NEW DEVELOPMENTS AFFECTING GLOBAL TRADE…

Rıza Mehmet KORKMAZ
UGM GENERAL MANAGER

Developments indicate that the world is moving from traditional alliance structures to a multipolar world where regional powers will be more influential. 

We can expect to see the rise of a multipolar world as trade and political partnerships are realigned, and the movement of goods and services will be redirected in the same way. We will see companies seeking geographic diversification, often accompanied by state support. We will witness a new era in which leaders develop trade relations, seeking to maximize economic benefits through more complex partnerships in a multipolar world.

More economic and technological advances have occurred in the last 100 years than in the history of the world combined. Developments continue at a dizzying pace. Integrating national economies into the global system was one of the most important developments of the last century. In particular, advances in production, transportation, logistics, communication, information and supply chain technologies, and new business models in trade have expanded world trade. Today, 25% of global production is now exported. 

In the last three years, the world economy has been shaken first by the global impact of the COVID-19 pandemic and then by the Russia-Ukraine War, the most significant conflict on the European continent since World War II. In 2022, the world economy and global trade, which had just recovered from the pandemic's effects, entered a contraction process again with the Ukraine crisis.

THE TRANSFORMING INTERNATIONAL SYSTEM...

• Today, evaluating the world economy and trade independently from geopolitical developments has become impossible. It is possible to list the main developments at this point under the following main headings:
• The post-World War II Western bloc-led security system is under threat.
• The efforts for a new NATO, Sweden's accession to NATO, the ongoing uncertainties as to whether QUAD (a quadrilateral structure for security cooperation between Australia, India, Japan, and the United States) and AUKUS (a cooperation mechanism between Australia, the United Kingdom and the United States) will work.
• China's growing influence and unstoppable rise in world politics, not only as an economic power but also as a political figure, and the waiting to see when it will take center stage as a hegemonic power.
• The risk of a new conflict in Taiwan.
• The growing importance in world politics of the positions taken by regional powers such as India, Indonesia, Brazil, Türkiye, the Republic of South Africa, the UAE, and Iran; in particular, which of the blocs India, which is becoming the world's third largest economic and military power, will support. 
• The prediction is that the global world order will be challenged more in the coming period, especially by countries such as Russia, Turkey, Saudi Arabia, and, to a lesser extent, the UAE.
• China and India are investing more in their defense budgets.
• Despite the sanctions imposed, India will continue to buy Russian oil at a discount in 2022 to avoid further widening its current account deficit as total energy prices rise. Economic and military cooperation was further developed between Russia and India during this period, despite the strategic partnership between the US and India. On the other hand, the US remained silent on this situation out of concern not to lose India.
• The Russia-Ukraine War, which has entered its second year and does not seem to be over in a short period of time, and which is gradually turning into a war of proxies between the Western bloc and the Russia-China bloc, the risk of nuclear accidents brought about by the war, the floods encountered with destroyed dams, the problems in food supply due to the ongoing war in the region, which is one of the world's grain warehouses.
• There are more than 10,000 economic, political, and cultural sanctions against Russia. 
• Uncertainties in US foreign policy, which has become less effective under President Joe Biden; the US focus on its domestic politics due to the 2024 elections; the rise of former President Donald Trump and the possibility of his re-election.
• The increasing struggle for power and influence in Africa by former colonizers, especially China, the uncertain future of Libya, and the lack of a solution to the conflict in Sudan.
• The EU's recovery efforts and search for a leader, the questionable leadership of Germany and France in the EU, efforts to build a new model with the European Mechanism for Political Cooperation, the EU's enlargement process, and the risk of civil war in Kosovo.
• In the Middle East, Saudi Arabia's new foreign policy and normalization efforts with Iran, efforts towards peace in Syria, and Israel's growing isolation in the Middle East.
• As of 2023, there are more than 35 million refugees and 108.5 million forcibly displaced people worldwide.
• The G-7 countries, which for years played a decisive role in global affairs, have been largely replaced by the G-20 countries.

All these developments indicate that the world is moving away from traditional alliance structures and evolving into a multipolar structure in which regional powers will be more influential.

