An onslaught of protectionism will change global trade

What’s going on with global trade? 2023 should have been a disaster. America and China entered an all-out trade war, with export bans, import tariffs and investment restrictions. Europe agonised over a riposte to the Inflation Reduction Act (ira), America’s plan to kickstart manufacturing with $1trn in subsidies and tax incentives. India threw up import bans of its own. War in Ukraine played havoc with grain supplies and shipping. The World Trade Organisation, enfeebled by America’s disengagement under Donald Trump, looked on in horror. Predictions about the death of trade came thick and fast.

And yet the world ended up buying more from China, relative to the country’s GDP, in the first nine months of 2023 than in the same period in any previous year. As a portion of its GDP, China bought just as much from the rest of the world as it did in 2022. India’s manufacturing share of GDP rose for the first time in five years. Including intermediate goods, America bought as much as from China relative to its GDP as it had in the previous five years. In 2024, policy and reality will continue to diverge. Though protectionism will continue to flourish, firms and countries will carry on adapting, not retreating.

For a start, expect more intermediated trade. Tensions over Taiwan, the source of 65% of the world’s semiconductors, as well as concerns about military uses of ai and a battle over the supply of rare-earth metals, make an economic thaw between the West and China unlikely. But laws to scrub China from supply chains will make Western companies nervous and eager to find alternatives. Chinese firms are looking for ways to skirt the West’s trade barriers. Both will settle on countries friendly to both but allied to neither. More goods made in China, or by Chinese companies, will be traded via countries like Vietnam, which is already prospering as a result.

The race to build the hardware of the green revolution will add to the need to adapt. In 2023, Indonesia banned the export of bauxite, necessary to make aluminium, after a similar ban in 2020 on nickel, a crucial component of green batteries. In 2024, other countries will follow suit, though few foreign firms will want to go to unstable countries.

In June, policymakers in Washington, DC, carved out green minerals from the IRA’s tariff regime, as long as the exporting country has a free-trade agreement with America. More developing countries could start negotiating similar arrangements. Should China’s economic slowdown continue to cool its demand for green commodities, the West could benefit from lower global prices (though poor producers such as Turkmenistan and Zambia, which rely heavily on exports to China, could suffer).

Many things will not change. China has long protected its chipmakers and car industry, but trade has continued. The West’s new industrial policies will take years to pay off. Europe’s desire to reduce its reliance on Chinese cars, particularly evs, will take time. It will be a while before new factories in America’s rustbelt start producing chips and evs. That is good news for trade in 2024. But it also means that the logic of national security will drive trade for years, regardless of the economic merit of the argument. ■

Cerian Richmond Jones, International economics correspondent, The Economist