Trade inTransition 2023
Global Report

Supported byTrade in Transition 2023

2

Contents
3

Foreword by DP World

4

About this research

6

Executive summary

8

Global trade: trends and expectations

16 Resilience matters
25 Sector deep dives
38 Regional Insights
56 Conclusion©Economist Impact 2023

Trade in Transition 2023

3

DP WORLD FORWARD

Making Trade flow –and the world move
One thing has become clear over past centuries and decades, without logistics
the world stops.
To keep it moving, businesses around the world must adapt when faced with major
challenges. We have seen supply chains emerging from the pandemic impacted
by geopolitical tensions and wrestle with policies potentially detrimental to theglobalised world we have become accustomed to.
New trends in regionalisation and reshoring are further changing thelogistics landscape. Like most other industries, logistics is undergoing its own
transformation. Emerging technologies, the drive to digitalise, new market entrants,
growing customer expectations, consolidation and new business models haveshaped the need for collaboration, diversification and innovation.
Sultan Ahmed
Bin Sulayem
Group Chairman
and CEO, DP World

That’s why I am delighted to welcome the third edition of “Trade in Transition”.
This Economist Impact-led annual global survey of over 3,000 trade and supplychain managers monitors and assesses these trends. Tracking sentiments andrecording current issues provides valuable insights into what is being done, andneeds to be done, to make trade flow—for the benefit of all.
Returning manufacturing to markets closer to home is one highlight of Trade inTransition this year. The survey found that twice as many companies as in 2021
are shifting manufacturing and suppliers from far-flung locations to their homemarkets. Continued inflationary pressures and being agile enough to expand into
stable and transparent markets are other key highlights.
I said earlier that trade benefits all and I am always encouraged by its capacity toresolve the issues that we face in our lives. Trade is an engine that creates jobs,
reduces poverty and increases economic prosperity. Indeed, over one billion
people have moved out of poverty because of economic growth underpinned by
global trade since 1990. Facilitating trade at borders, within borders and beyond
them is one of the solutions that we should all pursue.
As we move through 2023, real-time visibility, port-centric capabilities andsustainable supply chains will ensure companies can continue to find new
efficiencies in an increasingly challenging environment. Today, and in the years tocome, companies increasingly need simplicity with single distribution platforms
covering all elements of the supply chain to make their lives easier in an increasingly
noisy, fragmented and complicated world.
Without rapid transformation to keep pace with evolving demands for end-to-end
services, logistics runs the risk of being disrupted by new competitors. Adapting
to change and offering new capabilities are massive opportunities that will create
greater supply-chain efficiencies, wider market access and prosperity for the sector
at large as well as prosperity for the greater good.
I hope you find Trade In Transition 3 both thought provoking, insightful and ofinterest and I wish you all the best in 2023.
©Economist Impact 2023

Trade in Transition 2023

4

About this research

Trade in Transition 2023 is an Economist Impact
research programme, supported by DP World,which captures private-sector sentiment oninternational trade. In the inaugural programme,
launched in 2021, we explored the impact ofcovid-19 on companies’ trade operations. In
2022, the second year of the programme, we
explored how companies are navigating the ups
and downs of the global economic recovery
against the backdrop of an ongoing pandemic.
In this third edition we explore private-sector
sentiment on the trading environment shapedby global shocks, particularly geopoliticalshocks such as the war in Ukraine, but also
the sporadic covid-19 lockdown policies thatpersist in key markets. This year’s researchis also based on a global survey of senior
executives involved in their firms’ day-to-day
international trade decisions and transactions.
The survey of 3,000 respondents was conducted
between September and November 2022,
capturing the perspectives of executives across
six regions (North America, South America,
Europe, Middle East, Africa and Asia-Pacific).
As a further addition to our research weused quantitative techniques to assess themacroeconomic impact of three key global
scenarios, including 1) sustained inflation
rates and consequently higher than expected
monetary tightening; 2) the significant
deterioration in US, Taiwan and China tensions;and 3) the increasing use of technology intrade operations. Our economic modelling
exercise uses the standard Global Trade
Analysis Project (GTAP) model to estimate the1

impacts of these likely global events in termsof GDP, exports / imports and employmentoutcomes over the next 12 months.
The GTAP model is a multiregional, multisectoraland computable general equilibrium model thatassesses the macroeconomic impacts of policy
shocks. The model’s baseline, the GTAP 10 Data
Base, contains information on 65 commodities
and 141 global regions. These sectors andregions were aggregated into six geographicalregions and seven broad sectors (see Appendix)
for our modelling purposes. We derived inputs/
shocks for the model through our global survey
and secured responses from private-sector
executives on the extent of changes to exports
and imports under each scenario (see questionin the Appendix). The outputs of the modelare obtained as a percentage, which is theimpact compared to a baseline. We then use
the GDP data for 2022 derived from the data
hub of The Economist Intelligence Unit (EIU)
to quantify the impact in monetary terms.1
The survey findings were supplemented byin-depth interviews with trade experts andsenior executives across regions and sectors.
We would like to thank the following experts
for their time and insight (listed alphabetically):• Deborah Elms, executive director,
Asian Trade Centre• Stuart Harbinson, independent trade
policy adviser and former senior official
at the World Trade Organisation• Abel Kamau, trade policy manager,
Kenya Association of Manufacturers

http://data.eiu.com/default.aspx©Economist Impact 2023

Trade in Transition 2023

5

• Lalit Kumar Bhagat, director, material
planning and logistics, International Markets
Group (IMG), Ford Motor Company• David Lawrence, research
fellow, Chatham House• Angus MacNeil, chair, UK Trade SelectCommittee, House of Commons, UK• Anderson Martins, head of supply chain
and procurement, Nestlé Philippines• Rob Merrylees, policy manager (safety andnautical) and analyst, UK Chamber of Shipping• Fabrizio Opertti, manager, integrationand trade sector, Inter-American
Development Bank (IDB)• Sulaiman Pallak, regional manager of global
purchasing and supply chain, General Motors• William Alan Reinsch, senior adviser and
Scholl Chair in international business, Centre
for Strategic and International Studies (CSIS)• Oliver Stuenkel, associate professor,
Fundação Getulio Vargas (FGV), School ofInternational Relations, São Paulo, Brazil• Nangula Nelulu Uaandja, chief
executive officer, Namibia Investment
Promotion and Development Board• Rick White, president and CEO,
Canadian Canola Growers Association
The report was produced by a team ofresearchers at Economist Impact, including:John Ferguson – Project adviser
Melanie Noronha – Project director
Oliver Sawbridge– Project manager
Ashish Niraula – Lead analyst©Economist Impact 2023

Trade in Transition 2023

Executive summary

Against the backdrop of the covid-19 pandemic
geopolitical events, such as the war in Ukraineand US-China tensions, have created great
uncertainty for businesses. In response to theresulting supply disruptions, and in anticipationof a slowdown in trading activity in 2023,
businesses are focused on enhancing theirresilience for the longer term with the aim of
insulating themselves from future shocks.
Through changes to their trade operations
companies are endeavouring to take advantage
of small pockets of growth. The World Trade
Organisation (WTO) expects the volume
of world merchandise trade (an average ofgoods imports and exports) to grow by one
percentage point in 2023, compared with 3.5%
in 2022. So, amid all the disruption, there arestill opportunities for growth, but businesses
need to uncover where such opportunities lie.
In this report corporate perspectives are also
shared about how businesses are building
further resilience into their strategies,
responding not only to today’s shocks andtheir associated implications but also to
those that are likely to come hereafter.
The key findings of this report are:
1. Businesses are still prioritising

growth through market expansion.
The top drivers of export growth in 2023
are expected to be growing demand in
key markets (cited by 25% of executives
surveyed) and the expansion ofoperations into new markets (20%).
2. Inflation will be a persistent threat forbusinesses. Inflation is cited as the top

reason for pessimism about
global trade over the next 24 months
by the executives surveyed. According
to The Economist Intelligence Unit
(EIU), average global inflation in 2023
is forecast at 6.9%, compared with 9.9%in 2022 and 6.8% in 2021. The impact
both on the demand side (reducing thepurchasing power of consumers) and the
supply side (increasing input costs forbusinesses) will reduce the profitabilityof businesses severely.
3. Diversification is still the primary

approach to supply-chain
reconfiguration, but there is a
shift towards regionalisation andreshoring. The trend to bring supply
chains closer to “home” throughnearshoring/ regionalising or reshoringhas increased since our last Tradein Transition report. Nearshoring/regionalisation has increased by 8
percentage points and reshoring by
10 percentage points since our 2021
survey. There are multiple reasons forthis shift, from reducing the impactof higher transport costs to taking
advantage of government financial
incentives. Yet diversification is still
the primary strategy for overall cost
reduction and increased resilience(cited by 47% of executives surveyed).
4. While economics is driving supply-

chain reconfiguration, geopolitics is
also a critical factor. In general, cost

©Economist Impact 2023

Trade in Transition 2023

reduction is the top driver of corporate
supply-chain reconfiguration efforts,
followed closely by reduced risk of
disruption. However, 96% of executives
surveyed confirm that they are making
changes to their supply chains in
response to geopolitical events.
5. Resilience is being prioritised overshort-term profitability. Businesses
are thinking long term as they aresacrificing profitability in the immediate
term for increased resilience. On the
demand side, businesses say thatexporting to new markets and launching
new products in existing markets are
the most effective ways to increasedemand-side resilience. The adoption ofdigital tools for inventory management
and increasing co-ordination with
suppliers are the two most effective
supply-side resilience strategies.
6. Just-in-time is still dormant. Just-

in-case is the prevailing trend among
many businesses. Companies are
increasing their inventory buffers: onaverage, companies held 10.1 weeks
of inventories in 2022, compared with
8.9 weeks in 2021. Although increasing

inventories does push up costs, itappears to offset potentially greater
losses incurred through failure to holdsufficient inventory. With higher interest
rates in some of the largest economies,
the cost of working capital (including theopportunity cost of holding inventories)
is much greater.
7. The adoption of technology andincreased digitisation go hand inhand with the desire to achieve
greater resilience. Across technologies,
about 35% executives on average saythat in addition to just using digital tools
for inventory management they havestarted using advanced technologies
in their value chain, compared with
31% in 2021, and 29% of companies
say they are planning to adopt thesetechnologies, compared with 23%
last year. Furthermore, the share of
respondents who felt that advanced
technologies were “not applicable”
fell from 12% on average to 2%. With
resilience being a central theme in thisyear›s survey, executives are using
technologies to increase their agility
to respond to new challenges.

©Economist Impact 2023

Trade in Transition 2023

8

Global trade: trends
and expectations
The robust recovery the world anticipatedin 2022 never materialised. The shocks that
plagued global trade in 2020 with the onset ofthe covid-19 pandemic persist even today—
through old and new avenues. In China, theworld’s largest export market,2 the legacy of
pandemic-related lockdowns continues toblight the country through rising infections,derailing regional and global supply chains.
In addition, Russia’s invasion of Ukraine has
resulted in surging energy prices, supply
disruptions and protectionist policies,
reminiscent of the early days of the pandemic.

a contraction in the euro area of 0.3%
and anaemic growth of 0.2% in the US in
2023—the outlook for global trade is bleak.
Economists at the WTO predict only 1%
growth in global trade volumes in 2023.6

Despite these shocks, global trade remained
resilient in the first half of 2022.3 The World
Trade Organisation (WTO) estimates average
year-on-year growth of 4.3% in global trade
in real terms in the first five months of2022.4 In line with this, more than 70% of
respondents in our annual Trade in Transition
survey reported an expansion of theirinternational sales in the first half of 2022.
For the full year the WTO estimates trade
growth of 3.5% (according to figures releasedin October 2022), lower than the 4% initiallyforecast for the year.5 But with an economic
slowdown looming in key markets—The
Economist Intelligence Unit (EIU) forecasts

2

3
4
5

6

https://ec.europa.eu/eurostat/statistics-explained/index.php?title=China-EU_-_international_trade_in_goods_statistics#EU_and_China_in_world_trade_in_goods
https://unctad.org/system/files/official-document/tdr2022_en.pdf
https://unctad.org/system/files/official-document/tdr2022_en.pdf
United Nations Conference on Trade and Development, “Global merchandise trade exceeds pre-COVID-19 level, but services recovery
falls short”, December 9th 2021. https://unctad.org/news/global-merchandise-trade-exceeds-pre-covid-19-level-services-recoveryfalls-shorthttps://www.wto.org/english/news_e/pres22_e/pr909_e.htm#:~:text=The%20new%20WTO%20forecast%20estimates,than%20
what%20was%20previously%20projected.