THE RISE OF ALTERNATIVE FINANCIAL SYSTEMS 

Another significant recent development in the world is the acceleration of efforts to reduce dependence on the US dollar and its financial system. The US and its allies, the undisputed victors of World War II, created the world security framework and a series of institutions such as the IMF, the World Bank, and the World Trade Organization to help them shape the current economic order. Through the lending mechanism created by institutions such as the IMF and the World Bank, the US, and Western Europe were able to channel available money to nations in need while at the same time promoting Western policies and values. Thus began the development of a Western-led economic framework, including the dominance of Western financial institutions and payment systems. 

Today, you can use your credit card almost anywhere in the world. However, it is likely to pass through a system (think of it as a credit card rail system) owned by a US financial institution or card company. This means that some US companies can monitor a significant portion of all credit card transactions and cut off access to this system for individuals and countries.

MAYBE BASED SWIFT...

Similarly, when two banks need to make a payment transaction, they must use the SWIFT messaging network, a Belgium-based transaction system. SWIFT is usually based on an actual payment system, such as the Clearing House Interbank Payments System (CHIPS), which the United States owns. For any dollar-based transaction, CHIPS is the go-to entity for clearing payments. Of course, non-dollar transactions can be moved outside of CHIPS. However, most countries increasingly make counterparty payments in dollars, and most commodity products are traded in dollars. Thus, for most of the world, SWIFT and CHIPS are becoming the go-to entity for settling payments. Similar to credit card rails, Western countries can block certain parties from accessing SWIFT and CHIPS, making it difficult for them to make payments.

The US has managed to increase its grip on these systems by restricting access to Russia's invasion of Ukraine and blocking its ability to repay its creditors. Indeed, while the sanction was successful, it signaled to other countries that they could also face restrictions. For many countries, it also exposed the risk that a Western-led economic framework poses to their national interests. Accordingly, many large and economically dominant countries, such as India and China, which have a strong presence in international financial systems, have their own.

INDIA'S RUPAY...

In 2012, India launched RuPay, a local payment system to support Indian credit cards. At first, it was intended to help the government send cash aid to citizens. Since then, the new system has become an alternative to Western credit cards and payment systems. RuPay now has over 600 million customers, allowing a significant part of India's business activity to bypass Western networks altogether. This symbolizes Prime Minister Narendra Modi's desire to create India's financial architecture. This architecture protects India from geopolitical risks, including the potential ability of Western countries to restrict it.

RUSSIA AND CHINA'S MIR AND UNIONPAY SYSTEMS…

Russia and China have done the same for their Mir and UnionPay systems. Russia's Mir and India's RuPay also form a link enabling financial transactions between both countries. This new link could be essential as Russia is disconnected from the West and Western credit cards. Both sides have toyed with resolving commodity purchases through direct currency exchange rather than first converting them into dollars, but the idea has yet to catch on.

BRAZIL'S "SUR" CURRENCY PROJECT...

In addition, Brazilian President-elect Luiz Inacio Lula da Silva (or Lula) also advocates creating a single currency for Latin America called "Sur." Sur would act as a wholesale central bank digital currency to unify regional currencies. This could lead to a future in which Latin America moves away from SWIFT for payments.

These searches for a new financial system are likely to yield different solutions in the near future, and the world financial system could undergo dramatic changes.

IS DOLLARIZATION COMING TO AN END?

The end of the dominance of the US dollar, the world's primary reserve currency in the international economic system, has been discussed for years. However, since most transactions and commodity trades are indexed to and settled in dollars, the dollar will likely continue to dominate. Moreover, its reserve currency status makes it a sought-after asset. However, some efforts to de-dollarize the dollar have recently become more evident. The dollar's share of reserve currencies has fallen from 70% to 60% in the last 20 years. Part of this is due to technological progress and globalization, which has facilitated the use of other currencies. The rise of China as a dominant trading partner for many countries has also increased the need for more renminbi-denominated assets. But part of this has been driven by central banks seeking to diversify their portfolios.

Table I: Distribution Ratios of Foreign Currency Reserves at the Global Level by Years

• Graphic

The sanctions against Russia have accelerated the process of depolarization (de-dollarization of the economy). Following the sanctions, Moscow started invoicing its exports in rubles, and Saudi Arabia allowed China to pay for oil in its renminbi currency. Other countries have made similar moves. In November 2022, Brazil and Argentina agreed to establish a bilateral payment system to sell and purchase electricity in local currencies. The potential economic costs of this shift are seen in the context of disrupting the world order.

