The Current State of Global Trade and Risk Mitigation Strategies in Turbulent Times
13/12/2024
Dr. Ngozi Okonjo-Iweala, Director-General of the World Trade Organization (WTO), recently acknowledged that global trade is facing significant challenges. Increasing protectionism and the undermining of WTO rules are leading to fragmentation, impacting economic resilience and growth worldwide. In an interview with the BBC, she noted that global trade is not in its best condition currently. Before we dive into the conversation about how to mitigate the looming risks, it’s important to take an outlook on some of the alarming highlights of trade as mentioned by Dr. Ngozi Okonjo in her interview with BBC.
Rising Trade Tensions
The European Union (EU) and the United States have imposed substantial tariffs on Chinese electric vehicles (EVs), accusing China of unfair subsidies that allow for below-market pricing. This move, intended to protect jobs in the West, has escalated trade tensions. Both the EU and the US are also increasing import taxes on other critical Chinese products, including EV batteries and computer chips.
Global Trade Decline
For the third time in 30 years, global trade volume fell last year, with a 1.2% decline attributed to higher inflation and interest rates. The WTO forecasts a potential recovery this year, but underlying issues like geopolitical tensions and economic security concerns continue to reshape the global trade landscape.
Environmental and Security Concerns
The EU's strategy to "de-risk" its economic dependence on China stems from fears of technology misuse and support for Russia. Meanwhile, disruptions in major trade routes like the Panama and Suez Canals are further complicating global trade logistics. While protectionism is hampering global trade, a more alarming situation arises when these barriers are influenced by geopolitical situations. Geopolitical tensions, such as the Russian-Ukraine war or the ongoing Israel-Palestine conflict, lead to national security concerns, prompting businesses to trade only with politically and socially stable countries. This shift impacts nations like Peru, Ghana, and Vietnam, which must choose between strengthening economic ties with Western powers or aligning with the China-Russia axis. In addition, the lack of rainfall has made passage through the Panama Canal difficult. The authority has imposed restrictions on the number and size of ships passing through the canal due to historically low water levels in Lake Gatun. This results in added costs for diverting ships from the Swiss and Panama Canals, which will likely trickle down to a price increase, sparking another round of inflation in the coming years. These conflicts create societal polarization, which erodes uniformity in society. Without a unified society, peaceful communities, and stable trade environments, businesses cannot thrive.
Implications for Business Leaders
To navigate the multifaceted challenges posed by the current global trade environment, business leaders must adopt comprehensive and adaptive risk management strategies. One critical approach is to stress-test supply chains and growth strategies against various disruption scenarios, ensuring they can withstand trade tensions and geopolitical shifts. By identifying potential vulnerabilities and addressing them proactively, businesses can better prepare for unexpected disruptions, thereby safeguarding their operations and market position. Building on this foundation of risk management, diversification becomes essential. Expanding trade partners and markets can help businesses avoid regional disruptions and maintain stability. This involves seeking new opportunities in emerging markets and building resilient supply chains that are less dependent on any single region. Diversification not only spreads risk but also opens new avenues for growth and innovation, enhancing a company's competitive edge. Sustainability further enhances this competitive edge by aligning business practices with evolving global trade rules focused on climate change. Investing in green technologies can improve a company's environmental footprint and appeal to increasingly eco-conscious consumers and stakeholders. Sustainable practices can lead to cost savings, improved brand reputation, and long-term viability in a market that values corporate responsibility. Engaging with policymakers is also crucial in fostering a fair and balanced trade environment. By advocating for equitable trade practices, businesses can help shape policies that support sustainable economic growth. This engagement provides valuable insights into upcoming regulatory changes, allowing businesses to adapt more swiftly and stay ahead of compliance requirements. Active participation in policy discussions can also build stronger relationships with government entities, further stabilizing the business environment. Business leaders must integrate robust risk management practices with diversification, sustainability, and policy advocacy to navigate the complexities of the global trade landscape. These interconnected strategies will enable businesses to build resilience, capitalize on new opportunities, and contribute to a more stable and sustainable global economy.
How to approach Risk mitigation in such turbulent times?
The global risk scenario is fast moving and kind of a new era of risk. We are seeing artificial intelligence, misinformation, disinformation as new risks. But the more rapidly increasing risks are geopolitical risks.
1-Work collaboratively:
The best example for collaboration is covid’19 vaccine development. The vaccines that were produced in years, were produced in a matter of days through collaborations between business and governments. Governments played their role in rapid regulatory approval of vaccines, finance capabilities and mass distribution of vaccines. The businesses brought their product development and quality assurance skills to bring these life changing products to life. The covid collaboration proves that we are not incapable of communication, shared harmony and understanding. We just need to understand its value to human life, to the functioning of society and thereby the functioning of global trade. The unfair cross border protections on trade, the political biases and geopolitical unrest that unfairly hampers trade and businesses can be reduced with collaborative efforts of governments and businesses. It’s just a matter of paying enough importance to these geopolitical and climate change risks, that can potentially worsen economic activity.
2- Individual and collective action:
Individual companies should change their approaches towards the supply chain. For example, human rights issues are a big risk; companies must understand that with the rise of digital media they shouldn’t be using child labor, unethical sourcing, unethical packaging and practice green supply chain processes. If the policy makers start viewing these highlighted risks of geopolitical unrest as seriously threatening risks and the governments start collaborating and reducing the political barriers on trade, something can be achieved. The supply chains can be resilient and agile.
Final Thoughts
Geopolitics, misinformation, disinformation, climate change, economic downturn, and inflation are among the high-impact risks that will shape the global trade and economic outlook in the coming years. According to the Global Risk Report 2024, we have entered a new era of risks that require innovative and adaptive strategies. Considering these challenges, it is evident that traditional risk mitigation strategies may no longer suffice. Businesses and governments must adopt a more proactive and collaborative approach to navigate these turbulent times. This involves not only diversifying trade partners and investing in sustainability but also actively engaging in policy advocacy to ensure fair and balanced trade practices. The development of COVID-19 vaccines demonstrated that rapid and effective collaboration between the public and private sectors is possible and can lead to remarkable achievements. By leveraging such collaborative efforts, we can address the geopolitical and environmental risks that threaten global trade. Furthermore, individual companies must reassess their supply chain practices, ensuring they are ethical and resilient. Embracing green technologies and ethical sourcing not only aligns with evolving global trade rules but also enhances competitiveness in an increasingly conscientious market. In conclusion, the path forward requires a blend of strategic foresight, innovation, and cooperative action. By addressing these high-impact risks head-on and fostering an environment of global collaboration, we can not only mitigate the adverse effects on global trade but also pave the way for sustainable economic growth and resilience in an uncertain world. The future of global trade depends on our collective ability to adapt, collaborate, and innovate in response to these evolving challenges.
Silk Road Heritage is a boutique financial and business consulting firm based in the vibrant city of Dubai with branches in Italy and Switzerland.
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