©Economist Impact 2023

Trade in Transition 2023

9

Figure 1: Changes to exports and imports in the first half of 2022 (compared with H1 2021)
Exports
Expanded between 30-49%
16.2
Expanded between 10-29%
29.1
Expanded by less than 10%
20.8
Been flat
12.7
Contracted by less than 10%
6.9
Contracted by 10 -29%
2.9
Contracted by 30-49%
1.6
Contracted by 50% or more
1.8
0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

Percentage

Imports
Expanded by 50% or more
7.7
Expanded between 30-49%

13.3
Expanded between 10-29%
24.6
Expanded by less than 10%
20.1
Been flat
19.3
Contracted by less than 10%
7.9
Contracted by 10 -29%
3.7
Contracted by 30-49%
2
Contracted by 50% or more
1.5
0

2

4

6

8

10

12

14

16

18

20

22

24

26

Percentage
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.
©Economist Impact 2023

Trade in Transition 2023

10

Drivers of growth
The subdued growth in exports next year is
expected to be driven by three main factors,
according to the executives we surveyed. These
include “growing demand in key markets”, citedby 25% of respondents, followed closely by“expansion of operations into new markets”(22%) and “efficiency gains through digitisationof supply chains” (19%). The former points touneven growth expectations in different parts of
the world, where some countries are expected torecord robust economic growth in 2022 and 2023
(particularly the oil-exporting countries of the
Gulf Co-operation Council on the back of higher
oil prices, and potentially China if it manages torein in covid-19 cases). The Asia-Pacific region is
expected to be the outlier in terms of trade growth
because of higher consumption levels expectedin the more self-reliant economies of India,
Indonesia and the Philippines.7 However, foreignexchange stress is threatening this positive growth,particularly in some African and South Americancountries, of which businesses need to be mindful.
There will also be pockets of healthier growth incertain sectors in 2023. While the automotive
sector is only expected to see growth of 1%,
14 percentage points below 2019 levels, salesof electric vehicles are expected to increaseby 25%.8 Energy companies will be among thebiggest winners as a result of increased demand
from Asia. Demand for renewable energy alone
is expected to increase by 11%.9 Healthcare
spending will also increase in nominal US dollar
terms, given the ongoing effects of covid-19
and attention on the sector because of otherviruses such as monkeypox.10 There will bemany opportunities in the infrastructure sector.
Investment the world over will continue,
driven by legislative changes and initiatives,
7

8
9
10
11
12

from the US Infrastructure Bill to China’s One
Belt One Road initiative to the rebuildingof Ukrainian infrastructure.11 Information
technology is yet another sector that will see
growth as companies use these technologies
to predict demand and track supply.12
On the import side, 25% of executives
expect that rising production levels due to
growing demand will be a key driver in 2023.
Businesses are also confident about the impactthat technology will have on import growth,with executives citing this as the top reason
for optimism about global trade in general.
Over one-quarter of executives believe thatimport growth will be driven by an increase inproduction levels led by technological upgrades.
Around one-fifth of respondents also expect that
efficiency gains through supply-chain digitisation
will drive their imports in 2023. These responses
reflect the fact that firms are still investing in
improving efficiency as a way to recoup someof the costs incurred as a result of lower growth
rates (see chapter on “Resilience matters”
for more analysis of technology adoption).
Inflationary pressures
Corporate success will rely on how wellbusinesses are able to navigate the host ofchallenges facing them as they engage inglobal trade. Consistent with last year’s survey,
higher transport costs were cited as one of the
major impediments to export growth (cited by23%) and import growth (25%). On the export
side, supply shortages of key inputs have also
disrupted production levels, and ultimately
exports, for about 20% of executives.
Together, these challenges are contributing to
the highly inflationary environment in whichbusinesses are operating today. Additionally,

https://www.spglobal.com/ratings/en/research/articles/221128-economic-research-global-slowdown-will-hit-not-halt-asia-pacificgrowth-12573068
https://www.economist.com/the-world-ahead/2022/11/21/ten-business-trends-for-2023-and-forecasts-for-15-industries
Ibid.
Ibid.
Ibid.
Ibid.

©Economist Impact 2023

Trade in Transition 2023

11

geopolitical shocks, the resulting supplychain disruptions and pent-up demandfollowing the pandemic have also been
driving inflation in 2022. Average commodity
prices are projected to grow by 10% in
2022, which is a 26-year high.13 Overall,
The EIU expects inflation to reach 6.9% in
2023, compared with a rate of 9.9% in 2022.
Inflation is expected to ease slightly as theongoing monetary tightening slows down
economic growth and consumer demand.
Inflationary pressures are not expected tosubside even if China continues to loosen
its zero-covid policy (which is currently

creating supply-chain bottlenecks anddriving up prices). The supply disruption will
only be replaced by a surge in demand forseveral commodities as production ramps
up, sustaining high prices on average.14
Ultimately, higher costs mean reduced
profitability for businesses, which is a realand persistent threat for them as inflation is
expected to be sticky. As such, rising inflationis the top reason for pessimism about global
trade over the next two years, cited by 30%
of executives—significantly higher than the
20% who cited the economic recession.

Figure 2: Drivers of export and import growth in 2023
Growing demand in key markets

25
25

Expansion of operations into new markets

20.3
20.3

Improved efficiency through digitisation

18.1
18.1

Faster delivery times

16.5
16.5

Expansion of operations in existing markets

16.2
16.2

Lower transport costs

14.7
14.7

Adoption of competitive pricing strategies in key markets

13.6
13.6

Improved access to trade finance

13.2
13.2

Favourable foreign-exchange movements

12.8
12.8

Improved transport infrastructure in key markets

12.6
12.6

Lower tariffs in key markets

11.1
11.1

Sector promotion policies by governments in key markets
7.9
7.9
Reduction of non-tariff barriers
0

2

4

7.4
7.4

6

8

10

12

14

16

18

20

22

24

26

Percentage
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

13

14

https://pages.eiu.com/rs/753-RIQ-438/images/global-economic-outlook-q4.pdf?mkt_tok=NzUzLVJJUS00MzgAAAGIY2yj7x8eVsLJMfAaojabO8pwIvC-tU_VtpG0i2cQ8S3iQVURvjjlHyLWGsjxwVEGMUAFWohR2ZgsctrEaYzgZ00wQr5PmRSJCkd7IDu3OGFQxg
https://www.project-syndicate.org/onpoint/age-of-megathreats-war-climate-debt-inflation-technology-by-nouriel-roubini-2022-11©Economist Impact 2023

Trade in Transition 2023

12

Quantifying the impact of inflationary pressures
The isolated impacts of inflation on businesses and consumers at the regional level have been
quantified using the GTAP model (see “About this research” for more details). The impacts aremodelled based on the input shocks, which are the changes to exports and imports expected
over the next 12 months if inflation and monetary tightening persist (obtained from the global
survey of private-sector executives).
There are interesting regional differences worth noting. Europe seems to be taking the greatest
hit. Our modelling suggests that in the event of persistent inflation and monetary tightening
in 2023 Europe's GDP would be 0.2% lower than it would be in a business-as-usual scenario.
However, in terms of exports and imports by region the picture is mixed. In this scenario
of continued inflation and monetary tightening private-sector executives in Europe, North
America and Asia-Pacific expect exports to be 1% lower than they would have been if inflation
were to ease as expected in 2023, reflecting decelerated production levels in North America
and Europe and a fall in consumer demand reducing intra-regional exports.
For Asia-Pacific there are two reasons for expecting a decline in exports under this scenario.
Falling demand in North America and Europe, which are key export markets for Asia-Pacificcountries, particularly China, will reduce exports. In addition, lower production levels driven bymonetary tightening measures in response to inflation exceeding central bank targets in mostAsian economies will subsequently drive down exports.15 This is particularly true in the case of
consumer-facing exports, a study from S&P Global finds.16
Exports in the Middle East and South America are expected to be hit the hardest by rising
inflation and monetary tightening. Exports from these regions in 2023 are expected to decline
by 3.5% and 2.7%, respectively, compared with 2022. As a trade and travel hub, the countriesof the Middle East may see exports decline on the back of a slowdown expected in othermarkets due to high inflation and monetary tightening. As for South America, monetary
tightening policies by major central banks would render financing scarce, resulting in a
subsequent deceleration in activity.17
In this scenario impacts in Africa are negligible, with real exports expected to increase by 0.3%,
compared with a contraction in other regions. Although the situation will be challenging forresource-intensive economies and key commodity exports in the region, the outlook is not as
grim. Higher export prices and intense competition for Africa’s resources would still avert acontraction of their exports.18
While the model’s findings are consistent with the global discourse, the long-run impacts ofthese developments are yet to be seen.

15
16

17
18

https://www.imf.org/en/Blogs/Articles/2022/10/13/asia-sails-into-headwinds-from-rate-hikes-war-and-china-slowdown
https://www.spglobal.com/ratings/en/research/articles/220926-economic-outlook-latin-america-q4-2022-a-period-of-below-trendgrowth-ahead-12509793
https://www.imf.org/en/Blogs/Articles/2022/10/13/latin-america-faces-a-third-shock-as-global-financial-conditions-tighten
https://country.eiu.com/article.aspx?articleid=1952522378&Country=Nigeria&topic=Economy&subtopic=Outlook&subsubtopic=Overview#:~:text=African%20exporters%20will%20face%20a,markets%20in%20the%20year%20ahead.

©Economist Impact 2023

Trade in Transition 2023

13

Geopolitical shocks

The war in Ukraine is the most recent
example of this. Not only has it resulted insupply shortages of natural gas, ammonia andwheat from Russia and Ukraine, but it has
also forced companies to reorganise supply
chains, motivated either by the impositionof sanctions or for more altruistic reasons.

Beyond inflation and the bleak economic
outlook, geopolitical undercurrents are
influencing global trade. “There has been
a general shift in international trade
more towards being about geopolitics
rather than being about economics
and economic growth,” states David
Lawrence, a research fellow at Chatham
House, a London think-tank.

Similarly, ongoing trade tensions between
China and the US, as the two economic
giants compete for supremacy, are causing
companies to create two streams ofoperations: maintaining Chinese operations
to serve the local market and creating
new production bases in Asia to serve therest of the world. For instance, Samsung
stopped manufacturing smartphones,
TVs and PCs in China in 2019 and 2020and shifted its global production base toVietnam. Similarly, Apple has been moving“There has been a general shift ininternational trade more towards being
about geopolitics rather than being
about economics and economic growth.”
David Lawrence, research fellow, Chatham House

Figure 3: Reasons for optimism about global trade in 2023 and 2024
New technologies improving the ability to monitor supply chains and increase efficiency

25.4

The decline/end of the current pandemic

25

The end of the war in Ukraine

24.3

Rise in global economic growth rates

22.8

Growing consumer/middle class in emerging markets

18.8

Political stability in target markets/regions

18.5

Increased attention and support from national governments

18.1

Improved connectivity in physical infrastructure

17.1

New trade agreements lowering tariff and non-tariff barriers
0

2

4

6

8

10

17
12

14

16

18

20

22

24

26

Percentage
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

©Economist Impact 2023

Trade in Transition 2023

14

parts of its iPhone production lines to Indiaand some assembly lines to the US. For its
AirPods Apple has chosen Vietnam as theprimary production hub.19 In 2022, 5% ofApple products were made outside China,

but JPMorgan Chase, a bank, predicts
that this will rise to 25% in 2025 (stillleaving a sizable portion manufactured in
China).20 As such, geopolitical tensions areanother source of supply-chain shifts.

New
technologies
improvingability to monitor
supplychains andincrease
efficiency
Figure4: Reasons
forthepessimism
about
globaltrade
in 2023
and 2024
25.4
Rising inflation

30.3

Increased cost of living (i.e., rising transport, energy and food costs)

21.2

Economic recession in key markets (i.e., the outcome of interest-rate hikes)
20
Covid-19 variants forcing many countries back into lockdown or ongoing lockdowns
19.2
Instability caused by geopolitical uncertainty, e.g. the war in Ukraine, tensions between the US and China
17.4
Global warming and extreme weather patterns leading to supply-chain disruptions
12.7
Cybersecurity breaches

10.8

The increasing number of free-trade agreements and regional trade agreements
9.5
Tight labour markets

9

Rising protectionism from governments
8.3
The fragmentation of the world into trade blocs/ regionalisation
8.2
Public opposition to trade/ globalisation
7.2
Ageing populations leading to shrinkage of the workforce/difficulty attracting skilled talent
7.2
Outdated/ inadequate transport infrastructure
7
The demise of the WTO
5.4
0

5

10

15

20

25

30

35

Percentage

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

1920

https://www.asiaperspective.com/move-manufacturing-china-to-southeast-asia/
https://www.economist.com/business/2022/10/24/the-end-of-apples-affair-with-china©Economist Impact 2023

Trade in Transition 2023

15

Quantifying the impact of geopolitical shocks
On aggregate, a significant deterioration in US-China tensions (as opposed to continuing as
they are currently) is expected to have a negative impact on global trade and GDP. As per our
GTAP model (see “About this research” for more details), GDP losses under this scenario are
fairly low and are consistent for all geographical regions. The losses range from 0.01% to 0.07%
negative growth, except for the Middle East, where we observe a 0.31% reduction in GDP in
2023. However, the largest hit will be taken by Europe and North America, with a 0.07% decline
in GDP growth in 2023, which roughly translates into US$17.4bn and US$16.1bn, respectively.
Interestingly, Asia-Pacific suffers the smallest decline in GDP under this scenario, with areduction of just 0.01%. Protectionist tariff increases have already been implemented, andbusinesses in China have adjusted to these accordingly. Any future tensions are unlikely toincrease tariffs significantly. Moreover, bilateral trade agreements between the US and other
Asian countries, such as Japan, South Korea and Vietnam, would absorb the impact of a USChina tension shock through diverting trade to these geographies.
Some countries in Asia Pacific, such as India and Vietnam, even stand to gain from worsening
trade and geopolitical tensions, if companies move facilities out of China into these markets.

The way forward for businesses
The uncertainties caused by global shocks arepushing companies towards optimising theirtrade operations for resilience and growth.
Navigating these turbulent and uncertain waters
is no easy feat, particularly with lower prospects
for growth in 2023. Times are tough, and toughdecisions will have to be made. That raises
the question: how are companies worldwide
strategising their next move? “Companies are

more responsive now,” says Mr Lawrence from
Chatham House. “They are responsive to where
they think things are going, they are responsive
to consumers, they are responsive to regulations,and so some companies will benefit from this.
A massive risk assessment and fragmentation
are under way.” No matter what, the responses
from companies are essentially geared towards
building resilience, be it in terms of reconfiguring
supply chains or finding new sources of demand.
This will be explored in-depth in the next chapter.

©Economist Impact 2023

Trade in Transition 2023

16

Resilience matters
In a fractured trading environment characterised
by geopolitical tensions, inflationary pressuresand supply disruptions, among others, businesses
worldwide are united in one goal: the need toincrease resilience in their trade operations.
Businesses are thinking long term as theysacrifice profitability in the immediate term,
continuing their search for efficiencies in otherparts of the value chain. Indeed, a crucial finding
in this year’s edition of Trade in Transitionis that the most effective demand-side andsupply-side resilience strategies adopted bybusinesses are also the costliest (see Figure 5).
But it is still economics that underpins theirapproach to supply-chain reconfiguration andchoice of strategies for resilience, as we explore inthis chapter. We discuss the shifting direction of
trade, the driving forces behind these shifts, andthe resilience strategies that are yielding results.

