Future of Trade 2022 - Global Trade in A New Era of Multilateralism

2022
GLOBAL TRADE IN A NEW

ERA OF MULTILATERALISM
Introduction Introduction
THE FUTURE OF TRADE:

THE OPPORTUNITIES AHEAD
INTRODUCTION
The Future of Trade 2022 is the fourth edition of DMCC’s Geopolitics, as ever, will shape the trade landscape in 2022
biennial flagship report on the changing nature of global and beyond. The report will discuss new developments in
trade. In it, we examine the impact of technology, global regionalism, bilateral trade, and global investment flows.
economic trends, and geopolitics on the future of trade, US-China trade tensions constitute a continued risk to trade
with a focus on trade growth, supply chains, trade finance, openness between the world’s two largest economies. In
infrastructure, and sustainability. The report presents practice, US President Biden’s administration has embarked on
updated scenarios for how trade will develop in 2022 and a policy of ‘America First’ with a preference for ‘Ally-shoring’.1
beyond, relevant for any reader involved in trade, trade Although not a base case scenario, the risk is that an extension
policy, international investment, and the operation of of this type of policy in other countries could lead to a broader
businesses with global value chains. fragmentation of global trading relationships.
This fourth edition frames world trade’s capacity to While nationalist – as opposed to protectionist – trade policies
drive global recovery as economies continue to open up are likely to continue to dominate, there are signs of a growing
after the COVID-19 pandemic. The analysis will look at resurgence in multilateralism. The report looks at them closely,
multiple long-term recovery scenarios, both optimistic and including emerging trade corridors and emerging developments
pessimistic, many of them predicated on underlying issues in intraregional trade, such as growth in Middle Eastern trade
such as trade finance, digitalisation, and infrastructure. The with the emerging and developing economies of Asia.
picture is still mixed when assessing the political will of
governments to de-risk investments into such areas as the Bilateral, regional, and multiparty trade deals are another sign.
global economy recovers. China and Taiwan’s stated bids to join the Comprehensive and
Introduction Introduction
Progressive Agreement for Trans-Pacific Partnership, in addition trade, and investment. The report includes an analysis of both the
to the UK’s ongoing accession process, offer opportunities for opportunities and the economic impact of the further adoption of
trade and bilateral investment. The recent signing by 10 Asian crypto technology in mainstream trade, business, and finance.
countries of the Regional Comprehensive Economic Partnership
(RCEP) is a notable milestone, and the new Japanese prime Following COP26, we also provide an important update on
minister, Fumio Kishida, has indicated a rapprochement recent developments in sustainability. Compared even with the
with China, which could bring momentum to the long-term start of 2021, the level of urgency for climate adaptation among
discussions on Pacific trade deals and, more widely, on progress governments and multinational corporations has increased. We
in other regional deals. New types of trade deals, such as the are now seeing a much more realistic approach and broader
UAE CEPA programme and the Singapore-UK Digital Economy understanding of where we need to get to in terms of transitioning
Agreement, are also essential to the future of trade. to a sustainable future. A key aspect of sustainability is the
opportunities it presents for international businesses. The report
The US has unveiled its Indo Pacific Economic Framework for aims to provide new insights from businesses and investors
Prosperity, with 12 initial partners. It is not a trade agreement on sustainability and the potential risks in not incorporating
per se as it does not include market access or tariff reductions, sustainability into business practices.
but its aim is for the US to engage on trade and economic
matters with Asia Pacific nations. Overall, recovery and sustainability frame this benchmark report.
The clear imperative for businesses – both large and small – from
The nexus of digitalisation and trade remains core to the outlook. across the globe is the need to better understand the longer-term
Innovative technologies continue to drive productivity gains direction and composition of global trade. Additionally, tectonic
and sustainable economic development. Trade and technology shifts in the global economy, driven by trade barriers, inflation-
will continue to form a core part of this dynamic in 2022 and induced policy, and adapting to climate change, will make it
beyond. The Future of Trade 2022 presents and examines major necessary for businesses to change their approaches. This report
new developments on this front, including crypto currencies includes practical recommendations for businesses on how to adapt
and virtual assets. The rise and increasing development of to emerging trends in global trade and leverage the opportunities
central bank digital currencies stands to reshape global finance, that will arise from these trends.
1
https://www.atlanticcouncil.org/news/transcripts/transcript-us-treasury-secretary-janet-yellen-on-the-next-steps-for-russia-sanctions-and-friend-shoring-supply-chains/
Table of contents Table of contents
TABLE OF
CONTENTS
CHAPTER I CHAPTER III

