Trade flow reshaping – the near future

The emergence and growing prominence of trade blocs is having a dampening effect on traditionally deep and fast-growing trade lanes such as China-US and China-EU. Five emerging global trade dynamics will characterize the world in the coming decade. 

North America as a stronghold

The US-Canada-Mexico Agreement (USMCA) will benefit the US, Canada, and Mexico because US trade with its neighbors is expected to increase by $466 billion over the next ten years. The Biden administration has shifted its focus to industrial policies with a more protectionist slant, like the Infrastructure Investment and Jobs Act (IIJA), CHIPS Act, and the Inflation Reduction Act (IRA), in response to a combination of economic pressure and concerns about national security. As a result, direct investments in strategically important industries lead to a more significant regional manufacturing footprint.

Trade Dynamics in China

Trade relations between China and the West are still being impacted by ongoing trade tensions and rising trade barriers. One of the most important changes in the updated global trade map is the anticipated decline in US-China trade, with a $197 billion drop in trade value from its 2022 level predicted by 2032. This is more than three times the $63 billion contraction that a similar BCG analysis predicted a year ago. The change is the result of several factors, including China’s 2022 GDP growth slowing down. Trade between China and the EU will increase going forward, but more slowly than the global average.

Growth in ASEAN Trade

Among the largest beneficiaries of the new global trade order are the countries of Southeast Asia. It is anticipated that ASEAN commerce would increase by $1.2 trillion over the course of the next ten years as a result of the region’s growing importance as a destination for businesses looking to diversify away from China and reduce their reliance on the Chinese market. Because of its youthful, vibrant population, diverse economy, and largely impartial position among geopolitical blocs, ASEAN presents an appealing alternative to China.

India’s Blaze

Similar to the ASEAN countries, India is becoming a major home market and “China + 1” location for international manufacturing thanks to its competent labor and low cost structure. For businesses looking to expand internationally, India’s sizable market and unique strengths in sectors like chemicals, consumer electronics, and pharmaceuticals are alluring. New and under-negotiation trade agreements demonstrate how trade connectivity is growing, and this will contribute to India’s expected $393 billion rise in external trade over the next ten years, of which $180 billion will be with the US and EU and $124 billion with China.

Russian Trade Divergence  

Russia’s trading profile will be impacted, at least as long as the standoff in Ukraine persists, by the disruption of trade between Russia and the US and the EU brought about by the war in Ukraine, the sanctions that followed, and the decreased reliance of Europe on Russian energy. Russian trade has not stopped because of these circumstances; rather, it has been diverted to other markets. For instance, a large portion of trade with the EU has been transferred to Russia’s BRIC (Brazil, China, India, and South Africa) allies. Russia’s trade with China and India is expected to increase by $134 billion and $26 billion, respectively, in 2032, while its trade with the EU is expected to decline by $222 billion.

Several Obstacles Are Preventing Trade Growth  

The recent twin shocks of the pandemic and the war in Ukraine have resulted in a reordering of the global trade dynamics, which includes a decline in support for globalization and an increase in trade protectionism. This has led to a cooler trade environment. Reshoring of manufacturing is occurring due to a number of factors, which is expected to have a negative impact on international trade. Among them are:

  • Industrial policy. The growth of national policies aimed at promoting homegrown business and employment creation is a key component. Policies that prioritize national interests over multilateral, rules-based organizations, like the World Trade Organization, are exemplified by the United States’ Inflation Reduction Act (IRA) and its “Buy American” incentives. Other regions of the world and the European Union have comparable policies.
  • Economics of labor. Some regions are seeing an increase in the number of companies reshoring or nearshoring manufacturing operations due to the availability of new technologies and skilled labor at low costs. For instance, the labor cost differential between the US and China has closed as labor costs in China have increased relative to other regions, while labor costs in Mexico, Southeast Asia, India, and Latin America are now competitive with China.
  • Stability of the supply chain. Companies are trying to diversify their global manufacturing and sourcing networks by relocating to markets with lower geopolitical risk, dependable infrastructure, and, in some cases, proximity to end-markets. This is because they are concerned about the risks of disruption and an overreliance on extended and fragile supply chains.-      
  • Environmental factors. Companies are shifting their attention to regions with clean energy supplies, lowering their carbon footprints, and improving overall sustainability as a result of domestic and international pressure on the industry to decarbonize operations. European businesses are being encouraged to use more low-carbon energy sources by moving their manufacturing closer to home by policies like the EU’s Green Deal.