©Economist Impact 2023

Trade in Transition 2023

17

Figure 5: The most effective demand- and supply-side strategies for resilience are also the costliest
Demand-side resilience strategies
Most effective

Most costly

Exporting products to new markets

41.7

38.6
Launching new products in existing markets
37.4
Increased value-add through services

37.3

Bundling new services with existing products

5

38.8

31.6
30.9

Reducing product range

0

39.3

27.7
27
10

15

20

25

30

35

40

45

35

40

45

Percentage

Supply-side resilience strategies
Most effective

Most costly

Increasing use of digital tools for inventory management

30.4
29.7

Increasing co-ordination with suppliers
27.3Standardising inputs

26
26.3

Horizontal integration - outsourcing more supply-chain responsibilities

Vertical integration - insourcing more supply-chain responsibilities

22.8
22.8

Increasing inventories

5

24.7
23.6
24.3
23.5

Reducing the number of single-source suppliers

0

30

22.3
10

15

24.1

20

25

30

Percentage

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.
©Economist Impact 2023

Trade in Transition 2023

18

Figure 6: Companies’ primary approach to reconfiguration and their motivations
2021

2022

Diversifying your firm’s supplier base (e.g. increasing the number of suppliers for some input)

48
47

Nearshoring/regionalisation: switching to regional suppliers to shorten your supply chain
12
20
Reshoring: shifting manufacturing and suppliers from foreign locales to your firm’s home market
515Working with fewer suppliers regardless of location: reducing the number of tiers or links within your firm’s most critical supply chains
36
10
We are currently not reconfiguring our supply chain
8
0

5

10

15

20

25

30

35

40

45

50

Percentage
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

A new chapter for globalisation
Diversification continues to be the dominant
approach to reconfiguring trade operations,cited by 47% of the 3,000 executives surveyedaround the world, almost exactly the same aslast year (48%). But reducing the length of
supply chains, either through regionalisation or
reshoring, has risen sharply since the 2021
survey (see Figure 6). About 20% of executives
are pursuing regionalisation as their primary
approach to reconfiguration (versus 12% in2021), and 15% are pursuing reshoring (versus
just 5% in 2021).

“You rarely have two or three
suppliers for an input that are identical.
Usually, one of them is significantly more
effective, efficient, faster, and that’s
your preferred supplier.”
Deborah Elms, executive director, Asian Trade Centre

21
22

Diversification as a strategy has clear economic
benefits, according to the International Monetary
Fund (IMF). In a paper published in 2022 theIMF found that higher diversification of suppliers
reduces the loss in GDP through a supply
shock by almost 50%.21 This is the aggregate ofcorporate-level impacts, where having multiple
suppliers in different regions or even different
countries within a region can reduce exposure
to and losses from a supply disruption. “Asmuch as possible, our strategy is to deal withmultiple suppliers that we can leverage,” says
Sulaiman Pallak, regional manager of global
purchasing and supply chain at General Motors.
Diversifying the supplier base is complemented
by efforts to standardise inputs, designed
to increase substitutability in sourcing andproduction. This strategy is among the top threemost effective strategies (see Figure 5) cited byjust over one-quarter of executives surveyed(26%). For example, General Motors has reduced
the number of semiconductor chip types it isusing in its cars from 60 to three unique typesof microcontrollers, such that one chip has
multiple uses in a car.22 In this way, companies
can move away from a few specialised suppliers
and source from multiple generic distributors.

https://www.imf.org/en/Blogs/Articles/2022/04/12/blog041222-sm2022-weo-ch4
https://www.imf.org/en/Blogs/Articles/2022/04/12/blog041222-sm2022-weo-ch4©Economist Impact 2023

Trade in Transition 2023

But putting this theory into practice is easier
said than done. “You rarely have two or three
suppliers for an input that are identical,”states Deborah Elms, executive director
at the Asian Trade Centre. “Usually, one ofthem is significantly more effective, efficient,faster, and that›s your preferred supplier.”
For critical inputs with a limited number ofsuppliers companies are setting up long-term
agreements. At General Motors, for example,
Mr Pallak explains their strategy: “For battery
raw materials that are in high demand there
are very few suppliers, so we have structured
five- or ten-year agreements with them.”
This allows companies to secure supplies ona priority basis and deepen co-ordination
with these suppliers to gain more visibility on
inventory levels. A recent study of Indian firms
showed that companies investing in closer
relationships with suppliers were more resilient.23
However, this strategy requires the heft of amultinational with a large production base,leaving smaller firms at a clear disadvantage.
Diversification matters on the demand side
too. Exporting products to new markets andlaunching new products in existing markets are
the two most effective demand-side resiliencestrategies cited by 42% and 39% of executives,
respectively (see Figure 5). One study foundthat adding one export destination can reducethe impact of tariff shocks by 0.031 standard
deviations.24 So, taking a diversification
approach can help to insulate companies
from global shocks and contribute to securing
the long-term health of their business.

19

The ‘R’ words
Beyond diversification, the shift toregionalisation and reshoring has been
sharp but unsurprising. Protectionism
and diversification of the global trading
system has only increased since the start ofthe covid-19 pandemic. Among the mostprominent examples of this are the USChina trade tensions over semiconductors.
Recently the US signed into law the Creating
Helpful Incentives to Produce Semiconductors
and Science Act of 2022 (CHIPS Act).25 Thislaw entails a US$52.7bn subsidy in total tosupport chip manufacturing, earmarked
primarily for the construction of “fabs”, orsemiconductor fabrication plants, over the next
five years. However, the act prohibits fundingfor companies that expand semiconductor
manufacturing in China and other countries
regarded as threats to national security.26
But although reshoring promises more
control over inputs in the short run, it leaves
businesses exposed to regional shocks that
could significantly debilitate operations. For
example, as the US increases its production ofsemiconductors, it will increase its reliance on
suppliers of mineral raw materials, such as Chile.
At present US companies are at risk of facing
higher tax rates in Chile because of an unratified
treaty between the two countries. As a result,companies may have to pay rates of 44%,compared with the 35% its competitors pay inother countries where the treaty is in force, suchas China, Japan, Canada, Australia and the UK.27

https://www.richmondfed.org/publications/research/economic_brief/2022/eb_22-46#:~:text=We%20look%20at%20the%20COVID,maintaining%20relationships%20with%20their%20suppliers
https://www.sciencedirect.com/science/article/pii/S002219962200040X
25
https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-chips-and-science-act-heres-whats-in-it
26
https://www.pwc.com/us/en/library/forward-now-accounting-business-news/chips-act.html
27https://mineralsmakelife.org/blog/how-the-u-s-chile-tax-treaty-protects-mineral-supply-chains/
23

24©Economist Impact 2023

Trade in Transition 2023

20

Grappling with geopolitics“An enemy now might not be an enemy in ten years’ time,” says Angus MacNeil, chair of the
UK Trade Select Committee at the House of Commons. The uncertainty surrounding most
geopolitical crises, especially those that even the most experienced experts deem unlikely tomaterialise (read: Russia invading Ukraine), is one of the greatest threats facing companies’
trade operations. Almost all executives surveyed (96%) report that they were making changes
in response to geopolitical events, ranging from the war in Ukraine to US-China trade tensions.
The war in Ukraine has involved cyber-attacks which could escalate into full-scale, state-on-statecyber-attacks, further impacting business operations. For instance, the shutdown of a nationalgrid, likely to be targeted by such attacks, would severely disrupt business operations. Moreover, afurther deterioration of the US-China relationship, specifically as a result of tensions over Taiwan,
would force some markets and companies to pick sides and operate two supply chains.28
Companies are relying on a range of strategies to respond to geopolitical events (see Figure7). These include expanding into more stable and transparent markets (cited by 33% ofexecutives), increasing the length of supply chains to hedge against risks (30%) and undertaking
more due diligence (29%).
In particular, the need to undertake more due diligence places an unnecessary burden
on companies already saddled with high transport and inventory costs. “I just feel all of
this is just complicating the system more for businesses,” says Deborah Elms, executive
director of the Asian Trade Centre. Policymakers and multilateral organisations such as theWorld Trade Organisation have an obligation to resolve trade-restrictive issues and create
stable, predictable environments in which businesses, both local and international, canoperate and thrive (research shows that a one percentage point increase in uncertainty
can lead to a decrease in global trade of 0.02 percentage points).29 As such, current
geopolitical issues deserve urgent attention. The global economic outlook depends on it.
Figure 7: Corporate changes to geopolitical events

32.7%

27.6%

27.6%

Expand into
stable markets

Reduce numberof markets

Increase lengthof supply chains

27.2%
Decrease supply
chain length
to reduce
exposure

27%
Decrease supply
chain length
to reduce costs

29.3%

Geopolitical

4.2% events do not shapeMore duediligence

trade operations

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

https://pages.eiu.com/rs/753-RIQ-438/images/EIU_Risk%20outlook%202023.pdf?mkt_tok=NzUzLVJJUS00MzgAAAGIaEkuYgAAsZYwEtqg9KkWtSefU_Zxq9xMbAalFT5RogHvYsueoOHFMrTBFK55iwL0viFgllWFeM7SOWxT5VkmClSmylk3e2owoHTJX1C1Lek19A
29
https://blogs.worldbank.org/trade/how-policy-uncertainty-hurt-world-trade-2019#:~:text=The%20results%2C%20which%20are%20
robust,and%20services%20trade%20volume%20growth.
28©Economist Impact 2023

Trade in Transition 2023

21

Figure 8: Top motivations for companies’ primary approach to supply-chain reconfiguration(Executives ranked up to two top drivers)
Overall cost reduction

Reduced risk of disruption

Government financial incentives

Local content mandates

Percent
70
65
60
55

62

61
57

56

60

58

55
55
52

50
45
40

43

41

43

35

35

33

32

30

42

31

25
20
15
10
5
0

Diversification

Regionalisation

ReshoringWorking with fewer suppliers

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

But while geopolitical considerations and local
incentives or mandates are certainly playing
a role in nearshoring, the primary driver isstill economics, according to the executives
we surveyed (see Figure 8). Although “local
mandates” were a driver of reshoring for a slightly
higher percentage of executives (35% vs 32%
for diversification), “overall cost reduction” wasthe top driver (cited by about 60% of executives
on average), followed closely by “reduced risk of
disruption of critical inputs” (56%). “Economics
is always going to win out against politics,”
summarises William Reinsch, senior adviser
and Scholl Chair in international business at
the Centre for Strategic and International
Studies (CSIS), an American think-tank.
The prevailing sentiment behind some of theseresilience strategies, particularly on the supply
side, is to prepare for the worst, just in case. As
Stuart Harbinson, an independent trade policy

adviser and former senior official of the World
Trade Organisation, explains: “Companies arelooking at their supply chains and considering
what alternatives, what fallbacks they haveif things go really pear-shaped.” Indeed, theshift in supply-chain philosophy from “just intime”—that is, operating with less than a twoweek inventory buffer—to “just in case” since
the start of the covid-19 pandemic has only
become more entrenched. Companies haveincreased their inventory buffers and were
holding 10.1 weeks of inventories on averagein 2022, compared with 8.9 weeks in 2021.
“The just-in-time concept was introduced tomake sure that we have the lowest cost of
manufacturing a product,” says Lalit Kumar
Bhagat, director for material planning andlogistics at the International Markets Group(IMG) of the Ford Motor Company. “With thecurrent situation [with less predictability],©Economist Impact 2023

Trade in Transition 2023

22

you are losing more money by keeping lessinventory.” When critical input supplies are
disrupted, companies without sufficientbuffers have to pause production, which
reduces output and ultimately sales.

peak prices. Companies are using price derivatives
as a way to manage price risks, with Procter& Gamble and Nestlé reportedly doing so to
manage price risks for primary commodities.30,31

But global supply-chain managers are at a
crossroads. Against the backdrop of increasing
interest rates, the opportunity cost of working
capital (i.e. cash locked in inventories) is high. In
addition, an impending deceleration in global
demand may ease inflationary pressures, leaving
corporations holding inventories purchased at

This explains some mixed feelings about holding
inventory buffers and serves as a rationale fora surprising finding. In our survey, “increasing
inventories” was considered the least effective
resilience strategy, cited by 22% of executives,compared with 30% who cited the increasinguse of digital tools in inventory management.

Figure 9: Average inventory held by companies, 2022 vs 2021
100

2
7

90

14

2
5
11
27

80

27
70

Percentage

60

26
50

24

40

30

12

15

6-12 month buffer

20

10More than 1-year buffer

3-6 month buffer

13

14

1-3 month buffer
2-4 week buffer
2-week buffer

0

Operating just-in-time
2021

2022

Source: Economist Source: Economist Impact Trade in Transition survey, conducted
September-November 2022 and September-December 2021.

30
31

https://s1.q4cdn.com/695946674/files/doc_financials/2022/ar/2022_annual_report.pdf
https://www.nestle.com/sites/default/files/2022-07/2022-half-year-report-en.pdf©Economist Impact 2023

Trade in Transition 2023

23

Digitalisation for resilience
As stated above, increasing the use of digital
tools for inventory management is the mosteffective supply-side resilience strategy,
according to 30% executives surveyed (seeFigure 5). Digital platforms to engage withcustomers and suppliers were still the mostwidely adopted technology in 2022 (citedby 51% of executives), as in 2021. This isvital for co-ordinating with suppliers, the“Companies are looking at their supply
chains and considering what alternatives,
what fallbacks they have if things goreally pear-shaped.”
Stuart Harbinson, independent trade policy adviser and former senior
official at the World Trade Organisation

second-most effective supply-side resiliencestrategy (also cited by 30% of executives),
ultimately offering executives more visibilityof inventory levels and distribution networks.
The highest share of companies also started using
5G technologies (39%) and the Internet of Things(36%) in 2022, offering valuable real-time insights.
But these tools go beyond just cargo tracking.
“It›s not just about dashboards and reporting,but on the demand side, how we can be better inpredicting demand,” explains Anderson Martins,
head of supply chain and procurement at Nestlé
Philippines. Above all, it is clear that companies
around the world are embracing the use oftechnology for their supply-chain management.
The most powerful indicator of this may be theshare of executives who stated that advanced
technologies were “not applicable”—just 2% on
average in 2022, compared with 12% in 2021.

