SANTIAGO — Nearshoring has been front of mind for investors and policymakers in Latin America for a few years now. But we are still in the process of figuring out which countries are best suited to take advantage of the historic opportunity presented by this renewed fragmentation, or “regionalization,” of the global economy.

Early evidence suggests the following: Distance is a key consideration—but even countries relatively far from the United States are poised to benefit. Other factors, such as respect for property rights, stability of the financial system and overall political stability, are also of paramount importance. As a result, countries such as Uruguay, Chile, Costa Rica and Brazil may have an underrated opportunity to participate in nearshoring, illustrated by a “ranking” table we have included later in this article.

First, a look at recent history helps explain why the current opportunities are so tantalizing—if our countries can seize the moment.

The ebbs and flows of global trade

Globalization surged during the decades following World War II, with trade increasing from 20% of global GDP in the postwar era to nearly 60% just before the global financial crisis of 2008-09. That crisis marked the onset of a stagnation in trade growth, and initiated a trend of deglobalization. By 2018, global trade still hovered below 60% of GDP, but escalating U.S.-China tensions further slowed trade volumes as tariffs surpassed 20% by late 2019.

The COVID-19 pandemic added new disruptions. The resulting drop in global trade (-5.3%) was less severe than in 2009 (-12.6%) and the recovery was quicker. However, the crisis exposed vulnerabilities in global supply chains, as delays, shortages, and higher costs drove companies to reassess sourcing strategies. Post-pandemic recovery was quickly complicated by geopolitical conflicts, such as the Russia-Ukraine war, the crisis in the Red Sea, the conflicts between Hamas and Israel and Iran and Israel, and tensions between China and Taiwan. These conflicts not only created humanitarian crises, but also disrupted global supply chains, affecting the availability and prices of essential goods.

The Russia-Ukraine war, involving two of the world’s largest wheat exporters, led to an over 80% surge in wheat prices and a 25% rise in corn prices between December 2021 and May 2022. Conflicts in energy-producing regions, such as the Middle East and Eastern Europe, also raised oil prices and their volatility. The Russian invasion of Ukraine drove Brent crude to its highest price in seven years, while Hamas’ attack on Israel led to a 4% price increase in a single weekend.

These events also disrupted global trade routes. Attacks in the Red Sea reduced traffic through the Suez Canal, which handles around 15% of global maritime trade. Consequently, several shipping companies rerouted vessels around the Cape of Good Hope, increasing delivery times by an average of 10 days or more and impacting companies with limited inventories. Rising transport costs made shipping goods from distant locations more expensive and less predictable. The need to use more costly and less efficient alternative routes has increased maritime shipping costs, as evidenced by the Drewry WCI index for 40-foot containers. This remains 43% below the pandemic peak in September 2021 but 318% above the average rates of 2019 (pre-pandemic).

Geopolitical conflicts have amplified economic fragmentation and reshaped trade dynamics. Pandemic-driven product shortages fueled calls for relocating or renationalizing supply chains. Recent conflicts have emphasized the need for resilience over cost efficiency and advocating strategies like reshoring and nearshoring. This shift poses critical questions about who will bear the brunt of these trends and how they will specifically impact Latin American countries.

Reshoring, nearshoring

In a global landscape increasingly defined by geopolitical uncertainty and the vulnerability of supply chains, reshoring and nearshoring strategies have emerged with unprecedented significance. These approaches aim to redefine the production and distribution of goods by relocating industrial operations either back to the home country (reshoring) or to nearby countries (nearshoring). Their objectives include mitigating risks, enhancing resilience, and streamlining response times to global market disruptions.

Reshoring involves relocating business operations back to the company’s home country. It can therefore raise costs related to labor, production inputs, and regulatory compliance, potentially reducing efficiency and competitiveness despite savings in transportation. Meanwhile, nearshoring involves relocating business operations to a nearby country, generally within the same region or continent as the company’s home country. This strategy leverages geographical proximity to enhance efficiency, improve communication and coordination, reduce costs, and mitigate offshoring risks. Geographical proximity facilitates supply chain management by reducing transit times, transport costs, and political or economic instability risks in far-off regions. It also allows for better supervision and quicker production adjustments in response to market changes.

However, while transport costs decrease, labor and production costs in nearby countries can be higher compared to more distant ones, potentially sacrificing competitive advantages associated with overseas production. The success of nearshoring heavily depends on nearby countries’ labor, infrastructure, regulations, bureaucracy, and stability—social, economic and political.

Unlike reshoring, nearshoring affects both the company’s home country and potential nearby destinations. Thus, this strategy offers Latin America a unique chance to become a competitive alternative for companies seeking to diversify their supply chains.

Which countries could benefit most from nearshoring?

Nearshoring could offer the advantages of lower production costs compared to domestic markets, without the drawbacks of long-distance offshoring. Furthermore, the growing focus on building resilient value chains and geopolitical shifts in many advanced economies is likely to diversify supplier locations. But which countries are attractive as nearshoring destinations?

Geographic proximity to industrial centers is crucial in this strategy. Thus, several Latin American countries are emerging as prime destinations for nearshoring. The Inter-American Development Bank (IDB) estimates that nearshoring could boost annual exports of goods and services in Latin America and the Caribbean by close to $78 billion in the medium term. The automotive, textiles, pharmaceutical, and renewable energy industries, among others, have strong potential.

According to the IDB, Mexico emerges as the leading destination due to its proximity to North America—with $35 billion of that expected boost potentially set for Mexico. But while the projected volume for Mexico is substantial, countries like Brazil, Argentina, Chile, and Colombia also show potential as nearshoring destinations. As indicated by IDB data, they are projected to reap one-quarter of the total wins, equivalent to almost $20 billion.

While proximity to a major consumer market like the U.S. is a significant advantage, it is not the sole factor that determines a country’s appeal for nearshoring. Critical elements such as rule of law, investment protections, robust infrastructure, and a skilled workforce are critical in relocation decisions.

We gathered a variety of data to try to quantify which countries in Latin America offer the best opportunities for nearshoring. The inputs came from publicly available indices and other sources, including the World Bank and the World Justice Project. We standardized the scores for each indicator, and then divided by the sample’s standard deviation to come up with an average score for 20 countries in the Western Hemisphere.

