How global trade has changed as a result of the war in Ukraine

Thu 23 Feb 2023
Posted by: William Barns-Graham
Features

Russian and Ukranian flags hanging in a dark room illuminated by light bulb

The war in Ukraine has led to a reorientation of supply chains, a reprioritisation of trade objectives and a retreat from multilateralism – trade policy and economics experts have said.

Speaking on a webinar hosted by the Institute of Export & International Trade (IOE&IT) last week, to mark one year having passed since the start of the Russian invasion, IOE&IT trade policy and research specialist Hunter Matson said these trends had already been starting to emerge but had been “catalysed” by the war.

Supply chains hit

On a poll that was run during the webinar, almost half (48%) the delegates said their supply chains had at least been indirectly impacted by the war, with just under a quarter (23%) saying they had been directly impacted.

Trevor Williams, co-founder of FXGuard and visiting professor at Derby University, explained that energy and food prices in particular have soared because of the war, with Ukraine a significant exporter of fertilisers and wheat, while Russia was previously one of the world’s major gas exporters.

He added that this has led to consumer price indexes around the world being three to four times higher than expected, leading to the tightening of interest rates. He said central banks and governments were being forced to do this “because a) inflation hits the poorest worst; and b) it impacts decision-making as uncertainty leads to weak growth on the investment side, making it very difficult to assess what profit margins are going to be.”

“We’ve moved from a position where monetary policy was pretty loose and very receptive to encouraging economic activity, to a position now of significant tightening,” he said.

He warned that inflation and tighter monetary policy were contributing to slower economic growth around the world; “it’s a global phenomenon, no one has escaped this,” he said.

Reorientation

Matson said that this climate had led to both a reactive and proactive “reorientation of trade flows and supply chains”. In the reactive sense he gave the example of advanced manufacturing.

“As a result of export restrictions or sanctions, companies are not able to get the supplies they need so they’re having to pivot and find new sources,” he explained.

On proactive reorientation, he said there was a growing trend of governments and businesses ‘nearshoring’ (moving supply chains closer to home) and ‘friendshoring’ (switching to working with partners in allied countries).

He also noted opportunistic supply chain reorientations – such as India, China and Turkey increasing energy imports from Russia after western nations reduced this trade – and the diversification of supplies whereby businesses are “looking to have multiple sources, just in case there is any type of future supply chain disruption”.

Reprioritisation

Matson said that there had been a “reprioritisation of trade objectives” with governments moving towards “interlinking trade objectives with national security objectives”.

He described this as a shift away from trade liberalisation – i.e. the reduction or elimination of tariffs and the removal of market access barriers – being the priority in governments’ trade policy agendas.

He raised the United States and Indo-Pacific Economic Framework for Prosperity (IPEF) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as examples of agreements which had more of a focus on “integrating partners through agreed standards on digital economy, supply chains, clean energy infrastructure and anti-corruption measures”.

He also cited recent comments from UK trade secretary Kemi Badenoch about how the UK was now looking at “alternate agreements or vehicles to further UK trade beyond traditional free trade agreements”. This includes the UK including provisions on gender, innovation and data flows in its trade deals with Australia and New Zealand.

Retreat from multilateralism

Finally, Matson also noted a “retreat from multilateralism”, including organisations such as the World Trade Organization (WTO).

To illustrate this, he gave the examples of US, Canada and EU delegates choosing not to attend WTO or UN meetings where Russian delegates were present, and the collective decision of G7 members to suspend Most Favoured Nation (MFN) status for Russia.

However, despite the tensions that the war has caused within the WTO and other multilateral bodies, there is cause for hope. During last year’s 12th Ministerial Conference, WTO members reached consensus on a call to reform the institution. Matson expects that discussions around when member may unilaterally act to suspend rules will be part of that negotiation.

“Conditionality and unilateral revocation of the WTO bedrock MFN principle was never anticipated when the institution was being formed 30 years ago,” he said. “New rules will need to be established when members begin negotiating WTO reform, otherwise members may in future opt to unilaterally suspend MFN and other WTO rules for a variety of reasons, and in doing so undermine the credibility of the WTO and the multilateral trading system.”