Figure 10: Adoption levels of advanced technologies in supply chains
Already using in 2021

Started using in 2022

Planning to use in 2023

Don’t know/NA

Digital platforms to do business directly with customers or suppliers
51.3
Advanced automation and robotics to achieve greater efficiencies
25.4

32.5

16.2 034.8

38.31.5 1.5

Artificial intelligence, big data analytics and predictive analytics to gain real-time insights and forecast disruptions
28.6
33.2
Blockchain to improve traceability, security and data protection
28.3

34 4.2

34

33.8

4

Internet of Things for real-time tracking and monitoring
46.2

35.5

3D printing to enhance product customisation and decentralise production
28.5

34.4

35.81.3 1.3

Cloud computing to enhance agility, profitability, and competitiveness
42.4

35.2

5G for greater connectivity, speed and reliability
28.6
0

10

20

30

18.3 021.11.3 1.3

39
40

50

60

31.9
0.5 0.5
70

80

90

100

Percentage

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

©Economist Impact 2023

Trade in Transition 2023

24

ESG for competitiveness
Environmental, Social and Governance (ESG)
considerations within a supply chain range fromthe carbon emissions of the distributors of acompany’s products to labour rights at a supplier’s
facility. Such factors are important to consider,as more than 80% of consumer companies›
greenhouse gas emissions come from their supply
chains.32 Importantly, the International Labour
Organisation (ILO) estimates that over 17m people
are exploited in private-sector business operations
and supply chains.33 More than just curbing
these damaging practices, investing in supplychain ESG initiatives can enhance companies’
competitive advantage and is also linked to aquicker recovery post-crisis.34 Therefore, having
a focus on ESG can reduce both harm to theenvironment and business costs significantly.35

From our survey it is evident that companies
are taking a range of actions to achieve their
ESG goals. The top two among these are“aligning reporting to ESG frameworks such as
the Sustainable Accounting Standards Boards”
and “identifying specific ESG metrics relevantto the business”, each cited by about 33% ofexecutives (see Figure 11). But many otheractions, including investing more than 5% of theircompany’s profits, are being implemented by asimilar share of companies (31%). This shows thatcompanies are moving beyond the initial stagesof just aligning with frameworks and developing
monitoring systems to actually dedicating
significant financial resources to meeting theirgoals. With environmental supply-chain risks alone
estimated to cost companies US$120bn by 2026,
businesses need to ensure that their investments
prevent or reduce such costs sufficiently.36

Figure 11: ESG initiatives adopted by companies
Increased reporting to ESG guidance frameworks

32.9

Identified specific ESG metrics relevant to the business

32.8

Established a team focused solely on implementing ESG policies

31.7

Conducted a national-level audit of countries’ regulations

31.1

Invested capital totalling more than 5% of company profits into ESG policies

31

Invested capital totalling less than 5% of company profits into ESG policies

28.1

Conducted an ESG audit across all tiers of our supply chain

25.2

Updated procurement policies and selection criteria to focus more on ESG

22.8

Currently none but expecting implementation in 2023
5.6
Currently none with no plans for future implementation
2
0

5

10

15

20

25

30

35

Percentage
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

https://www.mckinsey.com/capabilities/sustainability/our-insights/starting-at-the-source-sustainability-in-supply-chainshttps://www.ilo.org/wcmsp5/groups/public/---ed_norm/---ipec/documents/publication/wcms_854733.pdf
https://corpgov.law.harvard.edu/2020/08/14/the-other-s-in-esg-building-a-sustainable-and-resilient-supply-chain/35
https://www.mckinsey.com/capabilities/sustainability/our-insights/starting-at-the-source-sustainability-in-supply-chains36
https://www.cdp.net/en/research/global-reports/transparency-to-transformation
32
33

34

©Economist Impact 2023

Trade in Transition 2023

25

Sector deep divesIndustrial (automotives)
With around 30,000 inputs going into the
production of a car,37 supply chains are criticalto this sector. According to Mr Kumar Bhagat at
the Ford Motor Company, the three biggest risks
to his industry in the last two years have been
covid-19, the war in Ukraine and semiconductor
shortages. All have inflicted significant
disruptions to supply chains. With suchdisruptions, single sourcing is very risk prone.
Diversification is therefore still the number one
supply-chain strategy for this sector, with 46.8%
of respondents citing this as their primary policy.
According to Mr Kumar Bhagat, automotive
companies may still have “a global player, butthey will have to have a backup player who
can supplement inputs if shocks arise”.
Rising inflation—and therefore higher input
costs—is the main reason for pessimism
regarding global trade in this sector, cited byover one-quarter of all executives surveyed. To
mitigate against increased costs, executives have
had to alter supply chains to get the best price.
A single approach to supply-chain management
does not suffice for this sector: the promotionof inputs which can be regionalised or localised
is also necessary. This will provide businesses
with greater control over parts of their supply
chains, which is reflected in our survey, wherethe vertical integration of supply chains is rated
more highly in the industrial sector than in37

the other sectors. However, the key is not toregionalise or localise everything, rather justa “few critical commodities”, notes Mr Kumar
Bhagat. Greater control of the supply chain
also comes with reducing suppliers for critical
inputs, specifically semiconductors. Mr Pallakof General Motors says that his company has
consolidated its imports of semiconductors to ahandful of suppliers to maintain greater control.
Not only is a supply-chain strategy important,but so is also the need to maintain visibility
and build trust, which is a central component
in order to maintain consistency of supply.
Increasing co-ordination with suppliers iscited as the second-most important factor for
supply-chain strategies in our survey. The firstis the use of digital tools, which is also criticalfor supply-chain visibility. However, this is alonger-term strategy, as companies need timeto test different technologies and suppliers. As
such, the real benefits are likely to materialise
one to two years after implementation.
That said, efficiency gains through the further
adoption and development of technology do
not negate the need for just-in-case supply
chains. As the world is less and less predictable,
there is still a need to rely on a just-in-case
supply-chain model. Most executives (49%)
are maintaining inventories of between
two weeks and three months, as holding
inventory to insulate the company is critical.

Kevin Quinn, director of additive design and manufacturing, General Motors (https://www.autodesk.com/customer-stories/general-motors-generative-design)©Economist Impact 2023

Trade in Transition 2023

26

Figure 12: Approaches to geographical reconfiguration of supply chain adopted by industries(automotive)
Diversifying your firm’s supplier base (e.g. increasing the number of suppliers for some input)

46.6

Updated procurement policies and selection criteria to focus more on ESG
22.8
Nearshoring/regionalisation: switching to regional suppliers to shorten your supply chain
21.4
Reshoring: shifting manufacturing and suppliers from foreign locales to your firm’s home market
16.3
Working with fewer suppliers regardless of location: reducing the number of tiers or links within your firm’s most critical supply chains
8.7
We are currently not reconfiguring our supply chain
7.1
Currently none but expecting implementation in 2023
5.6
Currently none with no plans for future implementation
2
0

5

10

15

20

25

30

35

40

45

50

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

Technology is not just important for supplychain management in this sector. Using
technology for production is increasingly
important. In our 2022 Trade in Transition report
General Motors stated that they were planning
to use 3D printing for automotive production.
The adoption of this technology will impact
global sourcing patterns, as it will allow moremanufacturers to produce intermediate andfinal goods closer to their end use. Plans for
3D adoption are progressing and are on track,with Mr Pallak stating that they are making
good progress on this front. Once fully rolled
out and operational in the coming two years,
supply chains are likely to undergo significant
changes by having more component parts
produced near the location of final assembly.
As an industry that is considered strategicallyimportant in many manufacturing countries,
the automotive sector is often at the whimof government mandates or strategies. While
companies are able to adapt to certain changes,
barring inputs from certain regions or mandating
domestic production will significantly impede
them. William Reinsch, School Chair andsenior adviser at the Centre for Strategic andInternational Studies states that “the flat out
38prohibition, starting in 2024, of using Chinese
minerals in US produced EV batteries will slow
down the transition to EVs in the US and lead toa less globally competitive US auto industry.”
Governments need to be more targetedwith their policies so as not to cause
businesses unnecessary harm anddisruption, adopting a more consultative
approach to policy development. Moreover,
governments need to ensure that they are
consistent with changes and open with theircommunication to businesses, as it is not theadded regulation that necessarily inhibits
businesses but rather the uncertainty.
Consumer goods
Despite a bleak economic outlook, sales in
the consumer goods sector are expected
to increase by nearly 6% in 2023.38 This isconsistent with our survey results, where
the majority of respondents in the sector
expect both exports and imports to increaseby between 10% and 30% in 2023 comparedwith 2022. However, in subsequent years thisdemand is expected to cool slightly because ofhigher household debt and borrowing costs.

EIU, Consumer goods and retail report: Non-food products, October 2022.

©Economist Impact 2023

Trade in Transition 2023

27

While demand will remain for 2023, thesurvey highlights that supply-side issues
will dampen the growth of the sector, with
supply shortages ranked as the secondhighest limitation to export growth in 2023.
In response, consumer goods companies
are undertaking risk mitigation measures toreduce the impact of supply-side disruptions.
For example, over half of the executives wesurveyed are maintaining inventory buffers
ranging from two weeks to three months.
Higher transport costs remain the top limitation
for companies wanting to increase exports
and imports in 2023. This is consistent withprevious years. But contrary to this finding,lower transport costs were rated as theprimary growth drivers by 15.1% and 18.5%of respondents, respectively, for exports andimports in 2023. According to Mr Martins,“the global shipping crisis is much better than
before. It›s a matter of balancing supply anddemand. We’ve seen some new ships coming
to industry, while on the demand side there
is a deceleration in the US and China.” Whendisaggregating consumer goods companies toonly those involved in the raw material stageof the value chain, higher transport costs areranked as an export limitation by just 12.5% ofcompanies, down by over 10% when comparedwith companies involved in the entire supply
chain. A decline is also apparent for imports.
Therefore it matters which area of consumer
goods a business is in, and at what stage ofthe value chain it finds itself. A one-size-fitsall approach cannot be taken in this sector
because of the diversity apparent within it.

Figure 13: Limitations with increasing exports of consumer goods in 2023
Higher transport costs

23.1

Supply shortages of key inputs

20.3

Higher tariffs, or uncertainty around tariffs, in key markets

16.5

Unfavourable foreign-exchange movements (that increase the cost of exports)
Falling demand in key markets due to economic uncertainty

15.7
14.3

Limited access to trade finance

12.5

Slower delivery times

12.5

Contraction of operations in existing markets

12.4

Uncompetitive pricing in key markets

11.8

Increase in, or uncertainty around, non-tariff barriers (e.g. sanctions, subsidies to local firms, quotas etc.)
11.8Lack of protection and security across the supply chain

11.4

Lack of access to digital tools for supply-chain management
10.6
Poor transport infrastructure in key markets (e.g. roads, ports, warehouses)
9.4
We do not expect any limitations
1.6
Other, please specify
0

2

4

6

8

10

12

14

16

18

20

22

24

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

©Economist Impact 2023

Trade in Transition 2023

28

Figure 14: Limitations with increasing imports of consumer goods in 2023
Higher transport costs

24.9

Increased inflation and economic uncertainty, leading to higher input costs

24.5

Fall in production levels driven by supply shortages

17.1

Higher tariffs, or uncertainty around tariffs, in your country of operations

16.7

Slower delivery times

15.5

Fall in production levels due to reduced demand

13.7

Unfavourable foreign-exchange movements (that increase the cost of imports)
13.1
Poor transport infrastructure in your country of operations (e.g. roads, ports, warehouses)
12.5
Increase in, or uncertainty around, non-tariff barriers in your country of operations (e.g. quotas, sanctions etc.)
11.6
Limited access to trade finance

11.4

Lack of protection and security across the supply chain
10.8
Lack of access to digital tools for supply-chain management
6.6
We do not expect any limitations
2.2
Other, please specify
0

2

4

6

8

10

12

14

16

18

20

22

24

26

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

The decline of the pandemic is rated as
the number one reason why the sector is
optimistic about global trade. This is again
linked to the supply-side issues that dampened
growth significantly. But the biggest reason
for pessimism is the increase in inflation, as
higher costs of essential goods mean that
there will be less disposable income to spend
on non-essential goods. Furthermore, becauseof the higher cost of living consumer goods
companies cannot pass significant costs on
to consumers. Companies “need to try as
much as we can to find efficiencies to protect[the consumer]. Otherwise, the profitability
will be impacted. One that is important is a
39
40

short-term view to protect the long term.
Because if we just go and increase prices, wemight lose competitiveness. That’s what we
don’t want to do,” comments Mr Martins.
Second-hand goods traders stand to benefit
as consumers will opt to buy goods that eat
up a smaller proportion of their budgets.39
To take advantage of this trend, companies
could look at introducing new aspects totheir business models, such as refurbishment.
Lululemon has done this with its “Like New”
initiative40. These initiatives also meetdifferent ESG requirements, which is an
important consideration for the sector.

EIU, High inflation bodes well for second hand goods consumption, April 2022
https://edition.cnn.com/2022/04/22/cnn-underscored/reviews/lululemon-like-new-launch©Economist Impact 2023

Trade in Transition 2023

29

As was the case in 2021, consumer goods
companies are continuing to diversify their
supply bases regardless of location, cited by over
40% of executives. However, working with fewer
suppliers is a bigger trend in this sector thanin the other sectors surveyed. Strengthening
relationships with suppliers has been foundto make supply chains more resilient.41 The
supply chains of firms that maintained fewer
but more important suppliers were less likely
to break down following covid-19 lockdowns.42
This increased resilience can explain why morebusinesses in this sector are prioritising thisapproach to supply-chain configuration.

Figure 15: Approaches to geographicalreconfiguration of supply-chain adopted byconsumer goods companies
Diversifying your firm’s supplier baseReshoring

Nearshoring/regionalisation

Working with fewer suppliers regardless of location

12.5%

14.1%

42.2%

20.5%

Source: Economist Impact Trade in Transition survey,
conducted September-November 2022.

41

42

https://www.richmondfed.org/publications/research/economic_brief/2022/eb_22-46#:~:text=We%20look%20at%20the%20COVID,maintaining%20relationships%20with%20their%20suppliers.
Ibid.

©Economist Impact 2023

Trade in Transition 2023

30

Food and beverages

as India announcing a restriction on exportsof wheat flour in July 2022 as a result of“global supply disruptions”.43 Restrictions
on the supply of key food groups have also
been announced by many other countries.44
Such shortages and uncertainties are likely
to persist as “restrictions of key inputs” israted by nearly 20% of executives as thesecond-biggest limitation to increasing
exports in 2023, followed by uncertainty
around tariffs in key markets.

