According to the World Economic Forum (WEF), global trade will be facing serious deglobalization in the upcoming years. Analysts believe that international exchange will stay here in the long run, however, it will most likely become more regional. Recent global developments such as COVID-19 pandemic, trade war and protectionism between China and the US, and the most recent – Suez Canal blockage, all have an adverse impact on global trade – fuelling regionalization of global trade.
Trade data between the years 1815 and 2014 shows that approximately 60% of global trade takes place on the same continent and 40% of global trade is exchanged between different continents. When observing trade data from 2016 to 2020, one can derive that global trade was quite stable – 80% of global trade took place among countries on a different continent, and 20% of global trade occurred between countries on the same continent in this period. However, following Brexit and the COVID-19 pandemic, the share of imports between countries on the same continent increased significantly, to approximately 25%. Moreover, the average geographic distance of EU-28 imports in early 2020 fell to 5,200 km from 6,000 km in the pre-pandemic period.
Regionalization can be further observed by studying how new trade – product level flows between countries that never traded goods on a commercial level – develops. WEF here concludes that the average trade-weighted distance had a negative trend over the last five years and has reached its lowest level in 2019 since the global financial crisis in 2008. Additionally, trade between neighboring countries reached an all-time high of 18% in 2019, whereas the global average was 9-10% in the past two decades. Furthermore, companies are shortening their supply chains with the goal of becoming more resilient to potential unfavorable geopolitical developments or new healthcare crises.
Global trade is definitely here to stay. Nevertheless, we must note that the pace of globalization is declining. Already stagnant global trade volumes faced downward pressure by the COVID-19 pandemic. The latest trade data shows that patterns of regionalization are becoming significant, challenging policymakers and businesses to develop new strategies and invest resources in studying potential implied risks.
This article was written by the team at ALPHA CREDO
World Economic Forum (2021). Regionalization vs globalization: what is the future direction of trade? Available here