The results, visible above, highlight how countries relatively distant from the United States are still attractive nearshoring destinations. For example, Chile ranks among the top five nearshoring prospects. Its strengths include better adherence to the rule of law, greater property rights protection, and a more developed financial system compared to Mexico and the regional average, making it a competitive nearshoring option. Other countries that also perform better than Mexico in these key factors include Brazil, Argentina and Colombia.

The countries mentioned also boast strong competitive advantages in high-potential industries. Brazil’s automotive sector, bolstered by a large domestic market and Mercosur membership, is a prime nearshoring hub for automakers seeking proximity to North America. Its leadership in biofuels and expanding renewable energy sectors further aligns with global shifts toward greener technologies, enhancing Brazil’s position as a major energy exporter. Argentina’s vast “Vaca Muerta” shale reserves make it a top choice for nearshoring natural gas production, strengthened by its trade agreements with North America. Similarly, Colombia’s rising natural gas output and strategic location provide direct access to North American markets, reducing reliance on distant suppliers.

Potential benefits from nearshoring

Nearshoring reduces reliance on international suppliers, shortens delivery times, cuts transportation costs and risks, and enables more efficient oversight of production processes. However, what are the benefits for the host country?

The foremost advantage is the attraction of foreign direct investment (FDI), which can significantly boost infrastructure, technology and human capital. Indeed, the current nearshoring trend has already driven a substantial increase in FDI across Latin America. Many industrial companies expect demand to rise between 2024 and 2025, with benefits fully realized after 2026. This is a reasonable timeline, as relocating industrial production lines is a complex and time-intensive process, involving infrastructure development, plant construction, securing permits, workforce acquisition, company registration, and other preparatory steps.

Nearshoring also creates new employment opportunities across sectors like manufacturing, technology and specialized services. It also integrates host countries into global supply chains, enhancing their significance in international trade. Additionally, nearshoring introduces advanced technologies and management practices, enabling host countries to build their own production capabilities. This often leads to investment in critical infrastructure such as ports, airports, roads and telecommunications.

Nearshoring’s impact extends beyond a single country, promoting regional trade and economic growth. For example, Mexico’s increased manufacturing could boost demand for raw materials and inputs from countries like Brazil, Chile or Argentina. Additionally, success in one country could inspire others in the region to improve their business environments, infrastructure, and regulatory frameworks to attract investment. This would foster competition, driving up standards across the region.

How to take advantage of nearshoring?

Proximity to the U.S. and North America alone will not guarantee that Latin American countries fully capitalize on future relocation opportunities. To attract FDI and strengthen their global position, the region must foster a more favorable business environment and improved commercial infrastructure.

To take advantage of this trend, countries should enhance their business climate, as each dollar spent on investment promotion yields nearly $42 in FDI, according to the IDB. Also, modernizing regional integration to reduce trade frictions and enhance competitiveness is essential. Despite numerous trade agreements among LAC countries, the region’s integration into international trade and global value chains remains limited. Harmonizing the more than 33 preferential trade agreements within the Americas could increase intraregional trade by more than 10%.

In addition, elements like the rule of law, investment protections, and tax considerations are crucial in determining relocation decisions, providing the certainty investors seek (and need). To enhance long-term attractiveness, the region must also ensure a qualified labor force through appropriate education and training policies. This is key to maximizing the benefits of incoming investments.

Host countries must also assure foreign investors that their intellectual property, business interests, and operational investments will be protected and effectively managed. Nearshoring, as part of the deglobalization process, is likely to reduce overall economic efficiency and growth. Nonetheless, some regions can significantly win from this. If appropriately complemented by domestic and regional policies, Latin America is likely to be one of them.

To read the article as it published by Americas Quarterly, click here

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What explains the stark inconsistency between what the people say they want and what the Republicans and Democrats, and especially those who wear those party labels in elected and appointed office in Washington, seem determined to give them?

According to the national survey, 66 percent of Americans believe global trade is good for the American economy; 64 percent believe it has increased material abundance in their own lives by increasing the variety of the products they can buy; 58 percent say it has improved their standard of living; 63 percent want to increase trade with other nations; 57 percent say doing so is good for their communities; and 53 percent have a favorable view of free trade.

Seventy-five percent of Americans worry that tariffs are raising consumer prices. Two-thirds of them, 66 percent, would oppose paying even $10 more for a pair of blue jeans due to tariffs—even if those tariffs are meant to help US blue jean manufacturing. In addition, three-fourths, 75 percent, worry that special interest groups are lobbying the government to impose tariffs or other restrictions on trade.

Virtually none of this is reflected in the current trade policies of our major political parties. Under the thrall of Donald Trump, Republicans have largely abandoned their longstanding historical support of free trade. Likewise, the decades-long struggle between free traders and protectionists for ascendancy in the Democratic Party has apparently ended in triumph for anti-trade protectionists. Although some Democrats are hoping Kamala Harris would step back as president from the most trade-restrictive and trade rule-scoffing of the policies of President Joe Biden—which are basically the same as those followed while in office by former President Trump—these wistful hopes seem mainly to be founded on wishful thinking.

Instead of pursuing the generally pro-trade sentiments of most of the American people, as demonstrated in the Cato survey, Republicans and Democrats alike are headed in the opposite direction. Trump is doubling and tripling down as “Tariff Man” with ever-evolving proposals for higher and higher tariffs on worldwide imports. The Democrats have had a hard time keeping up with his tariff-happy tweets, but they, too, are imposing and promising more regressive taxes on the American people in the form of tariffs.

Neither party seems to think trade is good for the American economy, neither appears to want to increase trade, and neither is trying to conclude or is committed to concluding more international trade agreements. Worst of all, Republicans and Democrats are united in ignoring international laws on trade and in impeding and undermining the World Trade Organization and its rule-based trade dispute settlement system.

Why this disjunction between the two parties and most of the people on trade? Put simply, both parties have been captured by minorities with minority views. Neither party is representing the broadest measure of their membership or the broadest extent of the American people. Both are responding mostly to their political “base,” which ignores a lot of other Americans—more moderate and centrist members of both parties and the independent voters who comprise a growing portion of the American electorate and are likely to be more favorable to more trade.