In 2022 the food and beverage sector wascharacterised by significant shortages.
Disruptions to operations from absences
as employees were forced to quarantine
or recovering from covid-19 was cited as
the predominant reason for this. Since
then, shortages and uncertainty of supply
have only been exacerbated by the war in
Ukraine. Certain countries have imposed
export restrictions on key food groups, such

Figure 16: Reasons for pessimism on global trade expansion
for food and beverage industry, 2022-2024
Rising inflation

28.6

Economic recession in key markets (i.e., the outcome of interest-rate hikes)

21.2

Increased cost of living (i.e., rising transport, energy and food costs)

21

Covid-19 variants forcing many countries back into lockdown or ongoing lockdowns

19.4

Instability caused by geopolitical uncertainty, e.g. the war in Ukraine, tensions between the US and China
13.8
Global warming and extreme weather patterns leading to supply-chain disruptions
12.2
The increasing number of free-trade agreements and regional trade agreements
10.4
Cybersecurity breaches

10

Rising protectionism from governments
Tight labour markets

9.8

8.8

Outdated/ inadequate transport infrastructure
8.6
Ageing populations leading to shrinkage of the workforce/difficulty attracting skilled talent
8.4
The demise of the WTO

7

Public opposition to trade/ globalisation
6.8
The fragmentation of the world into trade blocs/ regionalisation
6.6
0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

43
44

https://www.globaltradealert.org/intervention/104408/export-licensing-requirement/india-restriction-on-exports-of-wheat-flour
https://www.fao.org/newsroom/detail/joint-statement-by-the-heads-of-the-food-and-agriculture-organization-international-monetary-fund-world-bank-group-world-food-programme-and-world-trade-organization-on-the-global-food-security-crisis/en©Economist Impact 2023

Trade in Transition 2023

31

Rising inflation and the cost of living areweighing on the minds of executives, whocite them as the top two reasons for being
pessimistic about global trade over the coming
two years. Mr Martins at Nestlé confirms
this, stating that “the biggest issue we have
now across the board is very high inflationcommodity-wise”. Such issues mean thatthe risk premiums are high in this sector, andbusiness leaders should be mindful of this.
To mitigate against risk, executives in thefood and beverage sector are embracing
technological upgrades. Adopting newtechnologies to monitor supply chainsis ranked as the primary reason to be
optimistic about trade over the next two
years. Nestlé’s CEO, Mark Schneider, has
previously stated that innovation andembracing digital opportunities are key
ways in which the company can accelerateorganic sales.45 Over half of executives inthis sector have already widely embraced
using digital direct-to-consumer platforms.
Technological adaptation is not only about
growing sales but also increasing efficiency.
At a time of higher costs, which cannot easily
be passed on to the consumer in this sector,
food and beverage companies need to “try as
much as possible to find efficiencies to protect
consumers”, comments Mr Martins. Survey
results indicate that many executives are also
likely to start embracing advanced automation
and robotics to achieve greater efficiencies,
while also adopting artificial intelligence anddata analytics to get real-time forecasts. By
driving efficiency, investing in technology willthen help to absorb some of the inefficiencies
generated through higher inflation.
Diversification remains the central supplychain reconfiguration strategy for this sector.
The main purpose of this is to reduce overall
costs. Again, as inflation is going to be a45
46

significant factor for this sector, reducing
costs in other ways is going to be imperative
if businesses are to remain profitable. But
respondents are also pursuing diversification
strategies to reduce the risk of disruption tocritical inputs. Rick White, president and CEOof the Canadian Canola Growers Association,
believes that “diversified supply chains, longones, short ones and local ones, all need
to work together to provide the resiliency
when bad things happen to the environment
or geopolitical shocks cause disruption.”
Severe weather events are able to disrupt this
sector more than others due to the nature of
how food and beverages are produced. But
having a credible ESG approach is tough for this
sector. Two main reasons stand out, the first one
being that there is no common base or common
understanding around an ESG framework.
This then leads to demands being placed on
businesses to meet different ESG requirements
either at the country or the business supplierlevel, which increases costs. The second reason
is that the technologies allowing businesses
to significantly reduce their carbon footprint
have not yet been developed. According to
Mr White, “it›s going to take seed technology,
biological technologies to come along, so thatplants could be more efficient in the use anduptake of their fertiliser and requiring theneed for less fertiliser, yet increasing yields.”
So the industry needs to focus on developing
sector-specific technologies in order to increase
efficiency and reduce environmental harm.
On ESG, one area where the sector is making
inroads is waste management, and specificallytargeting plastic neutrality. Consumer goods
companies, which include the food andbeverage sector, are at the heart of the plastics
problem, accounting for more than 50% of
global plastic consumption.46 Plastic neutrality
is where companies aim to take back thesame amount of plastic as that used in theirhttps://www.just-food.com/analysis/nestle-2017-investor-day-5-things-to-learn-from-ceo-mark-schneiders-vision-for-food-giant/
EIU data, The plastics problem facing consumer companies, July 2022.

©Economist Impact 2023

Trade in Transition 2023

32

products, thereby having no impact on theenvironment. Nestlé have just celebrated theirsecond year of doing this.47 It is an important
issue for both consumers and businesses, andas Mr Martins says, by having these initiatives“we can guarantee that we are taking back,
we work with partners to process those usedplastics without having the risk to the ocean”.
However, this is just one area where businesses
in this sector are having an impact. Many
more initiatives will be needed to ensure asustainable future for subsequent generations.

vast majority of companies in the sector are
shifting their supply-chain operations.
One-third of respondents are increasing thelength of their supply chains to hedge against
future shocks. A further third are opting to
expand into more stable and transparent
markets. Interestingly, 30% of respondents
stated that they were decreasing the lengthof their supply chains. However, this was due
to reducing costs rather than hedging against
risk. Rob Merrylees, policy manager andanalyst at the UK Chamber of Shipping, offersa reason for this: “The range of supply-chain
issues coming off the back of covid-19 but also
congestion, worker shortages and pent-up
demand with lack of supply has meant the LNG
market now is becoming very tight, with day
rates that are 10 or 15 times what they havebeen in previous years.” LNG shipping rates can
now fetch around US$400,000 per day, with
rates expected to go even higher than this.48

Energy and natural resources
Amid the current geopolitical volatility, suchas the war in Ukraine and the US-China
tensions, the energy and natural resources
sector, particularly oil and gas, has been
severely disrupted. Fewer than 5% of thecompanies we surveyed say that current
geopolitical events are not shaping their tradeand supply-chain strategies. In response, aFigure 17: Commodity price, forecast up to 2027
Brent; US$/barrel

Beverages

GrainsOilseeds

2020

2021

2022

Sugar

Industrial raw materials

MetalsFibresRubber

2026

2027

110
100
90
80
70
60
50
40
30
20
10
0
-10
-20
-30
2018

2019

2023

2024

2025

Source: Economist Intelligence (EIU), 2022.

47
48

Economist Impact interview, Anderson Martins, November 2022.
https://www.freightwaves.com/news/lng-shipping-rates-shooting-for-the-stars-at-500000-per-day©Economist Impact 2023

Trade in Transition 2023

33

Figure 18: Effect of geopolitical events on energy and natural resources sector
Undertaking more due diligence of supply chains to assess exposure to geopolitical issues

31.3

Expanding into more stable and transparent markets

31.1

Decreasing the length of supply chains to reduce costs to your business (either transport or energy costs)

29.5

Reducing the number of markets your business is participating in

29.1

Decreasing the length of supply chains to reduce exposure to geopolitical events

28.9

Increasing the length of supply chains to hedge against risks

28.3

Current geopolitical events are not shaping our trade and supply-chain operations
3.2
0

5

10

15

20

25

30

35

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

To insulate themselves from further geopoliticalshocks, businesses in this sector are maintaining
larger inventories than other sectors, with 44%
holding buffers ranging from four weeks to
six months. This applies predominantly to theWest, as these countries try to wean themselves
off Russian oil and gas. US sanctions extend to
Russia’s oil and gas sector, and the UK and EU
are working to reduce their reliance on Russianhydrocarbons.49 While there is less security ofsupply, increasing inventories is an appropriate
measure to insure against any shortage.

To bolster resilience further, companies are
adopting a wide variety of both demand- andsupply-side strategies within this sector. On
the demand side, executives surveyed say themost effective strategies include exporting
products to new markets (43%), followed byincreasing the value added of products (37%).
The most effective supply-side strategies include
increasing co-ordination with suppliers (32%),
followed by increasing the use of digital tools
for better inventory management (30.1%).

Figure 19: Demand-side strategies for resilience in energy and natural resources sector
Exporting products to new markets

43.1

Launching new products in existing markets

40.1

Increased value-add of products through the use of services (e.g. research and development, marketing etc.)

40.5

Bundling new services with existing products (e.g. remote maintenance, predictive analysis etc.)
29.1
Reducing product range to more effectively manage sourcing, production and distribution
27.9
None of the above
1.6
0

5

10

15

20

25

30

35

40

45

Percentage of respondents

Source: Economist Impact Trade in Transition survey, conducted September-November 2022
49

EIU report, Europe aims to divert its gas supplies from Russia, March 2022.

©Economist Impact 2023

Trade in Transition 2023

34

Figure 20: Supply-side strategies for resilience in energy and natural resources sector
Increasing co-ordination with suppliers and their raw material inventory

32.3
Increasing the use of digital tools for improved inventory management

30.1
Standardising inputs to increase substitutability/ flexibility in sourcing and production

29.1
Horizontal integration - outsourcing more supply-chain responsibilities, i.e., increasing third-party
partnerships to provide key inputs or to move goods

25.9
Vertical integration - insourcing more supply-chain responsibilities, i.e., acquiring a business thatprovides key inputs or buying company-owned transport vehicles to move goods

23.4
Reducing the number of single-source suppliers for critical inputs

22.2
Increasing inventories

20.8
None of the above

0

5

10

15

20

25

30

35

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

Just as important as making the sector more
resilient to geopolitical shocks is making it more
attuned to ESG policies. The sector is investing in
ESG initiatives with varied resources. One-thirdof executives state that they are investing capital
totalling more than 5% of company profits inan effort to achieve their ESG goals. Moreover,growth in renewable energy will remain strong
in the coming years. According to estimatesfrom The EIU, solar and wind consumption
will surge by more than 11% in 2023 and willcontinue to grow at an annual rate of 10%
over the next ten years.50 Policies to restrict
capital expenditure on oil and gas, including the
exploration of new oil and gas fields, will fuel thegrowth in clean energy sources in the coming
50
51

years. But in the process the lack of capital
expenditure on hydrocarbons will create supply
tightness, leading to further price increases.51
The growing middle class in many developing
countries will mean that energy consumption
will increase substantially. This is the third-mostcited reason why energy firms are optimistic
about future trade in the next two years. As
the middle class grows and its consumption
increases, coupled with the rise in cleaner
forms of energy like electric vehicles, thedemand for natural resources, such as lithiumand cobalt, will become even greater. So,investment in critical mineral mining andexploration is likely to expand even further.

EIU report, Things to watch in energy in 2023, November 2022.
https://www.goldmansachs.com/insights/pages/from-briefings-20-january-2022.html©Economist Impact 2023

Trade in Transition 2023

35

Health and pharmaceuticals

and pharmaceuticals is the primary reason why
healthcare spending will remain elevated.

Our findings from last year’s Trade in Transition
survey have proved correct. Executives inthis sector anticipated that growing demand
would bolster exports and imports. It is now
expected that households and governments
will continue to prioritise healthcare spending
despite uncertain finances,52 with public andprivate spending expected to increase by 4.9%
in 2023.53 Over one-quarter (26%) of executives
surveyed also say that growing demand in key
markets will be the primary growth driver ofexports in 2023, followed by expansion into newmarkets (21%). In the aftermath of the covid-19
pandemic the importance placed on healthcare

While the demand is there, there is stillreason for executives to be cautious.
Increased inflation is ranked as the number
one reason for pessimism by almost onethird (29%) of executives in this sector. In
particular, this is impacting smaller biotech
companies, which have seen funding dry up
after an unprecedented boom in 2020, as
financiers are becoming more cautious with
their investments.54 Furthermore, a lot of theincrease in spending allocated by these firms
will go towards higher input costs, meaningthat more funding for R&D will be curbed.

Figure 21: Reasons for pessimism on global trade expansion for health and pharmaceuticalsector, 2022-2024
Rising inflation

31.1

Increased cost of living (i.e., rising transport, energy and food costs)

19.5

Instability caused by geopolitical uncertainty, e.g. the war in Ukraine, tensions between the US and China
19.1
Economic recession in key markets (i.e., the outcome of interest-rate hikes)
17.7
Covid-19 variants forcing many countries back into lockdown or ongoing lockdowns
16.7
Global warming and extreme weather patterns leading to supply-chain disruptions
14.7
Rising protectionism from governments
9.6
The fragmentation of the world into trade blocs/ regionalisation
9.6
Public opposition to trade/ globalisation
9.6
Cybersecurity breaches

9.4

The increasing number of free-trade agreements and regional trade agreements
9
Tight labour markets

8.8

Ageing populations leading to shrinkage of the workforce/difficulty attracting skilled talent
7.8
Outdated/ inadequate transport infrastructure
6.8
The demise of the WTO
4.8
0

5

10

15

20

25

30

35

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

52
53
54

EIU report, The EIU view: Healthcare
EIU report, Things to watch in healthcare in 2023, October 2022
EIU report, Things to watch in healthcare in 2023, October 2022
©Economist Impact 2023

Trade in Transition 2023

36

Figure 22: Technologies that optimised trade in the health and pharmaceutical sector in 2022
Already using in 2021

Started using in 2022

Planning to use in 2023

Don’t know/NA

Digital platforms to do business directly with customers or suppliers
51.8
Advanced automation and robotics to achieve greater efficiencies
25.7

34.9

13.3 035.7

37.5 1.2

Artificial intelligence, big data analytics and predictive analytics to gain real-time insights and forecast disruptions
33.7
29.3

33.5 3.6

Blockchain to improve traceability, security and data protection
27.5

32.5

35.7

4.4

Internet of Things for real-time tracking and monitoring
47.2

34.1

3D printing to enhance product customisation and decentralise production
31.9

34.5

32.1 1.6

Cloud computing to enhance agility, profitability, and competitiveness
44.4

34.5

5G for greater connectivity, speed and reliability
29.1
0

10

20

30

18.7 020.3 0.8

37.8
40

50

60

32.5 0.6
70

80

90

100

Percent
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

But even with more caution the sector is still
placing a lot of importance on innovation.
This is made possible by technology. Medical
technologies are helping to overcome anumber of complex diseases by providing novel
therapeutic devices, according to John Bowler,
portfolio manager for the Schroder Global
Healthcare Fund.55 Digital innovations are also
making health more accessible and efficient,
thereby driving better patient outcomes.56
Results from the survey also point to theimportance of technology for the sector, as
executives cite technological upgrades as the
predominant factor to increasing imports in
2023. Furthermore, results indicate that this
sector is more advanced than others where
technological adoption is concerned. These
technological innovations will help to drive
returns across the sector and to combat
the consequences of the rise in inflation.