The Future of Trade 26 Technology and the Future of Trade 98
Section One: The outlook for global trade 28 Section One: Implications of technology for the global 102
trade outlook
Section Two: Tectonic shifts and the drivers of trade 34
Section Two: Digital enablers for competitiveness and recovery 114
Section Three: Commodity price developments and an update 42
of the DMCC Commodity Trade Index Section Three: Digitalisation, free-trade pacts, and trade policy 122
Section Four: The drivers and dynamics behind trade recovery 54 Section Four: Crypto currencies, digital currencies, and crypto assets 126
Conclusions, key takeaways, and recommendations 58 Conclusions, key takeaways, and recommendations 130
References for Chapter I 60 References for Chapter III 132
CHAPTER II CHAPTER IV
The Geopolitics of Trade 62 Sustainability and the Future of Trade 134
Section One: Global pivots will define the near-term trade landscape 66 Section One: Green finance and impacts on the trade landscape 142
Section Two: Regionalism, multilateralism, and the new trade order 74 Section Two: Risk factors and challenges 154
Section Three: Nationalism in 2020s trade 86 Section Three: Digital innovation that boosts sustainability in trade 164
Section Four: The politics of supply chains 90 Section Four: Spotlight on semiconductors 172
Conclusions, key takeaways, and recommendations 94 Conclusions, key takeaways, and recommendations 178
References for Chapter II 96 References for Chapter IV 180
10 11
Table of contents Table of contents
CHAPTER V
Structural gaps in trade and
infrastructural finance 184
Section One: The importance of closing trade financing gaps 188
Section Two: Infrastructure gaps, opportunities, and change 192
Section Three: Bridging the gaps through blended finance 196
Section Four: Key developments in the de-risking of investment 200
Conclusions, key takeaways, and recommendations 208
References for Chapter V 210
12 13
Executive summary Executive summary
EXECUTIVE We expect the

SUMMARY underlying, or structural,
outlook for trade to be
underpinned and shaped
At a time of conflict in Europe, geopolitical rivalry, inflationary pressures
and concerns over economic growth, global trade has an encouragingly
by three tectonic shifts:
positive story to tell that may not be immediately obvious.
Multiple underlying factors are likely to support cross-border trade

