EMERGENCE OF TRADE BLOCS
That said, there are discrete trade blocs developing, but on a geopolitical rather than a geographical basis. Last May, an IMF study found that there were three major politically-aligned trade blocs emerging.
First, there was a US-leaning one that includes the US, Europe, Canada, Australia and New Zealand. Second, a China-leaning bloc including Russia, Belarus, Syria, and Eritrea. Finally, there was a third bloc filled out by countries like India, the ASEAN states and others in the “global south” that are non-aligned or neutral in their relations to the US and/or China.
According to MGI, there has been a decline in trade between non-politically aligned countries of about 7 per cent between 2017 and 2024. While tariffs and trade wars play a role, a good chunk of this was down to the shock of Russia’s full-scale invasion of Ukraine in 2022.
This is far less than the trade fragmentation seen during the Cold War, but it’s more significant economically, because back then global goods trade was 16 per cent of GDP, whereas now it is 45 per cent.
Also, as IMF first deputy managing director Gita Gopinath has noted, countries within trading blocs were integrating during the Cold War, whereas now they may actually be turning inwards. This is obviously true for the US, which is threatening tariffs on the very countries with which it has become economically closer over the past seven years.
But to really understand what’s changing in any given country, you have to dig into the nuances industry by industry. Consider, for example, the sharp increase in US imports of transport equipment from Mexico. You might think this is about importing less from China, but in fact it is about a decline in trade with Canada.
Likewise, while bilateral US-China trade is down, US import value dependent on China hasn’t declined much. This is partly because products that originate in China are being shipped to third countries before being sent to the US. As ever, tallying the reality of global trade is a tricky business.