Beyond the retained demand, other legacy
factors from covid-19 are also affecting this
sector. Higher tariffs or uncertainty aroundtariffs and non-tariff barriers are cited by over
30% of respondents as a top limitation forexports in 2023. During covid-19 there weresignificant changes introduced to trade rules,
where countries looked to liberalise imports andlimit exports of medical goods. These measures
restricted the supply of these goods and increased
the costs of trading medical goods by 60%.57
Even though a large number of restrictive trademeasures were introduced, not all were notified
to the WTO.58 Therefore, increased transparency
from governments, in line with WTO principles,should be prioritised for this sector moving
forward. This would help to reduce uncertainties
and also barriers to trade through additional
negotiations as a result of greater transparency.

https://www.schroders.com/en-gb/uk/individual/insights/how-tech-and-medical-advances-are-transforming-healthcare-investing/Ibid.
57
https://www.worldbank.org/en/topic/trade/publication/stronger-trade-systems-for-better-health58
https://www.wto.org/english/news_e/news22_e/mark_05apr22_e.htm
55

56©Economist Impact 2023

Trade in Transition 2023

37

As was the case in 2022, diversification is theleading supply-chain strategy for this sector, citedby more than one-half of executives surveyed.
This aligns with the increase in trade restrictions
from covid-19. Having more export andimport destinations would help to strengthen
the resilience of supply chains, ensuring

more consistent supply. Nearly one-third of
respondents cite increased resilience as theirsecond driver for the diversification strategy.
Yet almost 40% of respondents name cost
reduction as their primary driver for this supplychain strategy, reflecting the cost increases
that have arisen as a result of higher inflation.

Figure 23: Approaches to geographical reconfiguration of supply chain
adopted by health and pharmaceutical companies in 2022
7.8%
12.9%
Diversifying your firm’s supplier base
Nearshoring/regionalisation
Reshoring

51.2%

11.4%

Working with fewer suppliers regardless of location
We are currently not reconfiguring our supply chain
16.7%

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

Figure 24: Drivers of geographical reconfiguration of supply chain adopted
by health and pharmaceutical companies in 2022
Rank 1

Rank 2

Not Answered

Overall cost reduction
35.3

24.1

Reduced risk of disruption of critical inputs
25.2

40.5

25.2

49.6

Local content government requirements (without financial support)
16.8
16.4

66.8

Government financial incentives/ support (i.e., subsidies)
22.6
20.7

56.7

Other, please specify
0

100

0

10

20

30

40

50

60

70

80

90

100

Percentage of respondents

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

©Economist Impact 2023

Trade in Transition 2023

38

Regional Insights

North America
The WTO predicts that the volume of North
American exports will increase by 1.4% in
2023, with imports growing by 0.8% over thesame period.59 This is lower growth than in
2022. Sustained high inflation remains a risk
to the economic outlook for North America,
and in our survey it was the top reason for
pessimism about global trade over the next
two years among executives in North America,
cited by 33% of respondents. The US andCanada have begun tightening monetary
policy in response. As a result the US economy
is expected to experience an economic
downturn in 2023, with real GDP forecast to
slow from 1.7% in 2022 to 0.1% in 2023.60
Within the region, the political landscape has
resulted in more stability for trade, particularly
as US-Canada relations have become morepredictable under the administration of
the US president, Joe Biden, comparedwith his predecessor.61 Yet many Chinacentric trade policies enacted under the
Trump administration have been retained orenhanced under the current administration.62
These trade policies are restrictive to theflow of trade. If they continue on theircurrent trajectory or even worsen there will
be significant economic consequences, as
shown in the GTAP model (see “About thisresearch” for more details). Exports from North
America will decrease by 0.35%, equivalent

to US$13bn. Imports into North America
will also decline, by 0.29% or US$14.7bn.
US trade policy is being used to retain acompetitive advantage in key sectors (batteries,
critical minerals, semiconductors, pharma andpersonal protective equipment), particularly
with regard to China, which is deemed to be athreat to these industries and national security
more generally. This is primarily in response to
China’s military-civil fusion policy, which is using
new technologies, developed by businesses,
to increase their military capabilities.63
Mr Reinsch of the CSIS explains the paradox
with this policy, stating that “China issimultaneously the best customer and thebiggest threat”. But there is a public-private
divide. Businesses look at the monetary
value of the Chinese market, whereas the
US government looks at the threat throughforced technology transfer.64 US government
policy is now more actively seeking to curb
China’s military capabilities. “US government
policy has traditionally been to keep China
two steps behind by allowing US companies toexport only old technology, thereby providing
companies with the money for further R&D
while depriving China of state-of-the-art
technology,” comments Mr Reinsch. “Now theirpolicy has moved on to actively degrading
China’s military capabilities by expanding
controls to cover things that have previously
not been controlled.” Recent policy changes

https://www.wto.org/english/news_e/pres22_e/pr909_e.htm#:~:text=The%20new%20WTO%20forecast%20estimates,than%20
what%20was%20previously%20projected
https://viewpoint.eiu.com/analysis/geography/XB/reports/one-click-report61
https://viewpoint.eiu.com/analysis/geography/XB/reports/one-click-report62
https://foreignpolicy.com/2022/11/15/u-s-china-trade-war-wto-sanctions-xi-jinping-biden-trump/63
https://www.tandfonline.com/doi/abs/10.1080/03932729.2022.2080262?journalCode=rspe20
64
Economist Impact interview, William Reinsch, October 2022
59

60

©Economist Impact 2023

Trade in Transition 2023

39

have led to many companies taking the ABC
approach: Anywhere But China. Survey results
also align with this trend as executives believethat North American sales revenue from exports
to China will be lower than the global average.
Even so, Mr Reinsch believes the biggest risk
for North American companies is that they
stay in China too long. “It›s taken businesses
20 years to determine that they will neverbe treated fairly in China, and we can dothe same to them in the US if we wish.” Headds: “But that would miss the point, which
is whether we can compete with them in therest of the world.” The worry is that North
American companies will be captivated by
China’s large market so they will stay there

longer than they should, meaning they will
miss out on opportunities elsewhere.
Changes in US policy, for example through the
CHIPS and Science Act, are incentivising US
companies to reshore production. Executive
responses from our survey indicate that itis having an effect as the large number of
respondents (31%) who opted to reshore their
supply chains are doing so to take advantage
of government local content requirements
or to take advantage of government financial
incentives. The share of respondents who
say they are nearshoring increases to 35%.
However, the primary goal for executives
when reconfiguring their supply-chain
strategies is overall cost reduction.

Figure 25: Expected North American export destinations in 2023
North America

72

European Union

35.3

Central America

23.2

South America

20.5

China

17.5

South Asia
ASEAN

14.2
10

North Africa
8.8
Northeast Asia
7.2
Rest of the Middle East
7
Gulf Cooperation Council
6.3
Russia and Commonwealth of Independent States (CIS)
6
Sub-Saharan Africa
6
Oceania
1.7
0

10

20

30

40

50

60

70

80

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

©Economist Impact 2023

Trade in Transition 2023

40

Figure 26: Approaches to geographical reconfiguration of supply chain adopted by companies in

8.8%
9.8%
Diversifying your firm’s supplier base
Nearshoring/regionalisation

12.7%

50.3%

ReshoringWorking with fewer suppliers regardless of location
We are currently not reconfiguring our supply chain

18.3%

North America in 2022
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

Figure 27: Drivers of geographical reconfiguration of supply chain adopted
by companies in North America in 2022
Rank 1

Rank 2

Not Answered

Overall cost reduction
40.6

24.5

Reduced risk of disruption of critical inputs
27.4

34.9

31.8

40.8

Local content government requirements (without financial support)
11.7
18.5

69.8

Government financial incentives/ support (i.e., subsidies)
20.3
18.1

61.6

Other, please specify
0

100

0

10

20

30

40

50

60

70

80

90

100

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

The risk posed by these policies is that they willlead to the further demise of the multilateral
trading system in which North America haslong been a proactive participant. From a global

point of view, reducing free and fair competition
through domestic incentives under the guiseof national security is very harmful, comments
Mr Harbinson. Massive subsidisation in the US©Economist Impact 2023

Trade in Transition 2023

41

as a reaction to the state-sponsored subsidies
that the government of China has pushed in thepast decade will only degrade the multilateral
trading system and further disadvantage thepoorest nations, as they cannot afford thesame level of subsidies. More engagement at
the multilateral level, led by the US, needs tooccur to maintain a level playing field for all.

European countries forced to implement
energy rationing. Inflation is also high,dampening consumer spending.66 Combined,
these factors will lead to a regional economic
downturn in 2023. The recovery of trade will
also be slower than in other regions,67 withsluggish growth expected well into 2024.68
Rising inflation is the top reason for pessimism
about global trade in the coming two years.
Linked to this, significantly more European
executives cite the end of the war in Ukraine
as the top reason for optimism over thesame time period (34%) than executives inother parts of the world (20.9%). So, while
trade works as a global system, geographicalproximity to shocks still matters greatly
for trade and supply-chain health.

Europe
The economic recovery in Europe has stalled
because of the war in Ukraine. Trade volume
export growth is expected to be 0.8% in 2023,
down one percentage point from 2022. Tradevolumes for imports will decline, with the
WTO predicting a 0.7% contraction.65 Critically,
disruptions in gas supplies from Russia willlead to an energy crisis this winter, with many

Figure 28: Reasons for optimism on global trade expansion for companies in Europe, 2022-24
The end of the war in Ukraine

33.7

The decline/end of the current pandemic

24.9

New technologies improving the ability to monitor supply chains and increase efficiency
20.3
Rise in global economic growth rates

19.4

Political stability in target markets/regions

18.4

Growing consumer/middle class in emerging markets

16.6

Improved connectivity in physical infrastructure

16.5

New trade agreements lowering tariff and non-tariff barriers
16.3
Increased attention and support from national governments
14.9
0

5

10

15

20

25

30

35

Percentage of respondents

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

https://www.wto.org/english/news_e/pres22_e/pr909_e.htm#:~:text=The%20new%20WTO%20forecast%20estimates,than%20
what%20was%20previously%20projected
https://viewpoint.eiu.com/analysis/geography/XG/reports/one-click-report
67
Question two of the survey (don’t want to include the data though)68
https://viewpoint.eiu.com/analysis/geography/XG/reports/one-click-report
65

66©Economist Impact 2023

Trade in Transition 2023

42

Figure 29: Reasons for pessimism on global trade expansion for companies in Europe, 2022-24
Rising inflation

34.8

Increased cost of living (i.e., rising transport, energy and food costs)

24.8

Covid-19 variants forcing many countries back into lockdown or ongoing lockdowns
17.5
Economic recession in key markets (i.e., the outcome of interest-rate hikes)
17.3
Instability caused by geopolitical uncertainty, e.g. the war in Ukraine, tensions between the US and China
16.2
Cybersecurity breaches

11.2

Global warming and extreme weather patterns leading to supply-chain disruptions
10.4
Tight labour markets

9.7

The fragmentation of the world into trade blocs/ regionalisation
8.1
Rising protectionism from governments
7.3
The increasing number of free-trade agreements and regional trade agreements
7.2
The demise of the WTO

6.8

Public opposition to trade/ globalisation
6.7
Outdated/ inadequate transport infrastructure
6.5
Ageing populations leading to shrinkage of the workforce/difficulty attracting skilled talent
6.2
0

5

10

15

20

25

30

35

Percentage of respondents

Source: Economist Impact Trade in Transition survey, conducted September-November 2022

Today trade is becoming less of an economic
issue and more of a geopolitical one. Nations
and businesses have to be wary about aligningthemselves too closely with a unipolar
supply-chain model. Mr Lawrence cautions
that European countries are integrating theirtrade links, and by association their economic
models, too closely with China. Over-relianceon one country reduces resilience and could
hamper European trade and supply chainsdepending on future geopolitical shocks.
Over-reliance on one nation is the reason why
Europe, and particularly Germany and central
and east European countries, are afflicted with69

economic downturns as the majority of theirenergy needs used to be met by Russia.69
Executives in Europe recognise the importanceof diversification: a plurality (49%) say theirprimary approach to reconfiguration is diversifying
their supplier base regardless of location. But
diversifying is easier said than done. Mr MacNeilof the UK Trade Select Committee at theHouse of Commons explains: “Some economic
lessons have been taken to their extreme. Adam
Smith never really meant we should only haveone pin maker on the planet. Instead, he wasmaking an argument for specialisation. But inhttps://www.gisreportsonline.com/r/german-gas-policy/©Economist Impact 2023

Trade in Transition 2023

43

some cases it›s gone to such an extent that it›sleft businesses and countries vulnerable.”
Overall cost reduction and increased resilience (byreducing the risk of disruption) were cited as themain reasons for diversification. This resonateswith European policymakers, as in the aftermathof the initial shock of the war in Ukraine resilience
was put at the heart of European policy efforts.

The extension of the EU’s €750bn Recovery and
Resilience Fund is key, as it will help to diversify
energy sources and increase infrastructuredevelopment.70 Beyond energy, fewer European
executives are operating just-in-time supply
chains (10%) than executives in other regionsof the world (14%) to enhance resilience.

