As we approach the end of 2023, the year has turned out better than expected for the global economy.¹ Forecasts of a recession in the fourth quarter appeared to abate as the months progressed with the US economy leading the way.

The International Monetary Fund (IMF) expects world economic growth to be around 3% this year. Both the IMF² and the OECD³ expect this pace to slow next year (or at best plateau) as a result of tighter monetary policy. However, the fact that inflation appears to be coming back under control is seen as a success for global policy makers. China’s economy, after a slow start to the year and trouble in its property market is now posting strong growth.⁴ Bloomberg reports that the US economy is “barrelling towards 2024” in “better shape than even the soft-landing crowd expected only six months ago. As for Team Recession, it’s been 17 months of wrong calls.” At an annualised pace of 4.9% growth, as The Economist points out, it has defied even the strongest naysayers.⁵

“Trade and GDP growth historically have always been closely watched as they are interdependent”Dr Rebecca Harding, Trade Economist

The picture for trade and supply chain finance has been less rosy according to the International Chamber of Commerce’s (ICC) 2023 Trade Register.⁶ Trade finance revenues may have fallen by as much as 7.4% during the course of the year due to slower trade flows and higher interest rates pushing up the costs of more expensive trade finance products such as invoice financing and factoring. This will contribute to a worsening trade finance gap for SMEs and has already contributed to the figure widening in 2023 to around US$2.5tn.⁷

There appears to be a disconnect between the performance of global trade and the performance of the global economy. Trade and GDP growth historically have always been closely watched as they are interdependent. The trump card of globalisation was that trade would grow at roughly twice the rate of GDP, yet this has not materialised since 2016.⁸ With real growth in trade values forecast to land at around 1.7% in 2023 according to the World Trade Organisation (WTO)⁹, this is roughly half the level of expected GDP growth and indicates there is a problem with one of the major growth engines of the global economy that will afflict economic performance in 2024.

The WTO itself argues that many of the issues that underpin the weakness in global trade are associated with “trade fragmentation.”¹⁰ It argues a “trade sceptic narrative” has “gained traction” suggesting that trade is actually an obstacle to building a “more secure, inclusive and sustainable world.” Clearly this is against the WTO’s founding principles, which were to create economic interdependencies between countries in the world through trade which would play a “crucial role in achieving peace and prosperity”.¹¹

To suggest that trade by itself has stopped conflict between nations, dialled down a nationalist rhetoric, or even addressed major social or environmental issues in the world, would be patently incorrect right now. But to argue that trade itself is the problem is equally misleading. For example, Russia has long regarded a western approach to globalisation as a threat to its own power and influence; China’s foreign policy power is, and always has been, projected through its economic reach – globalisation gave it the platform to extend this power. In other words, it appears that globalisation, not trade, has caused the return of great power conflict.¹²

Nonetheless, with the WTO itself assessing the state of world trade, it is worthwhile looking at its case more closely.

The report outlines five principal reasons for the importance of trade and why policy makers around the world need to double down their efforts on re-globalisation:

1. Trade has been growing - thus there is no evidence of less globalisation.
2. The rules-based multilateral trade system creates a “more secure, affluent and sustainable world” for everyone because value chains are inter-dependent.
3. Economic nationalism and protectionism are barriers to the benefits of trade.
4. We can only solve the problems of climate change with a multilateral approach.
5. Economic rivalry creates net GDP losses, which damage emerging markets the most.

1) Trade growth is weak and reflects inflationary pressures and conflict

The data evidence to support the WTO’s assessment is mixed. First, trade did grow in value terms between January 2014 and the end of 2022, largely because of the impact of increases in commodity prices in the wake of the Russia/Ukraine crises that unfolded in February 2022. Trade volumes also increased over the same period, but to a far lesser degree – suggesting that trade values are still reflecting inflationary pressures (see Figure 1).

Figure 1: Global trade volumes and Values, 2014-2023

Source: Comrade; CBP Netherlands World Trade Monitor

2) Trade is not just about economics – it is increasingly political

Second, trade has not been used exclusively by policy makers over recent years as the means of creating a peaceful and fair economic base for the global economy to grow. Rather, it has been “weaponised”¹³ – rhetorically during the period of the US-China trade war after 2016 and literally in the period since the Ukraine conflict through the use of sanctions and export controls to limit Russia’s access to revenues that fund its military campaign.

“Trade is a key weapon in a “deterrence by denial” approach to constraining an adversary”Dr Rebecca Harding, Trade Economist

This is a new approach to conflict where trade itself is a key weapon in a “deterrence by denial” approach to constraining an adversary.¹⁴ For example, export control restrictions on military technology and dual use goods are used to deny both China‘s and Russia’s scope to develop advanced weapons capability using western technologies. This is trade being used as a means to pull back on globalisation, which has deepened and extended ‘great power the conflict’¹⁵ into geoeconomics, not just geopolitics. Trade is a part of this contested world – as it always has been, suggesting that maybe the globalisation narrative was always somewhat naïve.