in both 2022 and in the years ahead: an increasingly regional focus;
A lowering of trade barriers
strength in the services side of trade; and digital innovation, especially in
digital trade. Strategic geopolitical and climate considerations will also Soaring inflation and the policy responses to it
be supportive, while countries’ energy transitions will accelerate in both
developed and developing economies, providing another boost to trade.
The impact of the climate crisis on global trade
The upshot is that global trade growth is expected to remain resilient
in 2022 despite some slowing in pace. The upward trajectory is likely to
continue in the years ahead, but the shape of trade will change significantly. Central bank policy-tightening will become more widespread and
The world appears to be at the dawn of a new era of multilateralism, the pronounced to combat inflation, which will continue to climb in 2022. Fossil
features of which include regionalism, sustainable trade and digital trade. fuel prices are rising at an accelerating pace, driving up energy costs, while
The raft of new trade agreements and partnerships, including the recently rising food prices have begun to hit home in many economies.
launched Indo-Pacific Economic Framework for Prosperity (IPEF)2 and the
UAE CEPA programmes, are encouraging for the future of trade. Digital Central banks are already responding with higher interest rates, making
transformation will need to be central to governments and the private borrowing more expensive worldwide, straining the ability of exporters to
sector as this will further drive and facilitate trade liberalisation. access credit and affordable finance.
In addition, the rise and increasing development of central bank digital The third shift comes from climate change. Global trade will be
currencies stands to reshape global finance, trade, and investment. impacted by the climate crisis in terms of both the economic shocks
and opportunities it will bring. Faced with supply shocks, government
The drivers of lower trade barriers will increase over the next several intervention may be needed to limit potential economic losses. This will
years. Pandemic-induced protectionism in certain goods is costly and involve re-incentivising the private sector and mobilising the public sector.
distortionary. Given this, there is likely to be a migration towards loosening Crucially, as our report highlights, adapting to climate change presents
barriers. This would boost specialisation and reduce trade costs. As trade both business and public policymakers with risks (Eriksen et al., 2021). But
openness increases, production in each economy tends to decouple from it also provides markets for new, sustainable products and opportunities.
domestic demand. Increasing competition vis-à-vis foreign producers Adapting to a new climate scenario3 with a fitting economic growth path
instigates specialisation according to comparative advantage, lowering are inherently connected and trade policy will increasingly reflect this.
overall costs.
2
https://www.whitehouse.gov/briefing-room/statements-releases/2022/05/23/fact-sheet-in-asia-president-biden-and-a-dozen-indo-pacific-partners-launch-the- 3
The global response to the climate crisis has taken place along two interdependent tracks of mitigation, or actions to prevent further global warming through
indo-pacific-economic-framework-for-prosperity/ adaptation (de Coninck et al., 2018).
14 15
Executive summary Executive summary
We are now seeing a much more realistic approach and broader infrastructure and in trade finance. Lowering the cost and barriers to
understanding of where we need to get to in terms of transitioning accessing trade finance is a crucial part of closing the ongoing shortfall.
to a sustainable future, and this represents a huge opportunity for The trade finance gap is likely to have remained above the estimated
business. US$1.7 trillion.4 Tackling both trade and infrastructural financing gaps
in a way that is consistent with the energy transition will be crucial. So,
Beyond these shifts are several significant pivots in the trade too, will be closing the digital divide between countries and sectors to
landscape that could disrupt the status quo. Slower economic bring the benefits of global trade to all.
growth in China is one. Its policymakers are likely to continue a
policy of promoting economic stability and managing a slower, The main findings of the Future of Trade report are:
albeit resilient growth rate. A second could involve the price of
oil remaining at, or above, record levels, fuelling sharp growth
disparities and associated political tensions. A third is the danger of Trade growth will accelerate over the next five years despite
a continued (and unsustainable) rise in debt defaults, which could the current economic upheaval of soaring inflation and slower
fuel instability in fiscally vulnerable regions. More than half of low- economic growth
income countries are in debt distress or at high risk of debt distress,
threatening their ability to buy much-needed imports. A new form of multilateralism will emerge, central to which will
be regionalisation
This environment may seem fraught with risk. But it also offers
governments and business opportunities to act. For businesses, Trade barriers will be lowered over the next three to five years
there should be an increased strategic emphasis on economic
diversification to support resilience and sustainable initiatives Accelerated digital adoption will drive trade
against oil price shocks and climate-related uncertainty in
production. To ensure robust, resilient production, risk management The rise in Central Bank Digital Currencies has the potential to
and production models should shift from just-in-time systems to reshape finance, trade and investment
having a greater focus on long-term strategic considerations and
effective partnerships. An increase in the trade in services will be a feature of the next
five years
For governments, the opportunities lie in part in adapting and
reprioritising public and private economic development strategies to Countries’ energy transitions will play a key role in boosting trade
meet growing demand for goods and services in digital economies,
with a view to enhancing trade facilitation. In addition, continued Risks to trade growth include high oil prices, the slowdown in
trade liberalisation can and should be introduced. Examples of China, and monetary policy responses to soaring inflation.
important policy initiatives include infrastructure development at key
gateway facilities such as ports and airports. Additionally, liberalising
transport services markets, including through relaxing restrictions
on foreign direct investment, can promote consolidation and
productivity upgrading, as well as knowledge spill over.
Below, we set out a series of detailed recommendations for business