Figure 30: Approaches to geographical reconfiguration of supply chain
adopted by companies in Europe in 2022

10.5%
11%

Diversifying your firm’s supplier base

40.3%

Nearshoring/regionalisation
ReshoringWorking with fewer suppliers regardless of location

16%

We are currently not reconfiguring our supply chain

22.2%

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

Figure 31: Supply-side strategies for resilience in Europe, compared with global average
Increasing co-ordination with suppliers and their raw material inventory
28.1%
Increasing the use of digital tools for improved inventory management
25.9%
Increasing inventories
25.9%
Vertical integration - insourcing more supply-chain responsibilities, i.e., acquiring a business that provides key inputs
or buying company-owned transport vehicles to move goods
24.8%
Reducing the number of single-source suppliers for critical inputs
23.7%
Horizontal integration - outsourcing more supply-chain responsibilities, i.e., increasing third-party partnerships
to provide key inputs or to move goods
22.2%Standardising inputs to increase substitutability/ flexibility in sourcing and production
21.5%
0%

5%

10%

15%
20%
25%
Percentage of respondents

30%

35%

40%

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.
70

https://viewpoint.eiu.com/analysis/geography/XG/reports/one-click-report©Economist Impact 2023

Trade in Transition 2023

While current geopolitical events are throttling
the region›s growth prospects, predominantly
through higher input costs, longer-term
projections indicate that the EU›s energy supply
is expected to become greener and more
resilient, and as a result so will the region›smanufacturing capabilities. However, this will
depend on imports of renewable technologies.71
Global supply chains will still be necessary todevelop cost-effective energy sources andtechnologies, as production of the many criticalcomponents and essential resource extraction
happen outside the region. So diversificationis critical in order to hedge against future risk.
This is yet another reason why over-reliance on
the Chinese market, currently the EU›s number
one trading partner which produces manyof these goods, would be an oversight.72,73

44

However, there has been a marked shift inregionalisation and reshoring, with 24%
of respondents highlighting that they are
regionalising in 2022 (compared with 13%
in 2021), and 21% are reshoring (8% in2021). There is a push for industrialisation in
the UAE and Saudi Arabia in an attempt todiversify their economies away from oil, andregionalisation and reshoring would help toenable the development of nascent industries.
For example, the government of Abu Dhabi’s
2022 industrial strategy aims to double thesize of of the Emirate’s manufacturing sector
by 2031,74 and it wants to transition towards
a smart circular economy. Saudi Arabia also
has plans to bolster its manufacturing sector
by expanding 12 strategic industrial sectors
as part of its National Industrial Strategy.75

Middle East
Economies in the Middle East, particularly theoil-exporting countries of the Gulf Co-operation
Council (GCC), are set to experience a bump in
GDP growth in 2022, driven by exports of oil
at higher than average prices. This will trickle
through the economy mainly via increased
government spending. However, oil importing
nations in the region must bear the brunt ofrising inflation, as will the rest of the world.
According to our survey, in 2023 overall
export growth in the Middle East (which
includes only Saudi Arabia and the UAE) is
expected to be driven by an expansion ofoperations into new and existing markets(cited by 22% of respondents). This aligns
with the diversification strategy, which 49%
of Middle Eastern executives want to adopt
to reduce costs and increase resilience.

https://viewpoint.eiu.com/analysis/article/472327430
https://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122530.pdf
https://www.csis.org/east-green-chinas-global-leadership-renewable-energy
74
https://www.mediaoffice.abudhabi/en/economy/khaled-bin-mohamed-bin-zayed-launches-abu-dhabi-industrial-strategy-tostrengthen-the-emirates-position-as-the-regions-most-competitive-industrial-hub/
75
https://www.vision2030.gov.sa/v2030/vrps/nidlp/
71

72
73

©Economist Impact 2023

Trade in Transition 2023

45

Figure 32: Annual percentage change in merchandise trade volumes in the Middle East
Exports

Imports

Percentage growth
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
2018

2019

2020

2021

2022f

2023f

Year
Source: WTO, 2022
Projected data for 2022 and 2023

Figure 33: Drivers of export growth in the Middle East, 2023
Expansion of operations in existing markets

22.5

Growing demand in key markets

21.6

Expansion of operations into new markets

21.6

Improved transport infrastructure in key markets (e.g. roads, ports, warehouses etc.)
19.6
Improved efficiency through increased digitisation of supply chains
17.6
Adoption of competitive pricing strategies in key markets
Faster delivery times

16.7

13.7

Favourable foreign-exchange movements (that reduce the cost of exports)
13.7
Lower transport costs
Improved access to trade finance

12.7
10.8

Reduction of non-tariff barriers (e.g. labour mobility, quotas etc.)
8.8
Sector promotion policies by governments in key markets (e.g. subsidies, tax credits etc.)
6.9Lower tariffs in key markets
5.9
0

5

10

15

20

25

30

35

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.
©Economist Impact 2023

Trade in Transition 2023

46

Figure 34: Drivers of import growth in the Middle East, 2023
Increase in production levels driven by technological upgrades

26.5

Improved efficiency through increased digitisation of supply chains

23.5

Favourable foreign-exchange movements (that reduce the cost of imports)

23.5

Increase in production levels driven by growing demand

20.6

Favourable government policies in your country of operations (e.g. subsidies, tax credits, regulatory alignment etc.)
20.6
Improved transport infrastructure in your country of operations (e.g. roads, ports, warehouses etc.)
19.6
Lower transport costs

17.6

Reduction of non-tariff barriers in your country of operations (e.g. quotas)
16.7
Faster delivery times

14.7

Lower tariffs/customs duties in your country of operations
9.8
0

5

10

15

20

25

30

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022

When asked about limitations, the highest
proportion of executives (21%) expect a fallinglevel of demand in key markets as a result ofhigher inflation and high transport costs (20%)
to be the top limitations to their export growthin 2023. The top export markets for Saudi Arabia
and the UAE are China, India and Japan. An
economic slowdown in China and India would
therefore reduce exports from Saudi and UAE
to these markets, inhibiting economic growth.
Globally, the uncertainties created bygeopolitical events and elevated consumer
prices will hit the Middle East in terms of import
slowdowns as well. Executives in the region are
most concerned about inflationary pressureswhen it comes to imports over the next

couple of years, similar to what we observedin last year’s Trade in Transition study. Risingtransport, energy and food costs, as well thepresumption of economic recessions in key
markets, are all a threat to Middle Eastern trade
and therefore significant causes for concern.
Responding to higher inflation and therefore
higher input costs, executives in the region are
turning to technology. Executives state that the
top two drivers of import growth in 2023 are
expected to be an increase in production levels
driven by technological upgrades (27%) and
improved efficiency through the digitalisation of
supply chains (24%). Both of these technologies
would help to increase supply and also efficiency,
offering more opportunity for further revenue.

©Economist Impact 2023

Trade in Transition 2023

47

Figure 35: Reasons for pessimism about global trade over the next two years
Rising inflation

26.5

Increased cost of living (i.e., rising transport, energy and food costs)

19.6

Economic recession in key markets (i.e., the outcome of interest-rate hikes)
19.6
Instability caused by geopolitical uncertainty, e.g. the war in Ukraine, tensions between the US and China
19.6
Covid-19 variants forcing many countries back into lockdown or ongoing lockdowns
12.7
Global warming and extreme weather patterns leading to supply-chain disruptions
12.7
The increasing number of free-trade agreements and regional trade agreements
11.8
Rising protectionism from governments
Cybersecurity breaches

11.8

10.8

Tight labour markets

10.8

Public opposition to trade/ globalisation
8.8
Ageing populations leading to shrinkage of the workforce/difficulty attracting skilled talent
8.8
Outdated/ inadequate transport infrastructure
7.8
The demise of the WTO

7.8

The fragmentation of the world into trade blocs/ regionalisation
5.9
0

5

10

15

20

25

30

35

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

AfricaExport growth in Africa is expected to shrink significantly in 2023. The WTO forecaststhat African export volumes will fall by 1% in 2023, compared with 6% growth in 2022.76
The trade environment is further hampered by rising inflation, which is predominantly
caused by the war in Ukraine (as the continent is a significant export destination for
Russian and Ukrainian food and energy), global monetary tightening and debt distress.

76

https://www.worldbank.org/en/region/afr/overview#:~:text=Economic%20growth%20in%20Sub%2DSaharan,rising%20risk%20of%20
debt%20distress.

©Economist Impact 2023

Trade in Transition 2023

48

Figure 36: Annual percentage change in merchandise trade volumes in Africa
Exports

Imports

Percentage growth
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
2018

2019

2020

2021

2022

2023

Source: WTO, 2022
Projected data for 2022 and 2023

Export growth in Africa will largely dependon how economic growth plays out in its key
markets. The top destination for Africa’s exports
is the EU. In 2020, 33% of its exports went to
the EU and 31% of its imports came from the
EU.77 Europe is set to experience an economic
slowdown in 2023, predominantly becauseof the war in Ukraine. As such, companies
are turning to expanding their operations
into new markets, cited by 22% of executives
as a key driver of export growth. China andIndia are, respectively, the second- and thirdlargest markets for African exports. As the
Asia-Pacific region is expected to produce
healthier growth rates than other parts of theworld in 2023, African businesses may turn tothis region to export more broadly, as many of
their goods are already present in the region.

77

https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Africa-EU_-_international_trade_in_goods_statistics#Africa.
E2.80.99s_main_trade_in_goods_partner_is_the_EU©Economist Impact 2023

Trade in Transition 2023

49

Figure 37: Drivers of export growth in Africa, 2023
Growing demand in key markets

24.8

Expansion of operations into new markets

21.5

Faster delivery times

19.5

Improved access to trade finance

16.5

Lower tariffs in key markets

14.9

Lower transport costs

14.5

Favourable foreign-exchange movements (that reduce the cost of exports)
14.2
Improved efficiency through increased digitisation of supply chains
Adoption of competitive pricing strategies in key markets

13.2
13.2

Improved transport infrastructure in key markets (e.g. roads, ports, warehouses etc.)
12.5
Expansion of operations in existing markets

11.9

Sector promotion policies by governments in key markets (e.g. subsidies, tax credits etc.)
7.3
Reduction of non-tariff barriers (e.g. labour mobility, quotas etc.)
6.9
0

5

10

15

20

25

30

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

Figure 38: Drivers of import growth in Africa, 2023
Increase in production levels driven by growing demand

25.4

Increase in production levels driven by technological upgrades

21.8

Improved efficiency through increased digitisation of supply chains

21.1

Faster delivery times

21.1

Lower transport costs

20.8

Favourable foreign-exchange movements (that reduce the cost of imports)

18.5

Lower tariffs/customs duties in your country of operations

17.8

Improved transport infrastructure in your country of operations (e.g. roads, ports, warehouses etc.)
Reduction of non-tariff barriers in your country of operations (e.g. quotas)

15.8

14.2

Favourable government policies in your country of operations (e.g. subsidies, tax credits, regulatory alignment etc.)
12.9
0

2

4

6

8

10

12

14

16

18

20

22

24

26

Percentage of respondents

Source: Economist Impact Trade in Transition survey, conducted September-November 2022

©Economist Impact 2023

Trade in Transition 2023

50

To develop creative solutions for the toughtrading environment, a deeper understandingof the challenges facing African executives isrequired. Transport costs in Africa are higher
than the global average. Around one-quarterof the executives from Africa who took part inour survey cited higher transport cost as the
key limitation to export and import growth in
the region. For instance, according to Merian
Sebunya, chair of the National Logistics
Platform in Uganda, it takes around US$1.80
per kilometre to transport a cargo containerin East Africa, compared with an average ofaround US$1 worldwide.78 Moreover, theinterior of the country is vast, with only a
few extensive waterways passing through it,
requiring the use of more road haulage andrailways that are fairly old, further increasing
the difficulty of intra-continental trade.

comments Mr Kamau. The weakening currency isa particularly acute problem because of Africa’s
debt-servicing obligations. External debtservicing costs have surged to 11% in 2022, froman average of 4% pre-pandemic.79 This leaves
countries in the region with less access to publicsector support both directly and indirectly inthe form of better infrastructure development,
as funds will be used to service debt insteadof being invested in their economies.
While a weakening of several African
currencies makes imports more expensive,
it makes exports more competitive inglobal markets. Executives in the region arelooking to take advantage of this as growing
demand in key markets (25%) and expansionof operations into new markets (22%) areprimary growth drivers for exports in 2023.

In an effort to increase frictionless trade thatwill offset some of the logistical and transport
issues, the African Continental Free-Trade
Agreement (AfCFTA) is being negotiated.
However, there are still some issues that areholding up its full-fledged enactment. As Abel
Kamau, trade policy manager at the Kenya
Association of Manufacturers, points out: “There
are two key things holding it back. The regional
economic blocs are yet to give the tariff offers
to AfCFTA, and there are some pending rulesof origin, which are being negotiated upon.”
Inflationary pressures are further exacerbatedby unfavourable foreign-exchange movements,
which were cited as a top impediment to import
growth by 21% of executives in Africa, comparedwith 15% globally. “As of now, we are also
experiencing rising interest rates and inflation
because of what›s happening in the West. The
weakening of the Kenyan currency and other
African currencies against the dollar and otherhard currencies has weakened the purchasing
power and exposed the economies to inflation,”
78
79

https://www.independent.co.ug/transport-costs-in-east-africa-community-choking-business/
https://odi.org/en/insights/rising-interest-rates-are-threatening-debt-sustainability-in-africa/#:~:text=External%20debt%20servicing%20costs%20have,the%20'high%20risk'%20list.

