Carolyne Spackman, Vice President/Chief Economist, Country Risk, Credit & Political Risk, AIG
Global trade is a driver of economic prosperity that has lifted millions out of poverty. An open, fair and equitable global trading system benefits all of us by generating growth and business activity that creates employment
However, the trading system is at a critical inflection point. The rules-based order embodied by the World Trade Organization is being challenged by concerns about national economic security and protectionism. That challenge comes amid the intense economic uncertainty caused by COVID-19, which disrupted global supply chains and aggravated existing anxieties about inequality and sustainable consumption. Furthermore, heightened geopolitical volatility means the existing model for global trade is facing stern headwinds.
The business community has a meaningful role in moving the trade agenda forward, and to build a more open, inclusive, and sustainable trading system. Some of the most important issues facing the system are discussed in the AIG Global Trade Series, a series of podcasts produced by AIG in partnership with some of the world’s leading centres of expertise on global trade.
China’s increasingly dominant role in regional and global trade patterns has contributed to the strategic rivalry between Washington and Beijing. A prolonged geopolitical rift between the world’s two largest economies will have widespread consequences for the global economy. Containment of China is now a firmly bipartisan issue in the US which will continue to impact the global trade agenda, including the race to Net Zero.
Reconciling the climate agenda and the global trade system is one of the most pressing issues facing governments and business. Can job creation, investment, and the post-Covid recovery be aligned with green agenda targets? The race to Net Zero and the green energy revolution have increased demand for commodities needed for electrification and batteries, such as nickel, copper, lithium, and rare earth metals, like cobalt. The geostrategic implications of access to these resources are immense – critical to the success of China’s Belt and Road Initiative and to the credibility of both President Biden’s “Build Back Better World” and a “strategically autonomous” Europe. However, the enormous environmental impacts of this resource competition could imperil the climate agenda.
Separately, geopolitical tensions are increasing the incidence of cyber-attacks by state actors and proxies, increasing the risk to digital trade flows and supply chain disruption. As digitalisation changes what and how we trade, it raises complex new issues for supply chain security.
The tumultuous impact of COVID-19 led to acute supply chain disruptions around the world. This fragility continues as economies emerge from the pandemic, introducing a range of additional uncertainties for many businesses. A two-speed recovery between vaccinated and unvaccinated economies is exacerbating supply tightness and shipping times. Combined with limited mobility and migration in the US, UK and EU, this is pushing prices and notably wages higher, translating to higher inflation and increasing the likelihood of tighter monetary policy in early 2022, which could restrict access to capital in Emerging Markets and elevate social and political tensions.
Companies seeking to operate profitably across international markets will continue to face a multiplicity of risks, some established, many new. And the ability to adapt to the unexpected risk remains a key component in success: the US-China trade war and pandemic were previously unthinkable and yet have had a dominating effect on profit margins for many. A well-informed understanding of the geopolitical trends impacting global trade flows is essential in positioning companies to anticipate and cope with new headwinds. And where good intelligence provides insufficient risk mitigation, trade credit insurance can step in to help companies insure themselves against non-payment risks which may arise in this uncertain environment. ¬