Weekly Update - A globalization that changes dynamics and geographies
Post-Covid geopolitics raised fears of a potential slump in international trade and financial exchanges. The data show no crunch so far, but do reveal a change in the trend and map of international flows, with implications for countries’ economic and financial prospects.
Despite these fears, figures continue to show high levels of trade and financial flows. The Covid crisis and international political tensions have led to a new spirit of protectionism, affecting international trade and financial flows. Leading economies have been falling over each other to announce new “national” industrial policies, raising fears the globalisation process of recent years could come to a crashing halt. However, data reveal a different picture, with international trade and financial flows remaining strong thus far. International trade volumes which had shrunk as the world locked down in response to Covid have bounced back since, reaching pre-Covid levels in October 2020 and expanding by 5% in 2021 and 2022. In 2023, global trade has slowed again, but this reflects the slowdown by the world's leading economies rather than any deglobalising trend.
Globalisation may nonetheless have peaked and migrated in terms of countries. While overall trade remains strong, new trade barriers are multiplying and will likely mean a weaker trend going forward. Also, the map of supplier countries is changing fast. The United States has been shifting some of its imports and investments away from China and towards its neighbours (nearshoring) and friends (friendshoring). At the beginning of 2017, China provided 37% of all goods imported by the US from emerging industrial economies. This share has since shrunk by 10 percentage points, to 26% in July 2023, with ASEAN countries and Mexico taking a larger slice of the market instead. The picture is very different in Europe. There, China has been winning share of manufacturing imports, adding nearly 4 percentage points between 2020 and 2022, and now tops the rankings for emerging market imports with a 37% market share. The losers have been Eastern European countries. Looking beyond the trade figures, though, it should be noted that while China remains a big trading partner its inward investment looks to have tailed off and this could in time curtail its growth prospects.
Implications for economies and markets. For developed economies, the primary impact of slowing globalisation is likely to be less imported deflation and therefore structurally higher inflation – and hence interest rates. The remapping of supplier countries could also create new winners and losers among emerging markets. Nearshoring and friendshoring will continue to tilt the playing field away from China and toward new regions, with likely implications for these countries’ stock market performance.
In the highlights of the week, we chose to talk about the good performance of the US marketsthis week as well as the inflation figures in the United States.