The hard road back for global trade

In its Supply Chain Resilience Review, the organisation found that advanced economies could suffer significant GDP losses if they attempt to relocate supply chains too quickly in response to the deteriorating geopolitical environment, due to the very high dependence on China in many countries and sectors.  According to the model’s findings, such rapid reshoring could lead to an 18% drop in global trade and a 5% fall in GDP with some countries facing GDP losses of up to 12% compared to maintaining a globalised trading regime. The OECD, which represents most advanced economies, issued its warning as rising trade tensions between the United States and China have heightened concerns in boardrooms over the risks posed by integrated global supply chains.

While the pandemic opened our eyes to the risks of overdependence on a single trading partner, but the OECD now warns that swinging too far towards reshoring and trying to avoid international trade would be another mistake. Such a strategy would lead to domestic shocks and create major pockets of inefficiency – the very ones that globalisation had aimed to eliminate. That is the OECD’s message.

China: an unavoidable partner

It is something we are all aware of: since joining the World Trade Organisation, China has experienced an extraordinary industrial boom. Today, 30% of the world’s manufactured goods are produced in China, compared with just 15% in the United States and 5% in Germany. There’s no going back, especially as China is increasingly imposing export restrictions on critical raw materials to protect its strategic interests. It uses quotas, export taxes and licensing requirements for certain materials such as rare earth elements to preserve national resources, promote local processing, and strengthen its geopolitical leverage. China has therefore become a dominant trading partner, one that many countries and sectors, such as automotive, pharmaceuticals, and machinery parts, cannot avoid. A trade war hurts everyone, and the idea of bringing production back home seems utopian.

The OECD’s recommendations

The OECD is therefore logically calling for a drastic reduction in trade barriers to bring an end to this tariff war. It is also urging a renewed push for investment to prevent excessive price increases, especially given the growing budgetary risks and the fact that years of underinvestment have worsened the long-term challenges that most countries now face. Germany is currently confronting this harsh reality and is doing everything it can to escape the rut into which years of austerity have driven it.

Despite rising profits around the world in recent years, it is widely acknowledged that companies have often avoided fixed capital investment in favour of accumulating financial assets and returning funds to shareholders. Correcting this course will require significant effort, but it is necessary, if we are to secure a more promising future.