The changing global trade landscape

Paul Madden CMG, one of our Senior Advisors, shares the six challenges business face when navigating the growing trend of deglobalisation and the opportunities it offers.

If you’re thinking the global trade scene is suddenly looking a lot more complicated, you’re not alone. For most of my career, trade was moving in the direction of globalisation, liberalisation and multilateralism. But the landscape has changed, with increased schisms among politicians, voters and consumers about the future direction of travel. The nature of trade, the complex supply chains that support it, and the political context appear to be evolving faster than international rules can keep pace with. Meanwhile, the UK’s trade policy is no longer set in Brussels and we have an independent platform for the first time in half a century.

Against this changing backdrop we see an increasing trend of deglobalisation. Business needs to seize the opportunities and navigate the challenges around six key themes:

1. Dissatisfaction with the impacts of globalisation

Workers were hit hard by the 2008/9 global financial crisis, and their incomes had barely recovered before COVID delivered another economic blow. This led to a push back against globalisation, exemplified by the Trump Administration’s trade wars with China, whose effects were felt around the globe.​Business needs to understand the forces driving this and be part of the debate.

2. Resilient supply chains

Companies were already becoming concerned about over-reliance on key suppliers in a “just in time” world of complex global supply chains. COVID made us even more aware of just how dependent we were. There is now a renewed focus on resilience, including on-shoring or re-shoring, to bring key components closer to home. Companies need to become even more familiar with differing standards and sometimes obscure regulations on “rules of origin” (the criteria which determine where a product is deemed to be made, and thus its eligibility to benefit from free trade deals), in order to maintain their complex supply chains that criss-cross overlapping trading blocs.

3. Concerns about security of sensitive technologies

Governments are increasingly concerned about sensitive technologies leaching out through business and universities, creating new vulnerabilities. Just this year, the UK has, for the first time, introduced a new system for reviewing investments in sensitive sectors – something some countries have been doing for a while. The decision, at American prompting, to remove Chinese manufacturer Huawei from a number of countries’ 5G supply chains, was a pivotal moment. Companies need to understand the political forces driving these decisions, including the evolving definitions of sensitive sectors. For example, companies with considerable interests in both Chinese and US markets face tough decisions on how to insulate their global operations from future uncertainties. The swift and far-reaching international response to Russia’s brutal invasion of Ukraine, including government-led sanctions and individual corporate decisions, further demonstrates the increasingly close interplay between business and security issues.

4. New regional trade deals

With the World Trade Organisation unable to progress new global trade rounds, and its dispute settlement system in disarray, countries are turning towards regional trade deals instead. The Indo-Pacific region has been particularly pro-active. The UK is moving into the final stages of market access negotiations to join the 11 member CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), which constitutes 13% of global GDP. CPTPP is a high standard agreement with strong rules. Another new trade deal, the Regional Comprehensive Economic Partnership (RCEP) has relatively weaker provisions and doesn’t cover services. But with the major economies of China, Japan and South Korea joining their Association of Southeast Asian Nations (ASEAN) neighbours in RCEP, it represents over 30% of global GDP. Companies can influence the outcome of trade deals by working with governments to ensure negotiating priorities reflect their commercial ambitions. To do this, they need to understand negotiating processes, timetables and the domestic priorities of their trading partners.

5. Digitalisation

Around a quarter of the UK’s trade is now digitally delivered. We are consuming more digital services, from video streaming to online shopping and banking, while many industrial goods contain significant digital service packages. So, the rules governing how data flows across borders and is stored, as well as how digital services are taxed, are increasingly important. The UK is seeking ambitious commitments for free, open and trusted data flows both as part of its new trade agreements, and in international rule-making bodies.In a fast-evolving environment, companies concerned with emerging technologies and financial services, can play an important role in developing the new rules by sharing best practices with government stakeholders.

6. Avoiding the undermining of climate change commitments

As we saw at the COP26 Climate Change summit in Glasgow, while countries are making deeper commitments to cut greenhouse gas emissions, they don’t want this to be undermined by emissions simply shifting to production locations with weaker regulatory regimes. So, there will be more calls for border measures to prevent this, whilst avoiding introducing new protectionism. An effective private sector response to legislation, and to investor and consumer pressures, is essential to achieving COP’s ambitious climate change goals. Companies will need to promote consistency in their sustainability strategy across operations in developed and emerging economies.

With such a rapidly changing trade scene, companies must understand how these new trends are going to affect them, how they can adapt their businesses, and how they can influence the regulatory and trade negotiation processes. Trade policy is not just for wonks now.

Paul joined Stonehaven in 2022 as a senior advisor. He is the Former British Ambassador to Japan, High Commissioner to Australia and Singapore, and Managing Director at UK Trade & Investment.