Growing Regional Trade Blocs as Cooperation Cools  

As production moves closer to end markets, one feature of the new global trade order will be the increasing prominence of trade blocs, particularly those in North America, the EU, ASEAN countries, and possibly the BRICs. Countries looking to reduce geopolitical tension through trade with “friendly” nations find blocs appealing, particularly in the cases where trade agreements like the EU-Vietnam Free Trade Agreement, USMCA, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and Regional Comprehensive Economic Partnership are in place.

The US has enacted new industrial policies under the Biden administration, including laws that promote direct investment in vital sectors like semiconductors, home manufacturing, the production of renewable energy, the infrastructure for electric vehicles, and battery technology.

The net result of these industrial policies, when combined with the USMCA, is to bring investment back to the US, particularly in sectors like computer chips that are thought to be vital to national security. Over the next ten years, trade between the US and Mexico is expected to increase by an astounding $300 billion. The Inflation Reduction Act, for instance, extends the $7,500 credit for electric vehicles with powertrains or battery technology made in the US, Canada, or Mexico. This is an example of a “Buy North American” strategy that goes beyond the well-known “Buy American” incentives.
A persistent decline in trade between China and the United States will be one of the main effects of the increased focus on resilience through diversification of global markets and supply chains. This is because businesses are looking for manufacturing sites and trading partners to balance their exposure to global risk.

China, the largest exporter of manufactured goods in the world, is a resilient country. If trade between China and the West halts, it will simply shift to other markets. The ASEAN nations and India stand to gain significantly from a decreased US concentration in China, as numerous businesses shift their manufacturing operations to these economies in an effort to lower supply chain risks globally and tap into new markets. Because of this, trade will rise by an astounding $616 billion between ASEAN and China over the next ten years, and by more than $200 billion between ASEAN and the US and Japan. A 6.3% average annual growth in trade is anticipated for India, in part due to this rebalancing of trade with China.

“No-Regrets” Steps to Boost Competitiveness and Preparedness

The world market is becoming increasingly fragmented as trade tensions increase and confidence in multilateralism declines. A more uncertain world marked by a mix of smaller regional and local supply chains is rapidly replacing the more cooperative trade environment that allowed businesses to establish global supply chains in recent decades. Companies should take a number of actions to adapt in the near future.

–       Boost the ability to make geopolitical decisions so that supply chains can endure disruptions. By putting money into digital tools like artificial intelligence, businesses can increase resilience by facilitating quick decisions and flexibility. Additionally, businesses can take precautions like constructing buffer stocks of necessary goods, screening potential substitute suppliers, and creating backup plans for at-risk supply inputs.

–       Boost capacity to react to inflation and changes in price. Creating resilient pricing can be achieved in a number of ways, such as by anticipating demand changes and establishing dynamic pricing capabilities, improving customer relations and reducing flexibility, and investigating novel revenue streams like outcome-based pricing and “as-a-service” models.

–       Adopt “fractal innovation” to increase your flexibility and adaptability. Companies can address the unique needs of local customers by embracing a new approach to product design known as “fractal innovation” and a “customer-in” mindset, which can help them meet the challenges posed by a fragmenting global trading landscape.

–       Accelerate cybersecurity and risk management. To create a unique cybersecurity roadmap, businesses should assess security vulnerabilities, rank security initiatives and resources, and take into account strategies like cyber tool health index, zero-based budgeting, and cyber risk quantification.

The world economy and corporate decision-making will continue to be influenced by factors that have recently dampened the effects of global trade. Businesses that depend on international supply chains have to accept that there will always be difficulties with international trade and should keep expanding their networks and strengthening their resilience.

We tried to cover the major trade diversification trends in this piece. Still recommendations given above need to be adjusted to your business. If you liked this article and want to stay tuned to get export consultancy insights from an expert, subscribe to MCN’s newsletter. MCN is an export consulting firm specializing in trade advisory services that is always there to aid your business. 

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