Trade is not out of the woods just yet

The views and opinions expressed in this article belong to the author and do not necessarily reflect the views of Nordea.

The domestic versus the multilateral agenda

Over the last five years, trade has continued its ascent of the political agenda. It is and will continue to be a strategic tool of significant importance within the policy box of national governments, and mixed with soft power it will shape the dialogue between nations for years to come. However the nature of discussion over the last few years has clearly changed with a move to a more domestic, less multilateral focus.

The substances of these discussions has also changed; with new issues driving the economic, political and technological dialogue. Further transforming the playing field is that some of those countries traditionally key to global trade have adjusted their focus. In East Asia, an exporting power house, according to World Bank data, China has seen its exports to GDP drop from 27% in 2010 to 18% in 2020, Thailand from 66% to 51% and Indonesia 24% to 17% over the same period. A growing middle class, changing domestic consumption patterns and the associated domestic consumption increase that goes with it, are partly driving these transformations. In Europe, the shadows of Brexit are cast wide over the UK which is experiencing its own localised supply shocks partly linked to its focus away from the EU to its newly coined “Global Britain.”

Politically the rise of more populist governments and agendas are partly driving (and being driven by) a backlash against trade. The notion that trade is for good and a driver for societal transformation is being put under pressure by trade wars and disputes; US/China, US/Europe, UK/Europe to name but three. Whilst the spotlight has been taken off these issues in favour of more COVID related topics, they continue to shape the agenda under the surface and will need to be addressed.

Technology continues to transform trade and this is evident no more so than in the move to services trade and open account transactions. Services trade, which is generally less tradable than merchandise trade, pre-pandemic had grown to 14% of GDP globally. This growth will further pressure nations and international bodies to consider once again what changes are needed to the international system for transacting and facilitating global trade.

What happened to globalisation then?

The 1990’s and into 2000’s saw a period of extensive globalisation, some would argue at the cost of development of the domestic economy and nation state. Nations were concerned with how they could position themselves best on the world stage; and what structural changes were needed to cement their position. Deregulation, liberalisation or investments in education and infrastructure were all levers that could be pulled to achieve this.

The natural progression towards regional trade agreements followed and this was all implemented with national economic policy playing second fiddle to internationalism. Unfortunately not everybody benefitted from this and disenfranchisement followed and over the last five years we have seen a knock on rise in populist policy and frustration with regional and multinational organisations such as the WTO, EU, etc.

Is increasing protectionism the next logical step?

Not necessarily. Balancing trade policy decisions is a strategic priority for national capitals. International policies and agreements which facilitate smooth market access need to be weighed up with the demands of the individual nation state. Critics have long argued that the pursuit of internationalism has been a convenient camouflage for failing to address domestic imbalances and issues.

Today the electorate won’t stand for this and there is a greater emphasis on domestic support; prioritising jobs, health & social care and infrastructure, much of which has stemmed from the pandemic. This requires national governments to mix their policy choices focusing on domestic policy whilst leveraging the international economy to grow.

Whilst regionalism and globalisation are less of a priority in the current climate, there are pressing issues which can only be effectively tackled on the world stage. Climate and Green policies such as a potential carbon tax would need to be broadly explained in the context of the important issues they are trying to address. This would help mitigate concerns that a policy is not being used as a domestic protectionist measure; it is in fact part of a regional or global strategy.

What does this mean for the outlook for trade?

Initially, a swift bounce back and resurgence in global trade from the downturn linked to the COVID pandemic looks likely. Trade growth will support projected GDP resurgence across the Nordics in 2021 and 2022, and the contraction and shift in orders witnessed during 2020 and the early stages of 2021 are likely to give way to a period of increased business and consumer demand.

GDP and Trade Forecasts

The medium term though is likely to be characterised by a period of less vibrancy and buoyancy in world trade, with a much more regional and domestic focus.

What will be the focus in 2022?

As the previous table suggests, economic statistics and market sentiment indicate that a strong rebound in trade is likely to continue in 2022. On the national level, governments will continue to work on their domestic policy agenda; looking at ways of expanding and creating jobs. This will also take the form of appropriately targeted national policy development around educational and “levelling up”, prioritising under privileged areas in the forms of investment in infrastructure, regeneration and housing.

Trade policy plays a role in this process too. Trade policy ensures that the national governments domestic agenda isn’t undermined by outsourcing and a drive to the lowest cost, lowest standard producer. Areas of focus could include minimums on corporation tax, anti-dumping policies and controls around imports from countries with poor labour policies.

2022 will be characterised by further bumps on the road to recovery and unforeseen events. Supply pressures will continue as a result of the numerous factors discussed in this article, irrational consumer behaviour (panic buying) and shifting purchasing patterns will exacerbate the situation. Whilst the world trade system continues to be buffeted by these issues, there are major issues still to be addressed. The unresolved US/China trade issues will continue to be a major obstacle, a new government in Germany will provide a possible framework for a power shift within the EU and unanswered questions regarding the COVID-19 pandemic are but three.

Corporates should therefore plan for a rebound in trade in 2022 whilst factoring these macro challenges in to their plans. It is also important to think broadly about how business impacts the society it is operating in. With the balance between national and regional/global policy now more important than ever, questions should be asked about how a business supports its suppliers and the communities it operates in. This could be taken one step further to explore how the demands placed on the society where a business operates help contribute to it and its development.

As companies plan for 2022 and consider the role of trade within their strategy, speak to Nordea’s award winning Trade Solutions team who will be delighted to discuss solutions and ideas to help businesses grow internationally, mitigate risk and actively manage their suppliers.

To contact Nordea’s Trade Solutions team, write to Richard at Richard.Hayes [at] nordea.com.