Will trade fragmentation continue to deepen?

Trade fragmentation has not only changed the pattern of global industrial and supply chains but also impacted the momentum of world economic growth. Uncertainties and irregularities in the trading system have led to complications and obstacles to trade processes, making cross-border trade more difficult and slowing global economic growth.

At the beginning of last year, the International Monetary Fund (IMF) released a report suggesting that trade fragmentation would lead to a contraction of global economic output ranging from 0.2% to 7%, depending on the degree of fragmentation. Add to technological decoupling, some countries could see their GDP shrink by as much as 12%. As a result of fragmentation, low-income consumers in advanced economies will not be able to access cheaper imports. At the same time, emerging markets and developing economies will no longer benefit from technology spillovers. Instead of catching up with the income levels of advanced economies, they will fall further behind.

The U.S.-China trade conflict has already led to severe trade diversions and revenue losses. A more uncertain market environment can hinder economic growth by weakening consumer confidence and spending, dampening corporate enthusiasm for investment. The trade friction between China and the EU is also worrying, especially the recent EU anti-subsidy duty on Chinese electric vehicles.

The low prices and consumption choices that trade brings can help low- and middle-income consumers. Trade is projected to have lowered household consumption costs in advanced economies, with high-income households falling by a quarter and low-income households by two-thirds. Deglobalization could create severe inflation.

So, at a time of increasing international tensions, is trade fragmentation inevitable? When the multilateral trading system is not viable, many countries have turned their attention to intraregional trade.

In recent years, intra-regional cooperation has become the choice of many countries in the face of de-globalization. From 2012 to 2022, ASEAN’s total trade volume increased from US$2.5 trillion to US$3.5 trillion. In the absence of globally consistent trade rules, regional cooperation has become the second-best solution. Countries in the region are at a close stage of development, their interests and needs are aligned, and regional cooperation agreements can at least benefit every country in the area.

At the same time, the 2024 Annual Report on Asian Economic Prospects and Integration Process released by the Boao Forum for Asia Annual Conference 2024 pointed out that the Regional Comprehensive Economic Partnership (RCEP) has made positive progress, and the RCEP upgrade is conducive to coping with the adverse impact of world economic fragmentation.

Several major regional trade organizations all over the world, such as RCEP and CPTPP, have promoted trade through regional trade, which is of course an affirmation of international trade. However, the trend of trade fragmentation may be unavoidable in the short term. The sound development of the world economy still requires a more open and inclusive trade pattern, and the better solution to trade fragmentation is re-globalization. Embracing a strengthened multilateral trading system can lead to greater inclusiveness.

By Le Tianyu