As per the UNCTAD latest Global Trade Update, the world trade is poised to hit an all-time high of nearly $33 trillion in 2024, with a US$1trillion increase largely driven by a 7% rise in services trade. This $1 trillion increase, reflecting a 3.3% annual growth, highlights resilience in global trade. This growth has happened despite multifarious challenges on several fronts that include continuing wars in Europe and Middle East, and near complete breakdown of multilateral trade governance.
However, going forward the year 2025 may witness reshaping of trade and production patterns because of five key factors that include – 1) fear of a fresh US-led trade war under President-elect Trump, 2) rising geopolitical tensions, 3) emergence of more sustainability induced trade barriers, 4) China’s aggressive push for exports resulting from overcapacity in several key sectors and 5) rapid technological changes through application of AI in trade facilitation.
Fear of Fresh Tariff War Under President-Elect Trump:
In about a fortnight President-elect Donald Trump would begin his second term as US’ President. One may recall that Trump during his first term took three major trade disruptive decisions immediately after taking over the office of the US President. First, he initiated a big tariff war with China, pulled US out of TPP, and announced renegotiation of NAFTA. Hence based on his past approach towards trade policy and series of statements given during the election campaign trail, it is being widely anticipated that the Trump 2.0 administration would most likely trigger a fresh tariff war.
However, much depend upon the extent of trade policy shift under Trump 2.0, the depth of tariff increase, their form, scope, target countries and timing. During the Presidential election campaign, Trump pledged to increase tariffs to 60% on goods imported from China and 10% to 20% on imports from the rest of the world. Post-election, during his appearance at “Meet the Press”, he reinforced his earlier threats to impose 25% tariffs on all goods coming from Mexico and Canada and in late December, he threatened the EU with tariffs if member countries don’t increase their purchases of oil and gas from the US to reduce the huge trade deficit.
Washington’s approach is bound to invite retaliatory actions that together could cause significant disruption in global supply chains and trade & FDI flows. Even in 2018, the action on tariffs by Trump prompted retaliatory measures from major trading partners, including China, the EU, Canada, and Mexico. Experts also predict that the administration may deploy tariffs as strategic tools in negotiations on immigration, and foreign currency policies. Large US corporations, many of which operate through complex cross-border production network, are preparing for potential disruptions.
Geopolitical Tensions Resetting Trade and Investment Relations:
After years of shocks, first the Covid-19 pandemic, followed by Russia-Ukraine war and crisis in the Middle East, countries across the continent are reevaluating their international trade relation. They are exploring engagement with new partners to suit their economic and national security concerns. Non-state actors such as Hezbollah in Lebanon, Hamas in Gaza, and the Houthis in Yemen are adding more complexity to the already volatile regional political environment.
Countries are placing greater emphasis on the security of the trade relationship, including measures to avoid excessive dependency on one country either for import or export. This isn’t about decoupling but more aimed towards managing the risks of increasing weaponization of trade. The whole energy transition and “net zero” mission, for example, is being held back by the geopolitical fault lines, where China has disproportionate control over the supply of critical minerals. The market concentration, where a lot of the raw materials and processing capabilities held by a small band of countries, has potential to disrupt the supply chain.
Similarly, Foreign Direct Investment (FDI) flows are also being re-directed along geopolitical lines. A new UNCTAD report entitled “Global economic fracturing and shifting investment patterns” reveals major shifts in FDI guided by trends in global value chains, technological advancements, geopolitical dynamics and environmental concerns. Investments between geopolitically distant countries – those with divergent political interests or foreign policies – decreased from 23% in 2013 to 13% in 2022.
Sustainability Induced Trade and Investment Barriers:
Trade policy tools are increasingly being used to support climate objectives and circularity. With geopolitical shifts and a growing emphasis on sustainability, countries have to implement policy measures to ensure coherence between trade and environmental goals, aligning its long-term trade objectives with global trends. MNCs who lead their global operations through cross-border GVCs, impose social and environmental obligations directly onto their suppliers, as opposed to creating obligations for governments.
