Danial Norjidi
The International Chamber of Commerce (ICC) recently released a new report analysing the latest trends in trade and presenting an outlook for the 2023 trade landscape.
The ICC 2023 Trade Report: A Fragmenting World examines different forms of economic fragmentation in fields including trade, digital economy, debt and payment systems, and suggests that fragmentation is accelerating.
Authored by ICC Lead Economist Mélanie Laloum, the report provides an overview of fragmentation to help businesses and policymakers understand and anticipate risks associated with it.
According to the report, “economic fragmentation or decoupling is a risk for businesses as it can change the cost-benefit analysis of businesses. It will influence the decision-making process in businesses, impacting exports, investment and human resources. It is critical for businesses to understand and anticipate these risks”.
The report’s key messages were highlighted in a press statement, which notes that trade rebounded in 2022 but was disrupted by the situation in Ukraine, lingering COVID-19 restrictions, persistent high inflation and lower economic growth.
“Despite growing concerns, globalisation has not reversed but is changing. There is evidence of decoupling between China and the United States (US) but also Russia and Western countries. This could reap the benefits of global trade.”
In its trade outlook for 2023, the report states that trade is expected to slow down this year.
“Amid lower growth and high inflation, trade growth is expected to decelerate in 2023. Tight financial conditions will increase pressure on highly indebted governments and businesses, amplifying vulnerabilities and deterring investments and trade flows.”
The study’s outlook also notes that the US and China will continue to decouple some sectors of their economies. “Despite an increase of US imports from China in 2022, the relative share of merchandise imports from China, foreign direct investments and scientific collaborations suggest a continued decoupling of both economies. The rivalry between the US and China will constrain merchandise trade and could fuel inflationary pressure in the US.”
On another point, the report states that “Europe will continue to reduce its reliance on Russia in 2023 to achieve its energy and climate goals. The situation in Ukraine forced European countries to reduce their reliance on Russian coal, natural gas and petroleum in 2022. In a context of high fossil fuel prices, global investments in clean energy will continue to rise and renewable capacity is expected to almost double in the next five years”.
Also mentioned in the outlook is that demand for services, especially travel and transport, is expected to pick up in 2023. “Due to the easing of China’s zero-COVID policy, a strong US dollar, tourism is expected to grow steadily in 2023.”
Furthermore, the outlook highlighted that agile supply chains will be critical in 2023.
“Businesses will continue to adapt to this uncertain and volatile event by adjusting their inventory strategy and diversifying their suppliers. Businesses will continue their trade-offs between global and local supply chains.”
With regards to fragmentation and associated risks, the report proceeds to note that the rise of subsidies, export controls and investment restrictions are contributing to trade fragmentation.
“The number of trade restrictive measures has significantly increased since the pandemic, indicating a rise in protectionism. Countries are racing to subsidise green industry, and restrict the flow of goods and capital.”
Meanwhile, digital fragmentation is both driving and mirroring geopolitical tensions.
“Technology is becoming nationalised and weaponised to ensure national security or strategic autonomy.
“At the same time, increased regulations on data storage, usage, transfer and content moderation could constrain trade growth. Without international cooperation, digital sovereignty could threaten to ‘break the Internet’.”
Another of the report’s key messages is that debt fragmentation could lead to a debt crisis.
“Geopolitical tensions are hindering debt restructuring negotiations in a context of monetary tightening, prolonged negotiations could increase debt vulnerabilities. Failure to agree risks leading to another lost decade for several developing economies.”
It was also shared that payment fragmentation could increase instability and erode the role of the US dollar. “Although the US dollar remains the main currency, its role is eroding. The lack of interoperability, regulation and cooperation for payment systems could increase the risk of fragmentation and lead to further financial instability.”
In addition, the cost of fragmentation could range from 1.2 to 12 per cent of global gross domestic product (GDP), the report said. “Trade and technological fragmentation can affect the global growth by reducing trade flows, creating sectoral misallocation and hindering the foreign diffusion of knowledge. Emerging and developing economies will bear the brunt of the economic losses.”
Founded in 1919, the ICC is an institutional representative of 45 million companies in more than 170 countries, aiming to make it easier for businesses to trade internationally.