and government in response to each of the shifts we describe.
Our over-arching conclusion is that there is an imperative to
build more crisis-resilient economies – financing the shortfalls in
4
https://www.adb.org/publications/2021-trade-finance-gaps-growth-jobs-survey
16 17
Key messages Key messages
KEY MESSAGES
CHAPTER I:
THE FUTURE
OF TRADE
Context Recommendations for business
Global trade growth is expected to remain resilient, at 3 per cent Amid the current geopolitical and economic shocks, firms should increase
annually, in 2022. This would, however, mark a slowdown following 9.8 strategic emphasis on economic diversification to support sustainable
per cent growth in 2021.5 Despite downgrades to 2022 global growth initiatives against climate-related uncertainty in production.
forecasts, sector-specific pent-up demand should continue, in spite of
the impacts of the current conflict in Ukraine. For greater promotion of supply chain resilience, firms should look to
diversify their sources of financing. Enhanced coordination between firms
Global trade should also remain robust over a five-year period despite and financial intermediaries, particularly through greater intercompany
the economic upheaval of soaring inflation, rising interest rates and credit, would help cushion against shocks.
slower growth. An increase is digital trade and trade is services, as
well as the drive for sustainability and a general push for a reduction in Boost trade facilitation processes through increased digitalisation, enabling
trade barriers, should underpin global trade. faster customs procedures, to help offset increases in trade costs.
Global GDP growth is expected to be driven by resilient cross-border

trade in 2022 and beyond, underpinned by recovery in services trade, Recommendations for government
innovation and trade integration. Countries’ energy transitions are
likely to support import and export demand in both developed and Continue to prioritise filling trade financing gaps, that represent shortfalls
developing economies. in required trade finance for SMEs, including through export credit
agencies and the expansion of working capital programmes.
Global supply chain restructuring will continue to be a source of trade
normalisation as firms seek new markets and investment opportunities Make trade promotion a key policy priority.
to build resilient and flexible supply chains. This is likely to reinforce
long-term growth in bilateral trade relationships. Government-guaranteed bank loans should be used to inject cash into
supply chains during times of financial uncertainty and economic shocks.
Trade dynamics will be influenced by big trends: changes in trade Additionally, these guaranteed loans could be securitised and financed by
barriers; inflation-induced monetary and fiscal policy changes; and central banks.
more climate change adaptation on the part of government and
business. Prioritise digitalisation efforts in order to promote greater supply chain
efficiency and resilience. This would continue to reduce trade costs
Upside risks to the oil and energy markets are likely to persist. Both the by promoting more efficient customs and border clearance, improved
ongoing Russia-Ukraine conflict and a general hesitancy to raise OPEC quality of trade and transport logistics.
production limits are likely to contribute to price pressures.
5
https://www.wto.org/english/news_e/pres22_e/pr902_e.pdf
18 19
CHAPTER II:
THE GEOPOLITICS
OF TRADE
Recommendations for business
Context Much of the work in dealing with shocks means being prepared for them. To
ensure robust, resilient production, risk management and production models
The global political landscape is likely to be shaped by key global should shift from just-in-time systems to having a greater focus on long-term
pivots in 2022 and beyond: these will likely include the politics and strategic considerations and effective partnerships.
economic pathways of a slowing China, oil at elevated levels, and
the potential for disorderly debt dynamics. Firms should further combine the advantages of sourcing domestic inputs to
production with the opportunities offered by offshoring and international trade;
Slower growth in China, and the politics of this, as well as oil price an overarching policy objective should be grounded in domestic economic
and emerging market debt dynamics, could signal new paradigms diversification for sustainability.
that have implications for trade and investment.
Firms should upgrade investment in, and the promotion of, digital technologies
The global economic and political landscape will shift considerably that can improve information systems for risk management (such as with
with implications for global cross-border trade and investment. applications of the Internet of Things.); this would, in turn, help build response
Middle powers’6 growing economic clout will boost regionalism and forecasting mechanisms in relation to shocks.
through emerging trade agreements.
Amid new forms of multilateralism, and an increased trend to regionalism,
A new multilateralism is also likely to take hold. Old forms of firms should both diversify supplier connections and utilise and further build
multilateralism will fade, while new forms, such as increased long-term relationships. The latter are typically associated with increased firm
regionalism, will drive cross-border trade in new sectors. resilience and faster recovery after shocks.
In this context cross-border investment and trade could become