The Pew Research Center has found that only six percent of Americans and 12 percent of Democrats are of the “progressive left,” which is leading the charge against trade within the Democratic Party. The Republican Party has been captured by Trump and other anti-trade tribunes of economic nationalism, but there remain millions of traditional Republicans who, though exiled from Republican decision-making, nevertheless are still within the American electorate. Moreover, Gallup polling shows that a record 49 percent of Americans “see themselves as politically independent—the same as the two parties put together.” These many millions of Americans have been pushed aside in the policymaking of American politics.

In all their policymaking, both parties are now pulled by their “base” to the extremes. Republicans are pulled to their political right, where trade protectionism and other manifestations of the economic nationalism of Donald Trump prevail. Democrats are pulled to their political left, where progressivism is increasingly equated with protectionism and other forms of economic nationalism. The embrace by both parties of different versions of an interventionist and trade-discriminatory industrial policy by the federal government is one consequence of this pull to the extremes. With trade and numerous other issues, the center is not holding in American politics because, except in periodic general elections, it is not present and so is not heard in policymaking.

In the US House of Representatives and in many state legislatures, this hollowing out of the American political center is a result of gerrymandering in drawing the lines of congressional and legislative districts, which empowers the political extremes at the expense of the political middle in the electorate. This gerrymandering by both parties diminishes the political legitimacy of our democratic republic while advancing minority views that are translated into policy, including in international trade. Meanwhile, the vast center of the American electorate is increasingly left unrepresented. Where both parties once competed to be responsive to the political center in the country, now they often seem to ignore it, especially in their legislative and executive decision-making.

Instead, as the voters surveyed by Cato rightly fear, policymakers and decision-makers who should be pursuing the public interest increasingly hear and heed the voices and the views of self-seeking private interests. In trade, this includes those labor unions with workers in trade-challenged declining industries in politically pivotal states, and threatened businesses in those industries in those states that cannot—or will not—meet the challenge of global competition and thus seek to be sheltered from such competition behind protectionist trade barriers. Because these key states, such as Pennsylvania, Michigan, and Wisconsin, are crucial to the outcome of presidential elections and to control of Congress, popular calls for more openness to trade from other sectors in other states go unanswered.

Among the quibbles and qualifications to the overall desire of most Americans for more trade, as evidenced by the Cato survey, is the fact that most Americans want to make certain that trade policy benefits Americans. A majority of Americans, 56 percent, support putting tariffs on goods from foreign countries if those countries impose restrictions on goods from the United States.

This support plummets, however, if these retaliatory tariffs increase domestic prices, decrease innovation and US business growth, or decrease jobs in other American companies that rely on the imports affected by the tariffs. Overall, 61 percent of Americans believe US businesses must “learn how to become strong and compete globally without any government handouts or taxpayer subsidies”. Despite this, both parties are increasingly addicted to subsidies and other handouts, including protectionist tariffs.

Another qualification to the support of most Americans for more trade is the question of trade with China. Few Americans—only 15 percent—think that China has acted fairly in trade with the United States. Not surprisingly, both parties have “get tougher” policies on trade with China. However, 81 percent of Americans surveyed by Cato overestimated the share of imports the United States receives from China. (The correct answer is about 15 to 16 percent.) If the broad middle of the American electorate were better heard in American policymaking, a more temperate—and less bellicose—view might be evidenced in policymaking on China trade, perhaps leading to mutually beneficial solutions that have eluded the two trading partners thus far.

Like the overall support of most Americans for trade, these and other nuances in this majority support are blurred in the broad brush of pure protectionism that is manifested more and more in the trade policies of both parties. Hence the widening gap between what the American government, and the politicians who populate it, are saying and doing on trade and what most Americans seek in trade.

On trade policy, those who are leading us, and those who would lead us, are not giving voice to the views of the majority of the American people who generally support trade. Unless this changes, the result will be an American economy and an American future smaller than what they would be if the majority views were heard and reflected in US trade policy.

To read the blog as it was published on the CATO Institute webpage, click here.

To view Cato Institute 2024 Trade and Globalization National Survey as posted by CATO click here

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Such challenges pose obligations, burdens, and expectations for countries like Canada that rely greatly on global trade for their economic growth and prosperity. Canada must prepare for an increasingly contested, complicated, and fractious global trade landscape that will only become more onerous to engage, negotiate, and leverage.

Four megatrends are dominating global trade:

First, U.S.-China security competition continues to cast a shadow over the trading system, affecting and rewiring regional economic partnerships. This seemingly persistent rivalry is compounded by muscular industrial policies from both countries and other powers (such as the European Union), further distorting trade patterns. Both ‘friend-shoring’ and ‘near-shoring’ could accelerate, despite constraints, with countries such as Mexico, South Korea, Thailand, and Vietnam benefiting disproportionately.

Yet, the adverse impacts could also be widespread, as this competition navigates terrains spanning semiconductors, artificial intelligence (AI), and electric vehicles. The battle for chip supremacy will reverberate across industries, affecting technological innovation and the climate transition. A potential restructuring of the global economy into blocs could reduce global GDP over the next few years.

Second, besides U.S.-China competition, other geopolitical fault lines (in Ukraine, the Middle East, and the South China Sea) will further stress world trade. Trade between regions is slowing as intra-regional trade grows. Southeast Asia, in particular, continues to benefit from this dynamic, at least for now. U.S. tariffs and export controls are pushing multinational firms to relocate manufacturing from China to Southeast Asia, boosting foreign direct investment and creating more jobs.

Firms are pivoting by reconfiguring cross-border supply chains, lowering costs, rethinking business financing, localizing innovation in certain markets, reorganizing functions like hiring, reassessing their exposure to geopolitical hotspots, and developing new revenue streams. Risk management for firms will increasingly entail understanding how Indo-Pacific countries, historically not central to global trade, operate and move. Governments and firms must also internalize the notion that economic security is critical and craft a playbook that maintains and protects resilience given unpredictable geopolitical events.

Third, trade patterns, tensions, and preferences intersect, drive, and occasionally conflict with the unfolding energy transition as countries craft policies to mitigate climate change. Climate change is already affecting trade. Firms have to adopt low-carbon business models to become and/or remain globally competitive. Increasingly, sustainability will be commercially priced and included in the cost of doing business. New investment opportunities accompany climate mitigation. Some developed countries are strategically using trade-related environmental policies, littered with requirements to measure and verify the environmental footprint of imports.