The sanctions imposed, restricting Russia's access to dollar reserves abroad, and its exclusion from Swift probably accelerated the divergence of financial networks. Countries like India, China, and Saudi Arabia have likely accelerated the process of building their own financial architectures. This process will likely go beyond clearing systems, including financial diplomacy and lending. While China has historically been a significant creditor for emerging markets looking to build their infrastructure, India is also increasing its credit to gain new trading partners and compete with China. 

Over the last 30 years, the gap between the US economy and its successors has narrowed, allowing other nations to carve out a role for themselves in the financial architecture. Uncomfortable with being dependent on financial systems and networks created and managed by the West, the new emerging powers, given their growing economic clout, are in a position to build their systems and are doing just that. In 2023-24, we will see this trend accelerate even further[1]

CHANGES IN THE SUPPLY CHAIN

In the early 1990s, Saudi Arabia exported more than 2.0 million barrels of oil per day to the US, while in 2003 the amount increased to about 2.2 million barrels. However, by the end of 2022, US oil imports from Saudi Arabia had fallen to less than 400,000 barrels per day. Meanwhile, Saudi Arabia currently sells 1.6 to 1.9 million barrels of oil daily to China and just under 900,000 barrels to India. It is unsurprising that US-Saudi Arabia relations are at their lowest levels, as trade ties between the two countries are frayed. Therefore, trade flows can influence geopolitics and vice versa.

Looking ahead, we can anticipate the rise of a multipolar world with a realignment of trade and political partnerships and a similar realignment of goods and services. New trade routes are likely to open up in the coming years that could redirect the flow of goods.

Egypt used to get about 80% of its wheat from Russia and Ukraine. After the war, wheat supplies were drastically cut, leading to potential food shortages and inflation. We know from history how this works. For example, the "Arab Spring”- a series of anti-government protests - started in Tunisia but quickly spread to Egypt, mainly due to high food prices. In response, Egypt quickly began sourcing wheat from India, a market rarely tapped for agricultural products.

With sanctions on Russia's energy supplies, European countries were forced to look for new markets. For example, Italy, which imported more than 40% of its natural gas from Russia before the Russia-Ukraine War, aggressively sought to diversify its supplies by turning to Algeria. Italy and Algeria agreed to increase their current import volumes by 40%. 

This deal has also raised concerns about Spain's access to Algerian gas. Algeria could not increase its production in such a short period, limiting the amount of gas it could export. The process has also strained relations, showing the fragility of regional alliances such as the European Union against the priority of countries' needs.

CHANGE IN INDUSTRIAL POLICY

Equally important is the movement of technology products through the supply chain. Semiconductor technology is critical in products such as cars, computers, consumer electronics, and military equipment. The world's leading semiconductor manufacturers are primarily based in Taiwan, with additional facilities in Japan and South Korea. With growing concerns about Sino-Taiwanese relations, New Delhi encourages semiconductor manufacturers to set up shop in India. If this happens, we could see increased trade in technology products between India and developed markets.

Beyond semiconductors, the final assembly of critical products such as telephones is mainly concentrated in China. China dominates global exports of microchips in all modern technologies, including cell phones, computers, electric vehicles, and renewable energy generation. The level of dependence of states on microchips means that any supply disruption could threaten national security and lead to significant disruptions in global production.

• Graphic

The pandemic has clearly revealed the economic risks caused by interruptions in semiconductor supply and concentration of production in certain places. Consider the auto industry: fewer chips meant fewer vehicles produced, and the subsequent shortage of vehicles in the market led to a spike in both new and used car inflation, which ultimately contributed to overall inflation.

As China becomes more aggressive in its stance on Taiwan, the concentration of production in certain regions has also raised national security concerns. If semiconductor production is disrupted for a long time, not only will technological progress slow down, but there will also be a shortage of chips for critical products such as missiles and cyber defense.

As a result, we will see companies seeking geographical diversification in the coming period, often accompanied by government support. The United States has already enacted the necessary legislation, including the CHIPS Act, to encourage domestic production to shift production concentration away from Taiwan. In the fragmentation of supply chains, there will also be an increase in the concept of “friendly support,” where countries seek to establish supply chains in countries they are friends with.

