Fragmentation of international trade

Economic and political tensions between the United States and China -the world’s two largest economies- have been escalating for several years, leading to a fragmentation of international trade and the imposition of numerous tariffs.

These measures have led to some changes in international trade patterns, but evidence that they have rolled back globalization remains limited.

WTO chief economist Ralph Ossa said Thursday, «We see in the data some signs of trade fragmentation linked to geopolitical tensions. Fortunately, widespread de-globalization has not yet arrived. The data suggest that goods continue to be produced through complex supply chains, but that the extent of these chains may have stabilized, at least in the short term.»

One indicator of the extent of global supply chains is the share of intermediate goods in world trade.

Estimates of this share exclude fuels from the calculation due to their price volatility.

In the fourth quarter of 2022, the share fell firmly below 50% and has remained so until the first half of 2023.

The change is not drastic: measured by the average of exports and imports, the share of intermediate goods has fallen to 48.5% in the first half of 2023, compared to an average of 51.0% in the previous three years.

Fragmentation

It is unclear whether this decline is due to geopolitical tensions or the recent global economic slowdown.

Whatever the reason, the data suggest that goods continue to be produced through complex supply chains, but that the scope of these chains may have peaked.

Other data suggest that trade may be reorienting along regional and political lines.

Also, the WTO analyzed the share of partner regions in selected economies’ total bilateral trade in parts and accessories, which is a subset of intermediate goods made up of machinery components and transportation equipment.

The share of Asian trading partners in U.S. bilateral trade in these goods rose from 39 percent before the pandemic to 43 percent in 2022, but has fallen to 38 percent so far in 2023.

Asia

During the same period, China’s share of U.S. bilateral trade increased from 11 to 12 percent before falling back to 10 percent.

Similar, but even less dramatic, changes are seen in Germany and Japan.

Meanwhile, China’s trade structure has remained stable, with the most notable change being an increase in the share of other regions (Africa, CIS and the Middle East) in parts and components trade, from 5.3% in 2019 to 8.5% in the first half of 2023.