TWO years after Russia's invasion of Ukraine, there are clear signs that the global economy is fragmenting into two blocs and that multilateral trade rules that have underpinned commerce for nearly 30 years are under threat.
Rising geopolitical tensions, including in the Middle East, and concerns about economic security are leading to sanctions, trade curbs and signs of a widening split between countries supporting Russia and those backing Ukraine.
The World Trade Organisation (WTO), which hosts its biennial ministerial conference to debate global trade rules this week, has said that an outright fragmentation into two rival blocs would shrink the global economy by five per cent, with developing countries suffering the most.
In this extreme scenario, the United States and China and their allies would be engaged in a bipolar trade war and the blocs would set their own rules, disregarding multilateral agreements. WTO economists have shown that since Russia's invasion in February 2022, the two blocs are pulling apart.
"We find early evidence of a trend towards a stronger alignment between trade flows and geopolitical affinities since the onset of the war in Ukraine," they said in a report.
"Our findings point to the first signs of fragmentation in global trade."
They split the world based on different United Nations voting patterns, including but not limited to resolutions on the Ukraine war.
Their finding is that trade in goods between the blocs has grown four per cent slower than trade within blocs.
While the economists showed signs of "friend-shoring", they did not find evidence of extensive near-shoring, with no pick-up of trade within regions, although they did not assess whether countries are bringing parts of value chains back to their own territory.
"Friend-shoring" is a term used by US Treasury Secretary Janet Yellen and others to encourage countries to diversify supply chains away from China to market-oriented democracies such as India.
Looking at the US and China alone, the WTO economists find that trade tensions, which jacked up when former US president Donald Trump imposed tariffs on about two-thirds of Chinese goods imports, have been compounded by the Ukraine war.
Paradoxically, trade flows between the two spiked to a record high in 2022 as US demand for Chinese consumer goods rose and Beijing's demand for US farm products and energy grew.
However, relative to each country's goods trade with other partners, their bilateral trade has slowed, WTO research shows.
It concludes that the initial increase in trade tensions and the subsequent war in Ukraine resulted in bilateral trade that was 31 per cent slower from July 2018.
Geopolitical tensions are partly the cause of downbeat estimates for global goods trade growth.
And while policies have at times eased earlier import and export curbs, the ramp-up of subsidies, typically making domestic goods look cheaper against imported ones, outweighed these.
Trade restrictions and distortions reflect a push towards protectionism, undermining global rules that promote open trade and limit the extent to which countries can support domestic industry with subsidies and other measures.
The Institute of International Finance sees risks for global debt, with higher government spending to mitigate the adverse effects on supply chains of growing trade protection and geopolitical conflicts.
The writer is from Reuters