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Trade and geopolitics

Does geopolitics now determine global trade?

Published 09 July 2024

The increasingly popular thesis that the world is fragmenting into geopolitically defined blocs potentially ignores the very real aspirations of regional powers and the fact that not all neighborhoods are composed of like-minded or politically aligned countries. While US-China rivalry has resulted in a decoupling of their economic engagement at a rapid pace, it is far from clear that geopolitics is the key determinant of trade patterns beyond that.

Against a background of rising geopolitical tensions, a thesis among policy and academic circles has increasingly gained currency that the world is fragmenting into regional or geopolitically defined blocs. At its most simplistic, the thesis defines geopolitical blocs as a China-led BRICS against the Group of Seven (G7). It depends on the assumption that the overarching concern among the members of such blocs is either the preservation of the US-led global order on the one hand, or its overthrow on the other, and that such an overriding concern among members of each bloc will drive economic disengagement from the other.

US-China rivalry has resulted in a decoupling of their economic engagement at a rapid pace. In the past five years, the clock has been wound back to 2004 in terms of the relative size of their major trade linkages. US import dependency on China has fallen dramatically and will likely continue to do so given some critical dependencies remain in the bilateral relationship that US policymakers will likely crimp further. Chinese economic policy, meanwhile, has taken a significantly more autarkic turn.

But trade data are not supportive of the regionalization or bifurcation narrative, Research Fellow Stewart Paterson finds in this study. China continues to import from a wide range of supplier countries with differing degrees of superpower alignment across geographies. The major tenet of Beijing’s trade policy has shifted to producing resilience through diversification and more asymmetric trade relationships. For the US, the downsizing of China as a source of supply has resulted in both increased importance for USMCA partner countries and Asian countries other than China – a mix of near-shoring and friend-shoring. The US has not lost trade intensity in its economy as some had thought likely in the face of the Trump tariffs.

In this paper, the first in a series on the subject, Paterson sets out to analyze the emerging trade patterns of the two global superpowers. The series will eventually assess the thesis of geopolitical blocs on the costs of disengagement and whether trade has tracked geopolitical alignment above all other factors.

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Stewart Paterson

Stewart Paterson is a Research Fellow at the Hinrich Foundation who spent 25 years in capital markets as an equity researcher, strategist and fund manager, working for Credit Suisse, CLSA and most recently, as a Partner and Portfolio Manager of Tiburon Partners LLP.

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