– By Namrata Mittal and Varnika Khemani
In 2023, global merchandise exports experienced a notable decline of 6%, following a robust 11% increase in 2022 and a significant 26% rise in 2021, according to data from the ITC Trade Map. This downturn contrasts with the ongoing expansion in global trade services, which grew by 8.3% this year, building on the 15% and 20% expansions seen in the previous two years. These figures suggest a shift in trade patterns rather than a straightforward trend towards deglobalization.
The ratio of global goods exports to GDP in 2023 stands at 22.2%, aligning with the average observed from 2010 to 2020. This stability underscores that globalization is stagnating not reverse as yet and trade routes are evolving. However, recent actions by major economies indicate a growing trend towards restricting trade with China. For example, Canada has recently imposed a 100% tariff on Chinese electric vehicles and a 25% tariff on Chinese steel, mirroring similar measures taken by the US earlier this year. European countries, India, Mexico, and Indonesia have also increased their tariffs on various Chinese products post COVID.
These restrictive measures are partly a reaction to China’s increasing reliance on exports amidst a slowdown in their property sector and other areas of domestic demand. This trend has raised concerns about potential industrial decline in multiple regions worldwide. Additionally, the World Trade Organization‘s decreasing effectiveness in resolving trade disputes has contributed to the rise in protectionist practices affecting merchandise trade.
Despite these challenges in merchandise trade, the services sector continues to thrive. Political leaders have generally refrained from imposing significant restrictions on service trade. As a result, global services exports have reached a historical high of 7.5% of GDP. This robust performance suggests that the narrative of deglobalization may be premature. Moreover, the movement of capital, particularly Foreign Direct Investment (FDI), remains a crucial aspect of globalization that goes beyond mere cargo shipments.
In the US, direct imports of Chinese goods have dropped significantly. While total US imports fell by 6% in 2023, imports from China decreased by a substantial 22% last year, reducing China’s share of US imports from 22% in 2017 to 14% currently. In response, exports to the US from countries like Vietnam, Mexico, Canada, Thailand, Taiwan, and India have increased. Many of these nations are also experiencing substantial FDI from China. Research by the Hinrich Foundation highlights that Chinese content is often relocated to third countries before being exported to the US, as Western countries seek to decouple or de-risk from China’s dominant manufacturing sector.
China has also found alternative markets for its goods. Facing protectionist measures in the US, China has increasingly redirected its exports to Russia and Africa. Chinese goods now represent 53% of Russia’s imports and 30% of Africa’s imports. Consequently, China maintains its position as the largest player in global trade, with a stable share of approximately 15% over the past three years, compared to 12-13% in the previous decade.
The deep integration of economies such as Japan, Korea, and Germany into China’s industrial supply chain complicates efforts to limit imports from China. Conversely, countries like Mexico are under pressure from the US to restrict Chinese products. Many developing Asian nations are economically tied to China, making it challenging for them to impose trade barriers despite domestic calls for protectionism and US pressure to curb Chinese transshipments. Europe, while concerned about industrial competition and increasing the tariffs, are yet to see a reduction in Chinese imports.
In India, imports from China continue to rise, with China accounting for 18% of India’s total imports and 24% when excluding oil. The primary imports include electrical and electronic products, nuclear reactors, boilers, machinery, and mechanical appliances.
The landscape of global trade is shifting towards emerging market economies. Countries like Vietnam, India, Indonesia, and Brazil are gaining market share at the expense of traditional economic powerhouses such as Germany, Japan, the UK, France, and Korea. In 2023, India’s exports also saw a decline of 5%, slightly less than the 6% drop in global trade. Nevertheless, India’s share of global exports has improved to 1.85%, compared to an average of 1.66% over the past decade. Indian textile and electrical machinery sectors have gained prominence in the US market, reflecting India’s growing trade presence.
Overall, while global trade dynamics are evolving, with significant shifts in trade routes and policies (and focus on China +1), the fundamental aspects of globalization continue to play a crucial role in the international economy.
(Namrata Mittal is Chief Economist; and Varnika Khemani is Economist at SBI Mutual Fund.)
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