increasingly geared to “ally-shoring” rather than bilateral Recommendations for government
investment flows being efficiency-seeking and driven by cost
considerations. Governments should elevate economic diversification within policy agendas, to both
build resilience against shocks, and to promote sustainable growth over the long
OPEC+ is critical for current global oil-price stability. Concerns term and strength in cross-border trade.
over declining spare capacity could add to the inflationary oil price
shock, which has been linked to the current conflict in Ukraine. In the light of the shift to “ally-shoring” by some policymakers, governments should
not lose sight of the benefits of trade liberalisation in the promotion of stronger and
As a result of the pandemic, global debt levels have surged. In broader-based growth.
2020, total global debt reached 263 per cent of GDP, its highest
level in half a century. Disorderly debt dynamics would limit debtor The prospect of unsustainable debt dynamics means that governments should build
countries import demand. financial buffers in key sectors with a view to protecting affordable trade finance.
Targeted stress tests should also be put in place, including for supply chains.
More than half of low-income countries are in debt distress or at
high risk of debt distress; some countries have already defaulted, China’s economic slowdown is likely to be felt both regionally and globally. In order
while debt restructurings have been completed or are underway in to ensure continued and durable investment and trade growth, policymakers need to
some countries. continue to diversify their trade relationships through emerging trade deals.
6
https://www.adb.org/publications/2021-trade-finance-gaps-growth-jobs-survey
20 21
CHAPTER III:
TECHNOLOGY AND
THE FUTURE OF TRADE
Connectivity will be key to a more effective trade system in future, Firms should collaborate with government to scale up investments
and technology will be the great enabler of that. The continued significantly in order to build out more robust digital infrastructure
build-up of transparent, interoperable networks will be of primary ensuring accessible and affordable connectivity.
importance to the global trade outlook.
Firms’ resources should be devoted to developing production processes
There are opportunities for countries to use technology to diversify that promote economies of scale in innovative technologies, including in
their supplier bases. Emerging market economies becoming additive manufacturing, such as 3D printing.
involved in global value chains will need to ensure that they have
stable and attractive operating environments. Firms should help government implement and manage broader trade
facilitation digital systems and platforms; this would ensure more
All of this means increasing the amount and availability of scalable efficient interactions between importers, exporters, and authorities.
digital tools and technologies to promote broader connectivity.
Digital scalability will promote both digital transformation and
improvements in structural economic growth. Recommendations for government
Blockchain technologies have the potential to be disruptive for Governments should reinvigorate their investment climate through
firms facing competition barriers, and for households that want to facilitating imports of capital equipment, and through trade facilitation
exercise more control and efficiency in their energy sources, with and reduced import duties on information and communications
direct implications for the energy sector. technology (ICT).
Governments should adapt their economic development strategies to

elevate the role of digitalisation and to meet growing demand for goods and
services in digital economies, with a view to enhancing trade facilitation.
Greater breadth and application of ICT should be integrated at all levels

of education with a view to promoting economic clustering and industrial
collaboration with firms, to foster export promotion.
Governments (and businesses) need to incentivise ICT use among smaller

firms to enable their effective integration into global digital value chains.
This would include enshrining privacy and data protection standards.
New types of trade agreements should be designed to enable growth of