©Economist Impact 2023

Trade in Transition 2023

51

Figure 39: Reasons for optimism about trade over the next two years, Africa
The end of the war in Ukraine

28.4

Political stability in target markets/regions

24.1

Increased attention and support from national governments

23.4

New technologies improving the ability to monitor supply chains and increase efficiency

23.1

Rise in global economic growth rates

21.8

Growing consumer/middle class in emerging markets

19.5

The decline/end of the current pandemic

18.5

Improved connectivity in physical infrastructure

15.8

New trade agreements lowering tariff and non-tariff barriers
0

2

4

6

8

14.9

10

12

14

16

18

20

22

24

26

28

30

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

Figure 40: Reasons for pessimism about trade over the next two years, Africa
Rising inflation

28.7

Covid-19 variants forcing many countries back into lockdown or ongoing lockdowns

19.1

Increased cost of living (i.e., rising transport, energy and food costs)

18.2

Economic recession in key markets (i.e., the outcome of interest-rate hikes)

17.8

Instability caused by geopolitical uncertainty, e.g. the war in Ukraine, tensions between the US and China
16.2
Global warming and extreme weather patterns leading to supply-chain disruptions
16.2
Cybersecurity breaches

12.5

Tight labour markets

10.6

The increasing number of free-trade agreements and regional trade agreements
9.6
Public opposition to trade/ globalisation

8.6

The fragmentation of the world into trade blocs/ regionalisation
8.3
Ageing populations leading to shrinkage of the workforce/difficulty attracting skilled talent
8.3
Outdated/ inadequate transport infrastructure
7.9
Rising protectionism from governments
7.6
The demise of the WTO
0

6.6
5

10

15

20

25

30

35

Percentage of respondents
Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

©Economist Impact 2023

Trade in Transition 2023

52

Asia-Pacific
China’s zero-covid policy has dampened
economic growth in Asia-Pacific’s largest
economy, dragging the region’s average real GDP
growth down from 5.8% in 2021 to 3.6% in 2022,
according to estimates from The EIU. Althougha more pragmatic approach to covid-19
management in China is expected next year,
real GDP growth is forecast to remain flat at
3.5%. In line with this, the WTO forecasts export
volumes to grow by just 1.1% in 2023, comparedwith 2.9% in 2022.80 The biggest impediments
to export growth, according to the executives
surveyed in Asia-Pacific, are high transport costs(which stem from the surge in energy prices)and falling demand in key markets (such as the
US and Europe), cited by about 20% each.
The Asia-Pacific trade landscape is also being
shaped by global geopolitical trends—less soby the war in Ukraine and more so by USChina trade tensions and the risk of a ChinaTaiwan conflict with US intervention. The US
has now put controls on specified chips, theequipment needed to make them and thepersonnel required to design them, all in aneffort to deny Chinese capabilities for this
sector.81 “I think companies expect it to bechallenging, more challenging than it has been,”says Deborah Elms of the Asian Trade Centre.
In light of these geopolitical tensions, companies
in Asia-Pacific are responding in two key ways.
The first is undertaking more due diligence of
their supply chains (cited by 33% of executives
surveyed). At a time when companies are
already struggling in a high-cost environment,these efforts impose a greater administrative
burden on firms operating in the region.
But companies are also focused on expanding
into new and stable markets (also cited by
33% of executives). Mr Lawrence at Chatham
House adds: “For most companies it›s not that
there›s any legal restriction, it›s more that
if they expect a deterioration in US-China
relations over the next few years, they don›twant to be overweight in China.” This may be
the impetus for the region’s primary approachto supply-chain reconfiguration: diversifying
and increasing their supplier base, cited by amajority of executives in Asia Pacific (51%). The
US tech giant Apple has already been shifting its
supply chains away from China and expanding
its presence in India and Vietnam. The numberof large suppliers Apple has registered in thetwo countries has risen from 18 in 2017 to 37

Figure 41: Top reasons for pessimism among Asia Pacific executives about global tradeover the next two years

Rising inflation
25%
80

81

Covid-19 lockdowns
23%

Recession in key markets
22%

https://www.wto.org/english/news_e/pres22_e/pr909_e.htm#:~:text=The%20new%20WTO%20forecast%20estimates,than%20
what%20was%20previously%20projected.
https://www.csis.org/analysis/export-controls-dust-begins-settle©Economist Impact 2023

Trade in Transition 2023

in 2021.82 The company is also moving ahead
with the latest iPhone production in India
and has plans to commence MacBook laptop
production in Vietnam. However, as Ms Elms
points out, businesses “can easily produce
whatever they want in whatever quantity almost
instantly in China and have it in 10,000 pieces
by Friday. You don›t have those options in mostof the rest of the world.” Therefore, businesses
must undertake a cost-benefit analysis when
determining whether to include China intheir diversification supply-chain strategy.
As a result, within the region, some countries
even stand to gain from the worsening trade andgeopolitical tensions. This explains the net GDP
impact of the trade tensions modelled using the
GTAP database (see “About this research” formore details). Overall, in the next 12 months
GDP in Asia-Pacific would fall by only 0.01%(the smallest impact compared with otherregions such as North America (a fall of 0.07%)or the Middle East (a fall of 0.31%)) as a result of
ongoing tensions between the US and China.
Interestingly, just 19% of executives said they
were regionalising their supply chains, whichmeans that companies still have to fully exploit
the new regional free trade agreements, suchas the Regional Comprehensive Economic
Partnership and the ASEAN Free Trade Area.
South America
Forecasts from the WTO show that SouthAmerican export volumes will remain almost
flat in 2023 (0.3%) compared with 2022.83 The
top impediments to export growth, according
to executives surveyed, will be high or uncertain
tariffs in export markets (cited by 24%), followedby higher transport costs (19%). A fall in imports
by 1% in 2023 compared with 2022, according
to WTO estimates, is expected as a result of53

rising inflation as well as high transport costs.
There are a number of factors driving theseoutcomes. The most noteworthy has been
the fallout from the war in Ukraine. Although
Russia and Ukraine account for less than
1% of South America’s trade, the global
impacts on energy, fertiliser and food prices
are ultimately impacting South America as
well.84 These two interlinked trends are the
top sources of pessimism about global trade
among executives surveyed in South America(37% cited rising inflation and 21% citedinstability caused by geopolitical uncertainty).
The impact of inflation on South American
trade is mixed. Although importers of oil
and gas (as a source of energy but also
for fertiliser production) will face higher
import costs, exporters of food will benefit
in the short term, explains Fabrizio Opertti,
integration and trade sector manager at theInter-American Development Bank. The
net effect balances out, as we can see in the
results of the GTAP model (see “About thisresearch” section for more details on themethodology). In our “inflation” scenario theimpact on South America’s GDP over the
next 12 months is 0.0008% (representing asmall net increase in real GDP of US$30m).
“But the biggest force will be the decelerationof markets around the world, [particularly]
China, the EU, and the US to a certain point
as well,” states Mr Opertti. A slowdown inglobal demand expected next year will dent
overall export growth (The EIU forecasts
a contraction in the euro area of 0.3% andanaemic growth of 0.2% in the US in 2023).
In response to the geopolitical and economic
volatility on the global stage, companies inSouth America are adopting a host of strategies

https://www.economist.com/business/2022/10/24/the-end-of-apples-affair-with-china
https://www.wto.org/english/news_e/pres22_e/pr909_e.htm#:~:text=The%20new%20WTO%20forecast%20estimates,than%20
what%20was%20previously%20projected.
84
https://publications.iadb.org/publications/english/document/The-fallout-of-the-war-in-Ukraine-on-Latin-America-and-the-Caribbean.pdf
82
83©Economist Impact 2023

Trade in Transition 2023

54

Figure 42: Top reasons for pessimism among South American executives about
global trade over the next two years

Rising inflation
37%

Increased cost of living
22%

Recession in key markets
19%

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

to increase resilience. On the demand side,
the most effective strategy, according to 48%
of the executives we surveyed, is exporting
products to new markets. Given the ongoing
war, there has been an opportunity forSouth American firms to serve countries thatneed to substitute imports from Russia andUkraine. This is most likely to benefit countries
such as Brazil (for exports of iron, meat andsoybeans) as well as Chile (for exports ofcopper), according to analysis conducted by
the Inter-American Development Bank.85

their supplier base (46%), there has been a sharp
increase in the number of firms regionalising andreshoring since we conducted this survey lastyear. The percentage of respondents diversifying
their supplier base has reduced by 13% from 59%
last year. The share of those who are regionalisingand reshoring has increased to 23% (vs 12% in2021) and 10% (vs 3% in 2021), respectively.
One example is CTC Global, a US-headquartered
power-grid solutions company, which opened aconductor production facility in Paraguay in 2022
to be closer to its South American customers.

On the supply side, the most effective
strategy has been to adopt new technologies
for inventory management, cited by 42% ofexecutives in the region, significantly higher
than the global average (30%). Among the
top two technologies that executives say they
have started using this year for supply-chain
management are 5G solutions (40%) andadvanced automation and robotics (38%).
5G solutions allow for greater connectivity,
delivering real-time insights, and automation
helps to drive greater efficiency with theaim of lowering operational costs.

But for such a strategy to succeed, barriers to
intra-regional trade must be addressed. Hightariffs in South America are a concern (with
Venezuela and Brazil applying the highest
tariff rates of 14% and 8%, respectively).86 In
December 2021 negotiations with Mercosur,a common market including Argentina, Brazil,
Paraguay and Uruguay, ended without any
agreement on import tariff reduction.87

Most interestingly, although the largest share of
executives are still predominantly diversifying

85
86
87

Beyond this, non-tariff barriers must also
be addressed. “There are very important
trade restrictive policies that need to be
overcome,” explains Mr Opertti. “We’retalking about harmonisation of our 33
preferential trade agreements in the region.”

https://publications.iadb.org/publications/english/document/The-fallout-of-the-war-in-Ukraine-on-Latin-America-and-the-Caribbean.pdf
https://data.worldbank.org/indicator/TM.TAX.MRCH.WM.AR.ZS?most_recent_value_desc=true
https://www.reuters.com/business/mercosur-meeting-ends-without-deal-import-tariff-cuts-2021-12-17/©Economist Impact 2023

Trade in Transition 2023

55

More broadly, to enhance South America’s trade competitiveness its governments must
return to the fundamentals, especially infrastructure development. Ultimately, Mr Opertti
says, “the countries that will have better ports, better airports, better connectivity, better
human capital, are those that will benefit from this reshifting of supply chains.”

Figure 43: Primary approach to supply-chain reconfiguration by
South American companies, 2022

13.9%

6.4%
Diversifying your firm’s supplier base

46%
10.4%

Nearshoring/regionalisation
ReshoringWorking with fewer suppliers regardless of location
We are currently not reconfiguring our supply chain

23.3%

Source: Economist Impact Trade in Transition survey, conducted September-November 2022.

©Economist Impact 2023

Trade in Transition 2023

56

Conclusion

Supply-chain disruptions, originally causedby covid-19 and once thought an anomaly,
have become commonplace in today’s trading
landscape. While growth in trade is still
projected to be positive, this macro picture
does not account for the more micro issues
affecting specific regions and sectors. Executives
are having to factor in multiple scenarios anddevelop an agile strategy that can be altered inline with future headwinds and disruptions.
Geopolitics is becoming one of the mostinfluential factors affecting trade and supplychain operations, with 96% of the executives wesurveyed making changes to their supply chainsin response to geopolitical events. Even beyond
the war in Ukraine and US-China tensions,other shocks such as cyber warfare can inhibit
the proper functioning of economies aroundthe world. This is increasingly leading to more
protectionist government policies. The mostnotable examples come from the US in response
to China›s growing aggression through forced
technology transfers, state-sponsored subsidies
and their civil-military fusion strategy. Recent
US legislative changes have also been more
protectionist, such as the Infrastructure Bill andthe CHIPS and Science Act, both of which aim toincentivise and prioritise US and North American
manufacturing. Similar protectionist policies canbe seen the world over, and if they continue they
will only lead to a further fragmentation of the
global trading system. “The arteries [of global
trade] are clogged,” says Mr Opertti of the InterAmerican Development Bank. “We need to unplug
the arteries of trade and we need trade facilitation
measures that are lagging in order to operate.”88

Yet within this increasingly suffocating
trade landscape businesses are finding
ways to respond and grow. Altering supply
chains either through diversification,
regionalisation or reshoring to build
resilience is one response. The widespreadand increasing adoption of a plethora oftechnologies is yet another. Such changes
will help businesses to overcome the adverse
economic consequences associated withrecent geopolitical shocks, as demonstrated
by the GTAP analysis. Even in this context
expansion is still on the mind of businessexecutives, so being agile, having a businessstrategy and using scenario planningare essential to achieve this goal.
Ultimately, to resolve the most pressing
issues and facilitate frictionless trade requires
both private-sector and public-sector
involvement. Ms Elms of the Asian Trade
Centre comments that governments need tosolve trade problems too, but “government
solutions are often wildly out of date, clunkyand difficult”. Therefore, streamlining trade
policy at all levels needs to be prioritised.
While the many “players”, all with theirown respective interests, would make thisdifficult, progress has been made. This wasdemonstrated by the developments at the
WTO’s recent 12th Ministerial Conference,88
which led to the Agreement on Fisheries
Subsidies and a decision on the e-commerce
moratorium, showing there is still a willamong countries to work together to solve
the pressing trade issues of the day. Only
through further progress can trade flourish.

https://www.wto.org/english/news_e/news22_e/mc12_17jun22_e.htm©Economist Impact 2023

Trade in Transition 2023

67

While every effort has been taken to verify the accuracy of thisinformation, Economist Impact cannot accept any responsibility
or liability for reliance by any person on this report or any of theinformation, opinions or conclusions set out in this report.
The findings and views expressed in the report do not necessarilyreflect the views of the sponsor.

©Economist Impact 2023

LONDONGENEVASÃO PAULO

The Adelphi
1-11 John Adam Street
London WC2N 6HT
United Kingdom
Tel: (44) 20 7830 7000
Email: london@economist.com

Rue de l’Athénée 32
1206 Geneva
Switzerland
Tel: (41) 22 566 2470
Fax: (41) 22 346 93 47
Email: geneva@economist.com

Rua Joaquim Floriano,
1052, Conjunto 81
Itaim Bibi, São Paulo,
SP, 04534-004
BrasilTel: +5511 3073-1186
Email: americas@economist.com

NEW YORK

DUBAI

750 Third Avenue
5th Floor
New York, NY 10017
United States
Tel: (1.212) 554 0600
Fax: (1.212) 586 1181/2
Email: americas@economist.com

Office 1301a
Aurora Tower
Dubai Media City
Dubai
Tel: (971) 4 433 4202
Fax: (971) 4 438 0224
Email: dubai@economist.com

HONG KONG

SINGAPORE

1301
12 Taikoo Wan Road
Taikoo Shing
Hong Kong
Tel: (852) 2585 3888
Fax: (852) 2802 7638
Email: asia@economist.com

8 Cross Street#23-01 Manulife Tower
Singapore048424
Tel: (65) 6534 5177
Fax: (65) 6534 5077
Email: asia@economist.com

WASHINGTON DC
1920 L street NW Suite 500
Washington DC
20002
Email: americas@economist.com