Large economies like EU are resorting to trade agreements to drive their sustainability agenda in partner countries. Modern EU trade agreements contain rules on trade and sustainable development. The EU through trade agreements with partner countries, ensures effective implementation of labour and environmental agreements, including – respect of core principles of the International Labour Organization (ILO), and effective implementation of the Paris Agreement on Climate Change.
China’s Overcapacity to Impact Competitiveness:
Production overcapacity is not a new phenomenon in China, but it is expanding to a greater number of products. China’s overcapacity in production has now gone beyond steel and electronics to automobile and petrochemicals. China’s weak domestic economy and ever-expanding production capacity, fueled by cheap bank credit to manufacturing, has led to a surge in Chinese exports. Chinese exports are outpacing global trade, with Chinese exports up 12 percent or more in volume terms in 2024 while global trade registered a growth of little over 3 percent.
The most striking feature is that China not providing two-way support for global trade. China is exporting, but not importing. Over the last three months of data in 2024, Chinese import volumes have shrunk year-over-year. In the past, strong export growth would have implied higher imports of parts, but China now increasingly controls the entire supply chain of key sector such as EVs, EV batteries, and EV battery chemicals being some prime examples.
While growing Chinese exports may be benefiting few developing countries to some extent by providing inputs for their local industries in the short-term, but they also make them vulnerable. It has long been touted that China’s rising in the value chain would create an export opportunity for other developing economies in labor-intensive manufactured goods. But these hopes are being dashed as Beijing has failed to reignite the engines of its own domestic growth and absorb more of what it currently exports. Unless China implements serious demand reforms, many developing nations will be crowded out of manufacturing by Chinese overcapacity, leaving them dependent and without export opportunities.
Artificial Intelligence Usage to Reduce Trade Cost:
AI is a general-purpose technology having potential to transform deeply the way we work, produce and trade. Rapid advances in AI are expected to reduce trade costs and reshape economies’ comparative advantages. It can assist in navigating complex cross-border trade regulations and compliance requirements. By facilitating information-gathering on regulation changes and automating compliance procedures, AI can help customs officials to stay abreast of evolving regulatory landscapes with greater ease and efficiency.
The immense potential of AI has prompted countries to take necessary policy action to promote its development and use while mitigating potential risks. At the domestic level, several countries are putting in place strategies to enhance their AI capabilities. The number of economies having implemented AI strategies increased from three in 2017 to seventy-five in 2023.
Seeing its benefits on trade front, AI-specific provisions are being incorporated in trade agreements too. Digital trade chapter of FTAs include provisions on data flows, data localization, protection of personal information, access to government data, source code, competition in digital markets, and customs duties on electronic transmissions. These are all important for AI development and use. Currently 116 FTAs, representing nearly one-third of all existing FTAs had incorporated provisions related to digital trade.
Conclusion:
It is important that countries need to constantly address issues beyond the factors impacting competitiveness in its trade policy agenda. While geopolitical tensions are beyond the competency of private sector to influence but businesses from developing world need to invest resources to comply with growing needs to meet sustainability parameters both environmental and social. Complying with sustainability indicators is also import for companies to get integrated into GVCs as new laws such as EU Corporate Sustainability Due Diligence Directive (CSDDD) making it legally mandatory to ensure supply chain becomes sustainable.
Similarly, countries need to prioritize their AI strategy as it promises to transform trade logistics and supply chain management and reshape traditional trade patterns. AI is fast emerging as an important vehicle for future trade’s journey. The AI-driven digital transformation is poised to boost not only services trade, but it may also create whole new categories of tradable AI-powered goods – from autonomous vehicles to robotics and beyond. The DG WTO has rightly said that the future of trade is services, digital, and green.
Deep Kapuria is the Chairman of The Hi-Tech Group of Companies comprising The Hi-Tech Gears, The Hi-Tech Engineering Systems, The Hi-Tech e-Soft, and Novus Hi-Tech Robotic Systemz. The Group has manufacturing, R&D and engineering facilities in India, Canada and USA. He is also the Past Co-Chair of Digital Economy and Industry 4.0 Task Force of B20, 2018 Argentina and Past Co-Chairman, CII National Committee on International Trade & Trade Policy.