3) Economic nationalism was evident during Covid-19 but is less evident now

The third line the WTO takes is that economic nationalism militates against the benefits of free trade. Interestingly, economic nationalism, if we are to measure it by protectionism, seems to have been a particularly acute problem during the Covid-19 period. The rapid increase in protectionism was during 2020; with 2021 showing an increase in trade liberalisation measures and 2022 into 2023 showing a marked decline according to the Global Trade Alert.¹⁶

Protectionism did rise after 2016, and this was associated with a decline in trade integration by some analysts, notably the IMF,¹⁷ European Central Bank¹⁸ and the Bank of England.¹⁹ However, the causal effects are harder to define – just looking at Figure 1 it is quite easy to point out that any decline in trade was not permanent and, more importantly, was associated equally with a drop in confidence in trade resulting from fear of a trade war during the Trump presidency in the US and a global pandemic in 2020.

4) Collaboration to address the issues of climate change is not just about trade

The fourth argument is that we need to work together if we are to solve the problem of climate change. This is certainly true, but it is not a trade point, rather a multilateral one. In trade terms, we are seeing an increase in sustainable products within the trade mix according to the IMF,²⁰ but this may reflect changing production techniques and consumer preferences as much as it reflects a shift in trade. At just 8.1% of all trade,²¹ there is still a long way to go.

Defining the impact of world trade on sustainability is at best a challenge and at worst impossible. On one level, between 20% and 30% of global CO₂ emissions are associated with international trade according to the ICC²² making it a major contributor to the environmental challenges the world faces. On another level, almost by definition, international trade enables goods and services to move around the world that contribute positively to climate transition. In other words, the more trade grows, the more likely it is to have negative climate impacts at least in the short term.

5) Interdependencies between countries are the opportunity and the threat for international trade

Finally, the WTO argues that integrated value chains create interdependencies that pull countries together rather than separate them. According to the WTO, fewer interdependencies would be at the expense of integrating emerging economies into the global trade system. Yet it is these very interdependencies that deterrence by denial, and more general supply chain de-risking²³, attempt to unravel on national security grounds. The phrase “supply chain resilience” has entered our lexicon of defence and security as the world moves from the supply chain shortages of the pandemic and its aftermath to the conflict in Ukraine and the perceived threat that China represents militarily in the Indo-Pacific.²⁴

There are downside risks to the global economy in 2024 and inflationary pressures may persist. There are uncertainties around current forecasts, but most international agencies are suggesting that 2024 will be tougher because of the need for interest rates to stay “higher for longer” to ensure that inflationary pressures emanating from the monetary system are dampened.

Geopolitical impacts

However, not all of these inflationary pressures are monetary. The current conflicts in Ukraine and in the Middle East appear to be long term²⁵ and at best could cause volatility in oil markets. At worst they could fragment the global economy and trade system further as sanctions avoidance through “swing states”²⁶ countries such as India or Turkey, which are aligned to none of the “great powers” but want economic growth and development for themselves on their own terms.

So, the reader would be forgiven for thinking that the complexities of the current moment in time are too much for the trade professional or corporate to handle. Yet trade, and the trade finance that supports it are embroiled in the geopolitics of conflict, security and defence and sustainability whether they like it or not.

In 2024 the backdrop to international trade will be one of conflict and trade professionals will be dealing with an ever more complex sanctions and export control regime. As geopolitical tensions and conflicts continue (Russia/Ukraine and the Middle East being current examples), trade and trade finance will become even more central to deterrence strategies.

Incentivising sustainable behaviour

Similarly, there will be increasing pressures from regulators across major supply chains to improve the sustainability of global trade. This is unlikely to make life simpler for trade finance professionals since the regulations are complex and inconsistent across different jurisdictions.²⁷ However, trade finance is uniquely placed to make trade more sustainable if properly incentivised and if the collaborative structures are made to work effectively.

Role of trade finance

As always, it is trade finance that will drive the success of international trade during the coming year. How professionals deal with the geoeconomic, geopolitical and sustainability challenges in terms of their compliance functions, and their relationships with key stakeholders in government, clients and civil society will be key. Risk is at the centre of trade finance as we know, but this is what makes the job more interesting, and more relevant than ever.

Sources

¹ See forbes.com
² See imf.org
³ See oecd.org
⁴ See imf.org
⁵ See economist.com
⁶ See iccwbo.org
⁷ See gtreview.com
⁸ See ecb.europa.eu
⁹ See wto.org
¹⁰ See wto.org
¹¹ See wto.org
¹² See img1.wsimg.com
¹³ See Rebecca Harding and Jack Harding (2017): The Weaponization of Trade: the great unbalancing of politics and economics.” London Publishing Partnership.
¹⁴ See rand.org
¹⁵ This occurs when two powers conflict with each other, and can lead to military clashes
¹⁶ See globaltradealert.org
¹⁷ See imf.org
¹⁸ See ecb.europa.eu
¹⁹ See bankofengland.co.uk
²⁰ See climatedata.imf.org
²¹ See climatedata.imf.org
²² See ICC Policy Department (December 2023): Principles for Sustainable Trade: Wave 2
²³ See brookings.edu
²⁴ See gov.uk
²⁵ See carnegieendowment.org
²⁶ See foreignpolicy.com
²⁷ See itfa.org