For the first time in 25 years, global trade will grow slower than GDP

The conflict in Ukraine and its consequences have replaced the pandemic as the main brake on the growth of global trade. In the next nine years, it will grow at a slower average rate of only 2.3 percent per year, until 2031, according to an analysis by Boston Consulting Group titled ‘Protectionism, Pandemic, War, and the Future of Trade’.

Standard trade patterns will change, but not only as a result of the war in Ukraine, but also due to the decreasing reliance of Western countries on trade with China and the rise of economic blocs such as the Association of Southeast Asian Nations (ASEAN), BCG assesses. Energy will be the sector most affected by the slowdown in global trade. It is estimated that the European Union will increase energy imports from the US by $338 billion from 2023 to 2031, and there will also be a massive expansion in trade with ASEAN countries, Africa, the Middle East, and India.

Trade between the EU and Russia will sharply decline, as Western Europe seeks to reduce its dependence on Russian oil and gas. As a result, Russia will attempt to shift its trade flows from Europe to other regions, particularly China and India. Like the US, the EU has also adopted a more cautious stance towards China. The growth of mutual trade is slowing to a modest rate of 2.3 percent by 2031, amounting to $72 billion.

– We are witnessing a time of tectonic changes in global trade. At BCG, we predict that trade will recover from the slowdown caused by the pandemic and grow at a rate of 2.3 percent per year, but it will no longer be the trade we have known for the past forty years. Over the next decade, global trade will, primarily influenced by geopolitical forces, become more regionalized. Fortunately, Croatia is well positioned to benefit from these changes, a result of our rapid integration into the common EU market and the eurozone. Membership in the EU internal market allows us to trade under the same conditions as the other 26 members, which already account for more than 70 percent of Croatia’s foreign trade. The problematic aspect is that a large part of this trade consists of imports of low-quality goods and services, which does not make us competitive. After the introduction of the euro, currency risk in foreign trade with EU members has disappeared for Croatia, opening up enormous opportunities for attracting foreign direct investments necessary for transforming the economy and developing higher value-added activities. However, we will compete with Slovakia and Slovenia, which have already been identified by global companies as countries where they can diversify their supply chains. Thus, global companies are reducing their dependence on China while simultaneously building production capacities for the entire EU market. In this context, Croatia has significant opportunities for development in machinery and equipment manufacturing and ICT, as it has knowledge and experience in engineering technologies. However, this will require significant investments in infrastructure and expertise and skills, for which EU funds are available. We must have smart policies to attract foreign IT experts, and especially to retain Croatian experts in engineering technologies. With a good strategy, Croatia can compete with neighboring countries and has a real opportunity to develop its economy in the medium term, says Tomislav Čorak, a partner at BCG.

Weakening Globalization

The expected changes will continue to weaken economic globalization and trade openness that characterized the first three decades of the post-Cold War period.

Rising trade tensions and economic nationalism that accelerated during the pandemic will continue to affect global trade relations. Corporations will continue to focus on reducing risks in the supply chain and global investments, BCG consultants assess.

Michael McAdoo, a partner at BCG and one of the co-authors of the report, concludes that new patterns of global trade require companies to prioritize supply chain resilience and diversification, through strengthening stocks of key raw materials and components, as well as seeking alternative suppliers for the same. Once secure global trade flows that allowed companies to create complex supply and sales chains have been replaced by uncertainty that seeks a better balance between efficiency and low costs on one side and increased awareness of global risks on the other.

The consequence of the slowdown in trade between Western countries and Russia and China will be an increase in trade between northern and southern regions as these countries seek new trading partners in Africa, South America, and Southeast Asia.

Clear winners are ASEAN countries, which are likely to see new trade opportunities, particularly with China, Japan, the US, and the EU. They will increase trade by more than one trillion dollars (one thousand billion) from 2023 to 2031.