FRIEND SHORING, SUPPLY FROM FRIENDLY COUNTRIES…

Although “Friend Shoring” is new, the trend has existed for some time. For example, in the 1970s and 1980s, U.S. economic policy encouraged more excellent investment with Asian manufacturers to support friendly countries such as Japan economically. And she encouraged initiatives.

At its core, “Allied Sourcing” involves companies moving into new markets. From a manufacturing perspective, Asian countries such as Vietnam, Bangladesh, and India are well-positioned to reap economic benefits. Companies will increasingly prepare to protect themselves from concentration risk and potential stress points like war in the coming years. In this context, they will likely move their production to multiple facilities in new friendly markets. This change may increase the cost of production; however, the net benefit mitigates the potential risk. Although globalization is not dead, production points will move to new geographies that can benefit some Asian markets.

NATIONALISM AND INDUSTRIAL PROTECTION MAY INCREASE FURTHER...

With changes in industrial policy and disruptions in supply chains, we will see some countries adopt a more protectionist approach, especially for their growing industries. India has already taken many steps to present itself as a viable destination outside of China. In Indonesia, President Joko Widodo (or Jokowi) imposed a ban on nickel ore exports. Considering that Indonesia has the largest nickel reserves in the world and is a crucial component in electric vehicle production, this decision is a significant move to attract foreign capital and grow the local electric vehicle industry.

Latin America has taken a protective stance regarding its resource wealth. One vital commodity to watch for is lithium, a crucial component in rechargeable batteries for cell phones, laptops, and electric vehicles. In this context, approximately 55% of the world's lithium deposits are located in the "Lithium Triangle," which covers the northern regions of Chile and Argentina and the southwestern region of Bolivia. Chile is the largest regional player and lithium producer, producing 25% of the global supply in 2021. The price of carbonate equivalent (a lithium derivative) has increased by nearly 500% in the last two years. It is not surprising that regional leaders such as President Boric in Chile have expressed interest in establishing national lithium companies. Additionally, Bolivia and Mexico have formalized their own national lithium companies.

In this context, the world economic order and open markets established after the Cold War are disrupted, and countries are trying to protect their industries.

PROTECTIONISM BECOMES A GROWING THEME IN THE CONTEXT OF GREEN TRANSFORMATION

Significant changes in industrial policies will also determine the evolution of the "Green Transformation." As trade flows change, the value of commodities, and rare earth minerals in particular, may rise. Latin America and Africa are rich in critical ingredients needed to transition to green energy, including lithium, copper, cobalt, and nickel.

Investment need: It offers opportunities for rising powers, both as diplomatic partners and new investors, as well as lucrative sources of income for Latin America and Africa.

In conclusion, during the pandemic, governments provided various subsidies, support programs, and tax cuts to ease the burden on citizens while borrowing more to finance aid programs. Now, leaders face the challenge of maintaining or even increasing social spending, but this is made more difficult by their weakened financial situation as a result of past policies.

Latin America offers the best example in this regard. In the last wave of elections in 2022-23, citizens ousted incumbent candidates and replaced them with left-leaning leaders driven by a desire for fair distribution of wealth. However, many of these leaders also took office with the imperative to increase social spending while facing a high debt burden and slow growth.

Protectionist policies also mean more supervision of foreign companies operating in specific fields. This year, Congo's state mining company, Gecamines, blocked exports from the Tenke Fungurume mine, the world's second-largest cobalt mine, by Chinese firm CMOC, a significant shareholder. Realizing the increasing importance of cobalt in producing lithium-ion batteries, the government restricted exports to maximize revenues.

While Latin America and Africa will undoubtedly whet the appetite of foreign investors with their rich natural resources, which will spur their slowing growth, we will see changes in tax policies and tighter surveillance for certain commodities in 2023-24.

We will witness a new era in which leaders will develop commercial relations by striving to achieve maximum economic benefit through more complex partnerships in a multipolar world.

As a result of all these developments, according to estimates made by the World Bank, world trade will increase by 1.7% in 2023. It is predicted to grow by 2.8% in 2024 and 3.0% in 2025.