digital currencies which, in time, would promote interoperability between
payments systems and facilitate an ecosystem that would foster growth in
digital trade.
22 23
CHAPTER IV:
SUSTAINABILITY AND
THE OUTLOOK FOR TRADE
Green finance, both public and private, will continue to expand, Firms should prioritise green investments that aid in macroeconomic
representing an opportunity for investors to scale green resilience and economic transformation, generate returns, and help meet
investments. net zero climate commitments.
Sustainable debt issuance could break another record in 2022, First and foremost, this should involve applying a low-carbon approach
though current global debt dynamics may be a restraining factor. to operations and to the design of products and services, providing a
competitive advantage over late adopters.
Much of the global economy is covered by governmental net-
zero commitments. This is likely to mean increasing levels Firms should devote further resources and funding to promoting sector
of regulation in the coming years. In the short term, this and firm-relevant innovations to contribute to net zero commitments.
could restrain export growth; and yet, in the long run, the Where relevant, exporters’ usage of digital technology will be key to
digital innovation that is likely to occur from complying with sustainable initiatives.
environmental regulations will boost exports.
Global carbon trading markets will be reinvigorated by COP26 Recommendations for government
agreements that put in place some of the guidelines for how the
markets will operate. Governments should agree to reporting standards for green
finance to boost investor confidence. They should ensure that
China will continue to dominate the green tech sector. Of the the application of regulations and standards is implemented in a
three leading green energy technologies in the world — wind coordinated manner.
turbines, solar photovoltaics and electric vehicles — the last two
technologies are overwhelmingly produced in China. Governments should meet their commitments on catalysing green
finance to drive investments, innovation, and blended finance
The semiconductor sector will continue to be at the forefront initiatives aimed at adapting to climate change and meeting climate
of the green and digital transitions. An improvement in global commitments.
semiconductor capacity is expected in 2022, and beyond, as capital
and investment spending are increased to meet global demand. Collaboration with and advance notice of planned ESG regulations
should be given to firms in order to allow companies enough time to
In the short term, the war in Ukraine, and sanctions imposed on develop sector specific strategies and company business models.
Russia, are likely to further disrupt global semiconductor supply
chains. One of the knock-on effects of US sanctions on Russia A further scaling up of infrastructure investment is required to
could be to increase Russian demand for semiconductor chips allow green technology to flourish at scale, to safeguard long-term
from China. sustainable trade and to help de-risk further infrastructural investment.
24 25
CHAPTER V:
STRUCTURAL GAPS IN TRADE
AND INFRASTRUCTURE FINANCE
Infrastructure – and renewed investment in infrastructure – will Increase co-investment initiatives with development finance institutions and
lower costs in transportation. But the spike in oil and commodity multinational development banks in order to build a larger market for blended
prices will exacerbate the trade financing gap for resource- finance that would channel more financing into sustainable initiatives.
constrained SMEs and constitutes a negative growth shock (of
anywhere between 0.25 and 1 per cent depending on the economy). Financial institutions and firms should start to pivot away from traditional
models of bilateral investment transactions towards greater use of blended-
Fintech continues to help close the global trade finance gap, now finance funds and facilities in order to build sustainable investment initiatives.
likely to be over the US$1.7 trillion estimate; An illustration of this is
the use of blockchain for payment systems, or machine learning for To close financing gaps, portfolio investments managed by financial
underwriting. These mechanism help connect micro enterprises and institutions and non-bank financial institutions could be utilised to create
SMEs to investors. larger deals (through structured funds), to increase diversification and scale
up private finance.
The mobilisation and further scaling of blended finance remains an
important pathway to help close both the substantial trade finance
gap and infrastructure financing gaps that have been, in part, Recommendations for government
exacerbated globally by the COVID-19 crisis.
Policymakers need to strengthen the investment ecosystem and align
it with climate-change mitigation policies to mobilise greater green
investment, particularly in the renewable energy sector.
Prioritise automation of trade facilitation, which has proven crucial for the
cost efficiency of SMEs. For women-led businesses, automation also helps
eliminate formalities that subject women entrepreneurs to discrimination.
Greater standardisation in blended finance would simplify and lower