These burdens fall on unprepared and unhappy trade partners. It will therefore be critical for governments, firms, and interest groups to share vital information with respect to compliance as policies like the EU’s Carbon Border Adjustment Mechanism (CBAM) become mainstream. The CBAM works like a tax on energy-intensive European imports to ensure domestic manufacturers who produce similar goods are not competitively disadvantaged given their higher domestic standards.

That said, measures like the CBAM could also spur — and provide advantages to — developing economies to decarbonize faster, seizing opportunities in low-carbon energy like green hydrogen, fertilizer production, solar panels, etc. Finally, trade will become crucial in enabling flows of critical minerals, especially given their geographic concentration, to facilitate the spread of clean energy technologies that address issues such as pollution, carbon emissions, and electrification.

Fourth, technology is both enabling and constraining global trade. Although digital technologies are a key driver of trade, most countries have yet to effectively regulate their domestic and external effects. Digital trade measures have to be aligned across borders; this issue will become more important as countries pass laws on issues like data, AI, cybersecurity, and digital competition, which could affect digital trade.

For developing countries to benefit from digital services, they should create and support digital markets and provide adequate policy support related to privacy, consumer protection, and cybersecurity as their firms digitize. Simultaneously, developing countries will have to support broad-based digitalization, connecting citizens who lack broadband access. AI is already speeding up trade processes; it can further simplify supply chain management by enhancing inventory planning, production, and distribution. AI could also transform logistics planning and services as they move to optimal areas given production.

What do these trends portend for global trade?

These four trends could fragment the global economy further, as links and connections attenuate between specific ‘blocs,’ not within. This situation will likely fuel ‘reglobalization,’ splintering the global economy into highly competitive regions where trade and investment are concentrated and trade rules are harmonized. Security tensions and macroeconomic difficulties are compelling countries to bank on regions being and becoming new trade hubs and corridors, rewiring supply chains in the process.

Trade diversification for security reasons is precipitating new regional networks between ‘trusted’ partners that share security and economic concerns. This reality could spell trouble for Canada, which seeks to balance relationships with countries and not tether itself to any one camp. Friend-shoring and near-shoring are changing trade structures as countries reimagine economic partnerships to mitigate various risks.

Firms also appear to be pivoting after being subjected to shocks from the pandemic, the wars in Ukraine and Gaza, tensions in the South China Sea, and tariff rows between the U.S. and China. Countries like the United Arab Emirates and Singapore, which have solid and sophisticated trade infrastructures, will benefit.

Regionalization could thrive once again with potential costs and trade-offs for non-regional partners like Canada that appear strategically and institutionally distant. That Canada is reprioritizing trade within the Americas is positive, but that strategy must not come at the expense of deepening trade links in the Indo-Pacific.

The ‘choppiness’ of geopolitics is fuelled further by the recent industrial policies of China, the EU, and the U.S. Other powers, such as India, are still scarred by the pandemic, the ongoing climate crisis, and persistent supply chain difficulties. World Trade Organization rules have generally limited how countries use policies or subsidies to support specific industries within their borders to increase exports.

Yet, the selective application of these trade rules, due to China’s economic rise and experience, have altered the context around these efforts. National security considerations drive such policies given how specific goods and services can be weaponized by trading partners. According to Global Trade Alert, in 2023, countries used more than 2,500 policy interventions that were trade-distorting and discriminatory.

Considerations for Canada

What distinguishes this round of targeted interventions is that they are driven not by purely economic factors but a desire to strengthen resilience, protect national security, and advance climate mitigation. Resilience, rebuilding, and sustainability are now key trade objectives. These massive interventionist efforts to revive and restructure specific industries are hard for countries like Canada, which has limited fiscal capacity, to match. Canada and other smaller economies will find such policies untenable and unaffordable and will have to rely on other measures to compete.

Where does this scenario leave trade-reliant countries like Canada? Besides deploying capital to help various strategic industries, Canada has to take the lead in drafting, negotiating, and mainstreaming new forms of trade agreements with other ‘likeminded’ trade partners, including Australia, Japan, New Zealand, Singapore, South Korea, and the U.K., as well as with developing countries including Brazil, Indonesia, Malaysia, Mexico, and the Philippines, which find value in reviving and consolidating trade patterns.

Opportunities exist for these countries to drive trade initiatives now that the U.S., China, and the EU are disinclined to seek multilateral solutions to the trade challenges elucidated above. The U.S. has balked on trade given political difficulties while the EU’s trade and technology unilateralism sows resentment amongst its partners far and wide as they begrudgingly comply with European rules. China is not trusted to lead or drive multilateral trade solutions despite Beijing’s interest.

This situation generates space for other countries to explore newer agreements on trade issues like digital trade, green economy, and AI that advance mutual goals. Bilateral trade solutions such as the Australia-Singapore Green Economy Agreement (GEA) could serve as a viable template and example. Canada could benefit from such bilateral, open-ended, flexible agreements that facilitate green trade and investment across sectors to lower emissions.

The need to co-ordinate trade rules and standards is urgent with the regulatory demands for firms rising due to the extraterritorial effects of policies like the EU’s CBAM, General Data Protection Regulation, and EU Deforestation Regulation. Climate change and national security considerations have led to the proliferation of such measures. The competitiveness of firms and economies will become linked to the inking of coordinated trade rules and standards that help firms export goods and services.

Canada must deftly handle this complex landscape. Trade is no longer just trade; it is about establishing and correcting the conditions that enable countries to exchange goods and services and setting appropriate domestic rules to regulate problems and using those measures and market power to force compliance by other countries.

Trade, which plays a central role in Ottawa’s Indo-Pacific Strategy, relies on initiatives like trade missions, gateways, and agreements with India, Indonesia, and other Asian economies. These measures are necessary but insufficient for a region where trade is fundamentally strategic and inflected through issues like security, climate, and technological change. Canada’s trade policy must reflect and advance the ambitions of its climate transition, security concerns and interests, and technological strides. Anything less will not be fit for purpose.

To read the dispatch as it was published on the Asia Pacific Foundation of Canada webpage, click here.

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Global trade recovery remains fragile. Geopolitical tensions, spillover from regional conflicts, rising populism and protectionist policies are putting unprecedented pressure on globalisation.

The prospect of a complete breakdown in relations between the United States and China adds weight to any pessimism. Each day brings further threat — or the reality — of unilateral trade measures. While legitimate concerns may undergird these measures, such as climate considerations, the net effect is chipping away at governments’ faith in the global rules-based trading system. This is creating a vicious cycle of more barriers and more protectionism.

