A Global Shift in Trading

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By: Simon Constable

Constable, a former TV anchor at The Wall Street Journal, is a fellow at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

The growth in world trade has been nothing short of an economic savior since the end of WWII. As America reigned supreme, international trade grew from a mere 4.2 percent of world GDP in 1945 to 31 percent, reaching that peak first in 2008, and again in 2022 after retreating for a decade or so. This trade growth coincided with what economists expected: Over those many decades, increased trade lifted millions of people out of abject poverty and made some others rich. Unfortunately, those halcyon days seem to be ending—and quickly.

In short, the system of global trade that we used to know is fragmenting. The causes are many, but you can start with the outbreak of major wars and increased geopolitical tension, both of which have changed trade patterns significantly. “European and US exports to Russia have fallen dramatically,” says Harold James, professor of history and international affairs at Princeton University. Indeed, in the wake of Russia’s invasion of Ukraine, EU imports from Russia plunged by 82 percent by the end of last year. US imports dropped too.

But you don’t need an actual war in order to fracture trade relations. The mere threat of military conflict has made powerhouse nations focus on producing their own advanced technology. In the US, this includes ensuring that the most sophisticated semiconductors are manufactured domestically. Plus there are export rules restricting who gets to buy the goods. “The goal is not to let the potential enemies get the high-tech stuff,” James says. Renewed tension in the Middle East only adds to the concern.

The process of favoring allies when sourcing goods and services has been dubbed “friendshoring.” But James says “de-risking” would be a better term. Broadly, the practice is about avoiding dependence on a major supplier. One obvious example is semiconductor supplies, 70 percent of which come from three places, according to Statista: China, Taiwan, and South Korea.

Some basic materials, such as aluminum and steel, have also been pulled into the “national defense” category, a reflection of the idea that metal is in some ways the key component in military materiel. But the reality is that while steel is needed in war, it’s high-tech that’s really making the difference, experts say. “There seems to be an ever-expanding definition of what’s needed for national security,” says Marc Chandler, chief market strategist at Bannockburn Global Forex.

However, Robert Wright, a lecturer in economics at Central Michigan University, says that what trade restrictions mostly do is make trade routes ever more complicated. Specifically, he points to boycotts of Russian energy and restrictions on semiconductor sales. The truth is that plenty of traders are willing to buy something, then turn around and sell it. Already, US-made chips have been discovered in Russian war materiel, and it’s clear Russian oil is leaking into the global market. “There are a lot of people in the middle who are gaining a lot,” Wright says. “All that governments do is raise the costs of goods.”

The ongoing fragmentation is also due to the moving of manufacturing from China to other places. Companies, after all, got a jolt during and after the pandemic when supply chains, many focused on China, all but shut down. China is also no longer a low-cost producer of many goods. These developments have been a boon to places such as Vietnam, Thailand, and Mexico, all of which have lower labor costs than China.

US imports from Vietnam, Thailand, and Mexico increased over the five years beginning in January 2019—while imports from China dropped. “Moving production to lower-cost areas allows other countries to climb the modernization ladder,” Chandler says.