Fragmented trade likely to have short-term impact on global economy

Global tensions that are beginning to fragment trade as rivalries form will have a limited negative effect on global economic growth, a new report has found.
Output loss is estimated at just below 1 per cent, said the annual Trade in Transition report, commissioned by Dubai-based ports operator DP World and led by the Economist Impact research organisation.
This forecast comes at time of simmering US-China trade tensions, Houthi rebel attacks on Red Sea shipping, the Israel-Gaza war, and Russia’s invasion of Ukraine.
“Geopolitical shocks continue to disrupt global trade, driving the restructuring of supply chains to centre stage,” the report said.
“[Trade] bloc restructuring with increased trade barriers could decrease global GDP [gross domestic product] significantly.”
The report, released on Tuesday at the World Economic Forum annual meeting at the Swiss alpine resort of Davos, surveyed 3,500 company executives on their views about trade trends, technology adoption, supply chains and geopolitical risks.
Its findings on GDP impact are based on a hypothetical scenario of further “geoeconomic fragmentation” focused on significantly increased trade barriers on high-tech goods.
Under this scenario, disruptions to trade between a US-led western bloc and a China-led eastern bloc could cause a 0.9 per cent decline in GDP, according to the report.
This impact will weigh heavily on China’s economy – which is forecast to decline by 1.9 per cent – while the US economy is expected to contract by 0.9 per cent, and that of other western bloc countries by 0.8 per cent, the findings said.
If a 15 percentage point tariff increase is imposed on all traded industrial goods, then global GDP is expected to decline by 0.7 per cent, the report said.
This would “disproportionately affect” politically aligned blocs due to trade diversions. As a result, China’s economy would decline by 4.5 per cent and the remaining eastern bloc by 1.3 per cent.
The US and neutral countries would record marginal benefits of 0.2 per cent and 0.7 per cent economic growth, respectively.
Global economic prospects remain subdued and are fraught with uncertainty, the WEF said in a report on Monday.
More than half of chief economists surveyed by the WEF expect the economy to weaken this year.
Seven in 10 of the respondents anticipate the pace of geoeconomic fragmentation to pick up this year.
There is strong consensus that recent geopolitical developments will increase localisation (86 per cent) and strengthen geoeconomic blocs (80 per cent), the survey found.
Trade fragmentation means companies will need to balance economic factors such as cost and quality against non-economic elements such as security and resilience in supply chains, the DP World report said.
Some 36 per cent of surveyed company executives responded to geopolitical shocks by prioritising “friendshoring”, which means vital economic production should be done within the borders of ally countries, the findings showed.
Another 32 per cent of respondents said they were creating dual supply chains to address geopolitical tensions.
“These strategies aim to boost resilience but might raise costs for businesses juggling multiple supply chains,” the report said.
“Achieving this balance is pivotal in navigating the changing global trade landscape.”
In other findings, nearly a quarter of the survey respondents said that higher transport costs in 2024 will be the biggest challenge for companies aiming to increase their exports.
This was followed by higher tariffs in key markets, supply shortages of key production materials, unfavourable foreign currency swings and political instability in vital markets, the survey showed.
Despite the “formidable challenges” posed by the current geopolitical and economic climate, there are multiple growth drivers and sources of optimism underpinning global trade, the report said.
Some 26 per cent of the companies surveyed globally are expanding into new markets and 24 per cent are focusing on existing markets to address increased demand.
In the Middle East, 33 per cent of businesses are looking to diversify into new markets, it added.