because it seems unlikely the Houthi rebels will be able permanently to shut the Suez Canal to shipping without there being some fairly serious reaction. And the Panama drought is somewhat linked to the El Niño weather system, an extreme version of which has come around only once every couple of decades. Then again, it’s likely to come more frequently as the atmosphere continues to heat up.

Trade policy won’t do much either way. The big WTO ministerial meeting in February is set to achieve not very much. The US won’t engage properly with reviving the organisation’s dispute settlement process until after November’s presidential election, assuming Joe Biden wins it. As noted in the links below, the EU and US will also try to put their dispute over steel on hold until then. The EU will continue to try to drag the EU-Mercosur trade deal over the ratification line, which probably won’t happen but it might. The EU’s anti-subsidy case against Chinese electric vehicles will come out with something initially quite modest. China will continue to grind slowly through the process of joining the Asia-Pacific CPTPP agreement, while existing members decide if they have the nerve to block it.

Charted waters

Speaking of electric vehicles, Washington’s hostility to Beijing means that Chinese investment in EV plants is going into Europe instead. Given China’s lead in the area, that’s a big advantage for EU-based production over the US — the only question is whether you care who owns the company as well as where and what it produces.

Trade links

The remarkable story of a staff revolt at a German consultancy which did a review of labour standards at Volkswagen’s plant in Xinjiang, the Chinese province where the Uyghurs live. (See my Trade Secrets on this issue in June).

Javier Milei has surprised anyone expecting libertarian fireworks by adopting relatively conventional conservative economic policy, including supporting the EU-Mercosur deal. He’s also got some unpleasant authoritarian tendencies, though that’s hardly a novelty in Argentina or indeed among Latin American rulers calling themselves free-marketeers and supported by supposed libertarians from the US.

A commendable outbreak of political common sense in Brussels as the EU has decided not to impose tariffs on the US over the steel dispute until after the presidential election.

My FT colleague Peter Foster’s excellent Britain After Brexit newsletter gives the UK dimension to the issue I wrote about in the column last week — how does the UK achieve its desired light-touch regulation of artificial intelligence given the EU next door has taken a more interventionist route?

Speaking of the UK, government ministers can concentrate on signing meaningless bits of paper with individual US states, since it appears that the toxicity of trade deals in Washington ensures that no meaningless bits of paper will be available for signing at a federal level. Still, special relationship and “Atlantic Declaration” and all that.

Trade Secrets is edited by Jonathan Moules