Global business priorities have not shifted since the WTO was founded 30 years ago. Cohesive, multilaterally agreed rules for international trade that provide certainty and predictability remain a fundamental demand from traders around the world.

The WTO, despite its flaws, has proven to be the single cohesive vehicle able to attract multilateral participation — from countries across the world at every stage of development — to address global trade challenges. The need for such an institution has grown with time. For example, effective multilateral dialogue at the WTO level is required to resolve the unintended consequences of novel environmental legislation, such as the EU’s carbon border adjustment mechanism and new rules on deforestation, particularly as they affect small businesses in developing countries.

Against growing threats to the system, the urgency of reforming the WTO grows each day. Its rulebook must be updated to meet the challenges and opportunities of the 21st century — its rules enforced and its agreements effectively monitored. Reform must be tackled consistently with an eye towards lowering trade barriers and upholding current commitments. And this must be done in cooperation with the private sector.

The alternative to holistic reform is almost too awful to contemplate. An April 2024 an International Chamber of Commerce (ICC)-commissioned study found that WTO dissolution would have dire consequences for developing economies, decimating their exports by 33 per cent and lowering GDP by 5.1 per cent by 2030.

In that scenario, the trade-led convergence that has enabled developing countries to grow their economies would disappear. This would also hit producers in advanced economies by reducing supplier access, exposing developed countries to increasing volatility and higher consumer prices.

Countries that do not enjoy elevated levels of integration into global supply chains would be further disadvantaged by any erosion of the multilateral trading system. Given the catalytic role of trade in job creation, the implications for global poverty reduction perspective would be profound.

In this age of digital innovation, the world has never been technically better placed to conduct trade more efficiently. Technology underpins all modern supply chains, including the internet of things, big data, machine learning and artificial intelligence. This shift to digital technology calls for the movement of data and information across borders, with all stakeholders depending on seamless and uninterrupted information flows across companies and countries.

To secure supply chain resilience and efficiency, governments must promote policy coherence and harmonised digital rules, increasing the urgency for robust WTO action. As a start, an agreement containing disciplines that will address digital trade barriers and facilitate digital trade must be reached and implemented at the WTO.

Work is already going into accelerating the development of a globally harmonised, digitalised trade environment. The ICC Digital Standards Initiative is engaging the public sector to progress regulatory and institutional reform, and mobilising the private sector on standards harmonisation, adoption and capacity building.

Trade facilitation remains key to functioning supply chains. Delays at borders hinder cross-border trade at every level, both regional and international. Full implementation of the 2017 WTO Trade Facilitation Agreement — which has already increased trade by over US$230 billion — is more relevant than ever.

Low and middle-income countries have come a long way in fulfilling their trade facilitation agreement commitments, but many still require assistance to finish the job. A failure to connect developing economies to global markets threatens to cut them further adrift, stifling economic opportunity and reversing previous gains. Likewise, lack of implementation undermines supply chain optimisation in these countries, hindering competitiveness.

To support low and middle-income countries in this endeavour, the ICC co-leads the Global Alliance for Trade Facilitation with the World Economic Forum and the Center for International Private Enterprise. With the support of the governments of the United States, Germany and Canada, this entity uses the trade facilitation agreement to address obstacles to trade in an inclusive, sustainable way through public–private partnership. The alliance approach to meaningful trade facilitation initiatives involves buy-in and ongoing engagement from both government and business, from project inception through to post-completion, recognising a shared responsibility in promoting frictionless trade.

This spirit of public­–private cooperation must be brought to bear against today’s drift away from agreement and adherence to international rules and regulations. The WTO remains the best conduit for multilateral trade cooperation and future initiatives hinge on its reform and strengthening. Business as the real engine of economic growth and innovation needs to be engaged as a genuine partner — one that delivers on the concept of multi-stakeholder cooperation.

John WH Denton AO is Secretary General of the International Chamber of Commerce (ICC), Paris.

To read the full article as it was published by East Asia Forum, click here.

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The Commission’s actions on EVs may not be the last taken against clean technology from China, with trade measures having recently been considered for two more major pillars of Europe’s energy transition. 

An anti-subsidy probe into Chinese solar panel manufacturers bidding for a public project in Romania was closed after the targeted companies withdrew from the process. 

An investigation into Chinese wind turbine suppliers is ongoing. Both were launched under the new Foreign Subsidies Regulation. 

The risks of tariffs on decarbonization technologies

The EU is anxious to protect its companies from what it sees as unfair competition. It has bitter memories of the early 2010s, when cheap Chinese panels all but destroyed the European solar industry. 

The EU is right to identify clean technology as a crucial strategic industry, and to take action to mitigate the negative consequences of surging imports from China. Against a volatile geopolitical backdrop, it can be worth paying a premium for goods made at home. 

But decarbonization technologies like solar panels, wind turbines and electric vehicles share a characteristic that sets them apart from other traded goods. When swapped for fossil fuel alternatives, they reduce the quantity of planet-warming gases being pumped into the atmosphere. They are needed in vast quantities, and in very short order, to give any chance of avoiding the worst impacts of climate change. 

The EU has a legally binding target of net zero greenhouse gas emissions by 2050, and an intermediate target of at least a 55 per cent reduction by 2030, relative to 1990 levels. A target of 90 per cent has been proposed for 2040. 

These targets are ambitious, even if they are insufficient to limit warming to 1.5°C. With 2022 marking a reduction of 32.5 per cent, accelerated and sustained action will be needed. This implies deploying mass-market clean technology products like solar panels and electric vehicles in very large numbers. 

The costs of European manufacture

The EU wants these to be manufactured within its borders. In her 2023 State of the Union address, Commission President Ursula von der Leyen was unequivocal: the EU’s clean tech future should be made in Europe. 

The Green Deal Industrial Plan, announced in early 2023, seeks to do this by cutting red tape, increasing access to finance, boosting skills, and promoting fair trade. The Net Zero Industry Act sets a target for the EU to manufacture at least 40 per cent of the so-called strategic net zero technologies it deploys each year, by 2030. 

The Act proposes to achieve this through measures including requiring public authorities to consider non-price ‘sustainability and resilience’ criteria when procuring renewable energy. This would in theory increase the attractiveness of goods made on European soil. 

