Realignment of global trade: The good, the bad and the in-between

The trade world is getting reshaped along the sharply divided geopolitical lines. As the US-China trade war deepens amid persisting impact of Russia-Ukraine war and latest conflict in the Middle East, protecting trade interest is becoming more difficult for smaller economies like Bangladesh.

Fragmentation of global trade, as evident in measures being pursued by countries to secure their own interests and create barriers for others, could end up in a new cold war and its costs will overwhelm the short-term benefits some countries are expecting, an IMF's top official warns. While policymakers worldwide are finding it difficult to minimise the costs, some general principles can stop the world from descending into the worst-case economic scenario, Gita Gopinath, the first deputy managing director of the International Monetary Fund says in a Foreign Policy article.

Around 3,000 trade-restricting measures were imposed in 2023, nearly three times the number imposed in 2019, and growing geopolitical risks over the last five years have intensified threats to free flow of capital and goods.

Like trade, FDI flow is also segmenting along geopolitical lines.

With trade now accounting for 60% of the world's GDP, compared with 24% during the Cold War era, economies are more integrated and global value chains are more complex today, meaning that the costs of fragmentation would be much greater today than in the past decades.

The IMF suggests that these costs could be large and weigh disproportionately on developing countries—estimated global loss could be 2.5% of GDP for trade and around 2% of GDP for FDI.

A different scenario is also evident in global trade, with some countries benefiting from the rivalry as well.

Worsening trade and investment relations between the USA and China are causing trade and capital flows to reroute through other countries.

Mexico and Vietnam are among the countries that gained the most in trade with the USA. Mexico overtook China as the top exporter to the USA.

Vietnam is a major recipient of Chinese FDI, while Mexico is getting Chinese investors too who target the American market.

"Vietnam sources most inputs from China, while most exports go to the United States," Gita Gopinath says, showing how global trade and capital are being redistributed.

On the other front, Russia turned to India for bananas a few days back, suspending imports from its usual source Guatemala following an arms deal of the Central American country with the USA.

Global trade is going through a turbulent tide, creating both obstacles and opportunities, says trade analyst Masrur Reaz, Chairman of Policy Exchange Bangladesh, a local think tank.

The geopolitics is realigning the global trade order and the process in fact started even before, with Covid alerting nations to the danger of trade with single-source dependence.

Now, the shift is more intense, and countries are finding alternative trade avenues, creating new terms in trade relations like "nearshoring" and "friendshoring."

"Countries are trying to source more from the nearest possible countries, more preferably just across the border," he said, citing recent trends of trade between US and Mexico, Germany and Turkey.

"Friendshoring" is another option—doing more trade with friendly countries within the blocs and beyond.

Bangladesh also has opportunities to strengthen such trade corridors, both bilaterally and regionally, maximising tariff privileges offered by countries like China, India, Japan and Australia--- all still non-traditional markets for Bangladesh's exports.

"If the West diversifies its imports beyond China, Bangladesh could be a viable alternative in terms of low-cost, high-value products," the economist says, but there are risks as Bangladesh lags far behind in technologies and workers' productivity than competitors such as Vietnam.

To cope with the fast-changing global trade order and stay competitive, Bangladesh needs to step up its drive to procure and adapt new technologies to enhance productivity and quality if the country is to benefit from the realignment of global trade.

China is no longer the largest trading partner of the US and also no longer a prominent destination for American investment. But the trades between the two economic powerhouses are being rerouted.

As IMF's Gita Gopinath says, if countries deem some reconfiguration of trade and FDI flows necessary, a nondiscriminatory, plurilateral approach through the WTO can help them deepen integration, diversify, and build resilience.

Fragmentation could make it even more difficult to help many vulnerable emerging and developing economies that have been hard hit by multiple shocks, the IMF' managing director Kristalina Georgieva had warned a month ago.

We are facing the specter of a new Cold War that could see the world fragment into rival economic blocs. This would be a collective policy mistake that would leave everyone poorer and less secure, she wrote in a blog article.

But Asia seems to stand firm in a potentially complicated new trade world. Russia was able to undermine the US-led sanctions and showed even higher-than-expected growth, with exports of oil rising to Asian destinations, even to Brazil. The West has its allies in Asia—two major economies Japan and South Korea, still the continent is having a rising trade with Russia. Now, it will be another test for Asia how it will face if China sees more trade restrictions from the West.

China still remains the world's factory and a major raw material source for Bangladesh, while the USA is the single biggest export destination. Bangladesh holds prospects to gain from its balanced bilateral relation with major economies both in the East and the West, trade analyst Masrur Reaz believes.