However, this requirement can be disregarded if it implies ‘disproportionate’ additional costs. It is therefore doubtful it will be enough to offset the large difference in production costs between Chinese- and EU-made solar panels, for example. 

Building the factories needed to hit the Act’s manufacturing targets for solar panels and batteries is estimated to require nearly $70 billion by 2030. 

But unlike in the United States, where the Inflation Reduction Act offers lavish subsidies, the EU’s Green Deal Industrial Plan provides little in the way of new finance. 

The Plan loosens state aid rules, enabling member states to subsidize green industry, and proposed a new EU-level fund for investing in strategic clean technology projects. 

However, the return of EU-wide fiscal rules will restrict government spending, including on the transition; the European Sovereignty Fund was scaled back and ultimately became a platform to mobilize private finance. 

Current levels of investment in the EU’s transition fall far short, with the annual climate investment deficit estimated at €406 billion, or 2.6 per cent of GDP – implying that climate finance will need to roughly double to meet 2030 targets. 

A June 2023 report by the European Court of Auditors found ‘no information that sufficient financing will be made available to reach the 2030 targets’. Climate-focused public spending is also likely to get squeezed by an increasing focus on security and defence.

With financial resources constrained, and the timeframe tight, the unit cost of each product needed to achieve the transition becomes an extremely important variable. 

And when it comes to cheap, clean technology, China is the undisputed world leader. Two decades of consistent and targeted industrial policy, combined with the benefits of a huge domestic market, mean that China today produces extremely competitively priced, high-quality, low-carbon goods. 

In 2023, solar modules in China were being manufactured at a cost of $0.15 per watt, compared to $0.30 in Europe. In France in 2023, the cheapest electric vehicles were priced between €22,000 and €30,000 ($24,000 – $32,500) while in China, over 50 electric models were retailing locally for less than CNY 100,000 ($15,000). Analysis by think tank Transport & Environment found that European automakers have prioritized large, premium electric vehicles at the expense of compact, affordable models. 

All else being equal, anything which stems the flow of the cheapest low carbon products will increase the cost of the transition and slow it down, increasing the risk of the EU missing its emissions reduction targets. 

These are not the only risks, however. If solar panels and wind turbines become more expensive, it will ultimately feed through into higher electricity prices, increasing the cost of living for citizens and exerting a downward pull on the fragile competitiveness of European industry.

To read the full expert comment as it was published by Chatham House, click here.

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The Effects of Weather Disruptions on the Supply Chain

For many businesses, the supply chain is an international issue. Domestic interactions can be costly, so outsourcing labor and resources across the sea is often an unavoidable task. For example, flood-related damage in China has a huge effect on crop yield, forcing the country to face a hefty $25 billion economic blow. This means businesses in the Western Hemisphere that rely on Chinese agricultural exports may not be able to produce necessary items for grocery stores or, say, create holistic wellness items.

These types of events force businesses to look elsewhere for the materials, labor, and other areas of the supply chain they need to amend. For reference, let’s take a look at the restaurant industry. Climate change, among other factors like COVID-19, has given way to increased food costs. Essential items, like grain and meat, have risen in price. Avian flu and temporary price increases at the beginning of 2023 caused restaurants to eliminate a good portion of meat-based meals from their menus.

Supply issues like these mean employees are also not being offered wages in alignment with recent inflation and the rising demands of their jobs. This gives way to larger economic issues that can potentially restructure the way we do business globally.

How Extreme Weather Events Affect Transportation Costs

Climate change and extreme weather events don’t only affect things like food production. It plays a huge role in the cost of transportation. Transportation is a necessary part of doing business. You need a method of transferring resources to a processing plant and then the completed product to a warehouse where it is shipped to yet another location.

Ultimately, climate change affects multiple areas of transportation in the global market. Since burning fossil fuels contributes to climate change, it causes a cyclic effect on transportation costs. Extremely hot weather can affect the performance of oil refineries, which then causes a delay in fuel production, making gas prices higher.

Also, there is the matter of delivery fees, which affects both businesses and consumers. Consumers tend to foot the bill for delivery fees since it can be a huge financial blow for businesses to take care of this fee themselves. Unpredictable weather can affect air freight schedules, and unusual snowfall can prevent trucks from making deliveries in a timely manner. Evolving climate conditions force consumers to eventually pay more in delivery fees.

To lower transportation costs, businesses should consider using energy-efficient vehicles to stave off the growing fuel costs. Should this not be an option, you can also consider using a diesel delivery service, which ensures all trucks are receiving high-quality fuel on a set schedule.

Combating Climate Change

Though climate change isn’t something that can be altered by a single person or entity, businesses can still do their part to create a more sustainable global market through several strategies and innovative technologies.

First, consider optimizing your supply chain by staying local. Use local vendors to create a reserve inventory and try not to outsource a large portion of your business operations overseas. This will reduce fuel costs and benefit the local economy at the same time. Second, invest in sustainable technological practices. Using solar power for warehouses can have a significant impact on energy costs and lower greenhouse gas emissions.

Agricultural industries can make adjustments to livestock handling as well to reduce negative environmental impact. Exploring lab-grown meat or creating an emphasis on plant-based meat alternatives for the restaurant and food industry can make a huge difference in issues like water pollution as well as toxic emissions.

Reducing your carbon footprint may not seem like the most cost-effective solution at first, but doing your part to combat climate change will only fare your business well in the long term. Consumers will be more apt to purchase your products or services if they see your practices are environmentally friendly. You will also end up financially benefiting from stable supply chain costs as climate change efforts increase.

The Big Picture

Eco-friendly business strategies are essential for increased performance and keeping costs stable across the board. Staying well-informed about sustainable supply chain practices and the location and environment of all areas of your business cannot be understated. At the end of the day, switching over to energy-efficient transportation options and investing in climate-friendly tech is just good for business – it provides a chance for future generations and industries to thrive.

To read the full article, click here.

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• For 2023, we are downgrading our forecast for world merchandise trade volume growth to 0.8 per cent, less than half the 1.7 per cent growth we forecast last April.
• However, the outlook for next year has not been downgraded and remains relatively strong. We predict 3.3 per cent trade growth in 2024, slightly higher than our estimate of 3.2 per cent in April.

So what has led to this revised forecast?

The global situation over the past year

The downgrade is not entirely surprising as we had already considered the risks to be mostly on the downside in our April forecast.

Several factors have contributed to this revision. The global economy has been grappling with rising inflation and high interest rates since the fourth quarter of 2022, particularly in the European Union and the United States.

While falling energy prices and the end of Chinese COVID-19 pandemic restrictions raised hopes of a quick rebound, strained property markets have prevented a stronger recovery from taking root in China. Added to these factors, the ongoing Ukraine conflict also continues to weigh on the global economy.

The trade slowdown in the first half of 2023 appears to have involved a large number of economies and a wide array of goods, specifically certain categories of manufactured goods such as iron and steel, office and telecom equipment, textiles and clothing, although sales of passenger vehicles have surged in 2023.

The stronger growth predicted for 2024 is likely to be driven by increased trade in goods closely linked to the business cycle, such as machinery and consumer durables, which tend to recover when economic growth stabilizes.

Figures for world GDP growth at market exchange rates, anticipated to be 2.6 per cent in 2023, show little change since the April forecast. However, shifts in the regional composition of growth could influence trade.

Specifically, GDP growth rates for North America in 2023 and 2024 have been revised upwards, from 1.5 per cent and 1.0 per cent, respectively, in April, to 2.2 per cent and 1.4 per cent in the current report. Meanwhile, estimates for Asia for 2023 and 2024 have been revised downwards, from 4.2 per cent and 4.3 per cent, respectively, in April, to 4.1 per cent and 4.0 per cent. European GDP growth in 2023 should come in at 1.0 per cent, up slightly from 0.9 per cent in the April forecast, while growth in 2024 should be 1.4 per cent, down from 1.8 per cent previously. Finally, output in the Commonwealth of Independent States (CIS) region is expected be stronger than previously forecast, both this year and next year.

In terms of imports, demand appears to be weakening in manufacturing economies, with import volumes in 2023 expected to contract by between 0.4 per cent and 1.2 per cent in North America, South America, Europe and Asia. Meanwhile, imports appear set to rise sharply in regions that export fuels disproportionately, thanks to the increased revenues flowing from higher prices.

Effects of trade fragmentation on the global economy

Many people may be wondering how much of the current trade slowdown is due to trade fragmentation, possibly as a result of rising geopolitical tensions, and how much is due to tighter financial conditions as countries around the world raised interest rates to fight inflation. The report suggests that, while we do see initial signs of fragmentation, we do not see evidence of broad-based de-globalization.

For example, the share of intermediate goods in world trade, which provides an indication of the health and extent of global supply chains — a key indication of the extent of trade fragmentation — fell to 48.5 per cent in the first half of 2023, having averaged 51.0 per cent over the previous three years. While this suggests that supply chains may be contracting, it may also simply reflect higher commodity prices as these have a greater influence on the cost of intermediate goods than on final goods costs.

A possible indication of an increase in near-shoring is the recent decline in the share of Asian trading partners in US trade in parts and accessories, which is an important component of intermediate goods. However, while this share fell from 43 per cent in the first half of 2022 to 38 per cent in the first half of 2023, it remains close to the pre-pandemic (2019) share of 39 per cent.

Similarly, the share of politically like-minded trading partners (as measured by United Nations voting patterns) in US total trade recently rose to 77 per cent in the first half of 2023, from 74 per cent in the first half of 2022. Again, while this could signal increased friend-shoring, in fact the 2023 share is very close to the 2019 share of 77 per cent.

These findings are in line with the results we presented in the 2023 World Trade Report on 12 September 2023. While they do not yet suggest broad-based de-globalization, nevertheless, we will continue to monitor these trends carefully going forward.

To read the full edition of the WTO’s “Global Trade Outlook and Statistics” which is referenced above, click here. 

To read the full blog by Ralph Ossa, click here.

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As rumors percolate about possible new U.S. export controls and outbound investment restrictions targeting China, it’s a good time to take stock. Since 2017, the U.S. government has implemented a vast array of policy changes with the intent of diversifying supply chains, more effectively competing with China, and safeguarding national security. These policies – including tariffs, export controls, and chips manufacturing incentives – have had a significant impact on U.S.-China technology competition and have, in many ways, already achieved the U.S. government’s stated goals.

The post Without Robust Trade Policy, U.S. China “De-Risking” Falls Short appeared first on WITA.

The modern era of trade can be traced to an important meeting between Winston Churchill and Franklin Roosevelt on a battle cruiser in Argentia Bay, Newfoundland, in August 1941, early in the Second World War. The two statesmen had been close observers of what had already been a catastrophic period comprised of unprecedented bloodletting in World War I followed by a global economic depression. They saw trade as a means to restore both peace and prosperity to the world. Theirs was a utopian vision – “to further the enjoyment by all states, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity”. This policy, which they issued as a press statement, was of sufficient importance that it was forever known as the Atlantic Charter.

When the war was won, the vision was gradually made into reality. Twenty-three nations signed the first-ever multilateral trade agreement, the General Agreement on Tariffs and Trade (GATT), to be administered by an International Trade Organization (ITO). The ITO never came into being, but the parties to the GATT kept up their efforts, decade after decade, liberalizing trade under a system of agreed rules. There were eight great rounds of multilateral trade negotiations, each one becoming more complex, until the last, the Uruguay Round, which lasted eight years, from 1986 to 1994. The number of participants grew dramatically to 128 and they agreed to try again to create a World Trade Organization (WTO), this time successfully.

The world economy benefitted enormously. Trade flourished, economies grew, and peace reined among the major powers (until the Russian invasion of Ukraine). Before the multilateral trading system existed, real GDP took seven decades to quadruple, moving from US$1.92 trillion in 1870 to US$7.81 trillion in 1940. Over the next seven decades, world GDP grew by 14 times, from US$7.81 trillion in 1940 to USD 108.12 trillion in 2015. With the help of trade, hundreds of millions of people have been lifted out of poverty. Human life expectancy has increased over this period by 62 per cent due significantly to the organization of the world economy in favour of openness and living up to internationally agreed rules.

Today, the WTO consists of 164 members, and its rules govern 98% of world trade. An additional 24 countries are pursuing WTO membership. The organization has, however, been experiencing internal problems and facing external challenges. The members all recognize that reform is needed. Over the last quarter-century of the WTO’s life, the number of truly multilateral trade agreements they have negotiated, that is with all signing on to binding obligations, just number two – one on trade facilitation (lowering administrative burdens at the border), and an incomplete agreement limiting subsidies to fisheries. Binding dispute settlement applicable to all, a distinguishing feature of the WTO compared with other international arrangements, is no longer functioning. Transparency in terms of reporting measures affecting trade is inadequate.

Even so, world trade is served by ongoing WTO functions. Members large and small come before a committee of the whole to have their trade policies reviewed. Governments for most of their trade live up to their international obligations. Assistance is given to the least developed. Tariffs generally do not exceed agreed levels. Groups of members seek to reach an agreement on important new subjects such as rules for the burgeoning world of digital trade, while others created an alternative dispute settlement mechanism.

Revitalizing the World Trading System is a guidebook to the WTO. It traces the organization’s history from the outset in 1995 when it came into existence, through 12 Ministerial Meetings, at which decisions were taken or failed to be taken, that defined the role of the organization in international trade. The book describes the subject areas governed and to be governed by the rules of the trading system, including agriculture, services, e-commerce and more. It places the reader in committee and working party meetings to see how members express their concerns and how they respond to the concerns of others. Key moments in trade history are witnessed, such as bringing China into the WTO, and hearing what the representatives of members and China said at that time. In other committees, members discuss product standards that will channel trade, and the reader is present for their deliberations.

The book considers both the value and the values of the WTO. It addresses the challenges the world has faced (such as the COVID-19 pandemic) and will face. Future challenges include the trade aspects of climate change (moving food from areas of plenty to areas of need), the development of the digital world, future pandemics, how to best bring about economic development through trade, how to support peace among conflict-affected countries, and the accession process for bringing additional countries into the organization.

The book offers ideas on how to make the WTO more effective in meeting global needs. It recommends solutions to restore binding dispute settlement, reinvigorate rule-making and multilateral trade negotiations, and strengthen the executive functions performed by the Secretariat. It also provides practical advice for trade negotiators based on a lifetime of practitioner experience as a former US trade negotiator, a trade lawyer, and a former international civil servant as Deputy Director-General of the WTO.

World leaders, including Nelson Mandela, Bill Clinton, and Tony Blair, came together in Geneva in 1998 to celebrate the 50th anniversary of the multilateral trading system embodied in the GATT and express their hopes for the future of the then-new organization, the WTO. The year 2023 is the 75th anniversary of the system, and it needs world leaders to once again focus on the kind of world they wish for and the role of international trade in delivering it. Revitalizing the World Trading System is designed to assist their negotiators in thinking through how to achieve this objective.

Ambassador Alan Wm. Wolff is a Distinguished Visiting Fellow at the Peterson Institute for International Economics, and was co-Acting Director General (2020–21) and Deputy Director-General of the World Trade Organization (2017–21). He is a leader in the field of international trade, with over five decades of experience as a lawyer and trade negotiator. He is a member of the Council on Foreign Relations (CFR) and the Friends of Multilateralism Group (FMG).

To read the full article, please click here.

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There are six major drivers of global commodity markets covering energy, metals and agriculture. These are: economic growth; geopolitics; monetary policy; currency; weather; and financial investment/funds.

To the above, we can now add two more drivers. Logistics as the 7th driver and technology as the 8th.

While the first six are self-explanatory, challenges of logistics came to the fore during the last three years when the Covid pandemic struck, soon followed by the Russia-Ukraine war. The world witnessed shipping dislocations and supply chain disruptions, while sanctions forced countries to look for new suppliers and new markets.

Russia and Ukraine are important exporters of oil, gas and coal; metals like palladium, platinum, nickel, enriched uranium, iron ore as well as grains (wheat, barley, maize), vegetable oil and fertilisers.

Logistics challenges

Logistics challenges immediately impact on the world commodity markets because of their disruptive effect. Technology too has emerged as a driver. Energy transition and decarbonization mean embracing green technologies that will have a significant impact on world commodity market covering fossil fuels and industrial metals.

But technology is a slow driver with its impact felt over time. Movement towards Electric Vehicles (EVs), solar power and so on means that energy transition would be metals intensive while demand for fossil fuels (crude oil, coal) may reduce over time.

We have seen how geopolitical developments have resulted in imposition of sanctions, protectionism, resource nationalism and occasionally, weaponisation of commodities. These developments are changing the global commodity trade landscape.

There is interdependence among nations for sourcing and marketing of goods either as raw material or as finished products. This has fostered substantially liberal trade flows resulting in formation of global value chains. Now, geopolitical events (political instability, war-like situation, strife) have resulted in dislocation of the established value chains. Sanctions have polarized nations, adversely affected settled trade flows and even led to trade controls.

So, countries are forced to diversify their supply sources and destination markets to de-risk trade and ensure continuity. We find redirection of merchandise trade with new origins and new destination markets. We also find countries are forced to compromise. For instance, the rift between China and Australia is settled because neither can afford a stand-off.

Growing cartelisation

Geopolitics has also strengthened cartelisation. We have OPEC + that includes Russia. China has brokered peace between Saudi Arabia and Iran which is a major development, the impact of which may be felt over time.

The adverse effects of geopolitical instabilities have been exacerbated by the recent banking crisis and US debt ceiling issue. After several rate hikes by the US Federal Reserve and other central bankers to tame inflation recession fears have come to the fore.

Clearly, the global policy context is becoming increasingly complex. Countries are forced to take sides. There is a possibility that the world may be fracturing into a US-led bloc and a China-led bloc.

The IMF has flagged the issue of forced polarisation among nations calling it ‘geo-economic fragmentation’.

In all of these, there is one common global challenge that’s climate change. Climate mitigation has to be a global effort. The moot question is: ‘Are we all in it together?’

For green transition, critical raw materials are concentrated in a few countries like China. Resource crunch may impact the pace of transition in India. For instance, India has turned from a net exporter of refined copper until 2018 to the position of a net importer of copper in the last five years. Copper is a critical metal for energy transition and electrification.

Finally, we have to accept that we live in a VUCA world (Volatility, Uncertainty, Complexity and Ambiguity), which will linger for longer. Geopolitical stresses can escalate. But it is for all of us to ensure that such stresses do not derail global cooperation on climate efforts.

If we don’t sail together smartly, we will sink together!!

The writer is a policy commentator and commodities market specialist. The article is based a keynote speech the author recently delivered at an international conference in Dubai . Views expressed are personal

To read the full blog post, please click here.

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