transaction costs, as well as promote transparency. Closer coordination
between pension funds and sovereign wealth funds would mobilise more
blended finance.
26 27
CHAPTER I
THE FUTURE
OF TRADE
CHAPTER I: The future of trade CHAPTER I: The future of trade
SECTION ONE FIGURE 1
THE OUTLOOK
Export and import growth in services trade
ANNUAL PERCENTAGE CHANGE
FOR GLOBAL Volume of imports of goods and services Volume of exports of goods and services
TRADE
15,000
10,000
5,000
-5,000
-10,000
-15,000
1980 1990 2000 2010 2020
Five pillars
of 2022 trade
Global trade growth is expected to remain Increased regionalism: Regional trade A significant catch-up in services trade:
resilient in 2022, despite the likelihood of agreements are becoming stronger and The gap between trade in goods, which has
it slowing somewhat in comparison with more prevalent, and include the Regional accelerated, and trade in services, which
2021. Notwithstanding several uncertainties, Comprehensive Economic Partnership (RCEP), remains comparatively more moderate, is
particularly regarding the short-term outlook involving the Asia-Pacific region, that came likely to narrow. Continued, albeit more
for services trade, strong growth in demand for into force on 1 January 2022 and which, it is moderate, services trade growth is likely
goods will prevail, in part a reflection of pent-
up demand. This will support an acceleration
estimated, will eventually account for 30 per
cent of world trade. Although trade growth
given the recent bounce-back (Figure 1),
given that global services trade regulations
Regional
in trade growth in the years ahead. An remained uneven in 2021, it has since showed have shown signs of increased liberalisation, trade
agreements
improvement in cross-border trade has already some signs of broadening. Additionally, trade according to the OECD Services Trade
been supported by the easing of COVID-19 flows are expected to accelerate strongly for Restrictiveness Index.10 Additionally,
pandemic restrictions, by economic stimulus
packages, and (for resource exporters) by
developing countries, closing some of the
disparity with richer ones. The United Nations
notwithstanding China’s slower growth
prospects, services trade will expand
are increasing
recent rises in raw-materials prices. Conference on Trade and Development significantly in emerging and developing
(UNCTAD) valued global goods trade at economics, owing in large part to vast
Multiple underlying factors are likely to US$5.6 trillion in the middle months of 2021, improvements in digital infrastructure and,
support cross-border trade in both 2022 denoting an all-time record. in some cases, the transition from middle- to
and the years ahead. Increased regionalism, higher-income status.
strength in services trade, and innovation
will significantly boost prospects. Strategic Broad-based innovation: The powerful
geopolitical and climate considerations two-way relationship between trade and
will also support these economic drivers: innovation is likely to strengthen in 2022
increased demand growth for sustainable and beyond. The introduction of new and
goods will accelerate in both developed and breakthrough technology will dominate
developing economies. the global trade outlook. Structurally,
7
https://unctad.org/system/files/official-document/ditcinf2022d1_en.pdf
8
https://unctad.org/news/global-trade-hits-record-high-285-trillion-2021-likely-be-subdued-2022
9
https://rcepsec.org/2022/01/14/rcep-agreement-enters-into-force/ 10
https://www.oecd.org/newsroom/services-trade-liberalised-in-2021-showing-significant-decrease-in-volume-and-effects-of-new-measures.htm
30 31
FIGURE 2 A resilient, equitable, Trade aids economic diversification: This

Export and import growth in services trade and green recovery in can contribute to economic resilience by
allowing countries to be less dependent
DOLLARS PER BARREL
global trade on a limited number of importers,
Europe Brent Spot Price FOB Cushing, OK WTI Spot Price FOB exporters, and a restricted number
The underlying resilience of the global of sectors. Trade and diversification
200
economy, and the global trading system, will can also reduce reliance on vulnerable
be of particular importance in the years ahead, sectors with a view to protecting against
150 given the likelihood of multiple shocks. climate risk.11 Trade facilitation will
boost trade integration and sustained
The COVID-19 crisis, and the prospect of diversification for emerging and
100
increasingly frequent and intense natural and developing economies’ climate resilience,
man-made disasters, raise important questions in particular (UNCTAD, 2018).
50 regarding the strength of the global economy
to deal with multiple and unexpected shocks. Trade integration: The World Trade
0
Organization’s promotion of lower
Crucially, the global trading system has both trade barriers and further international
-50 the capacity to propagate shocks and to cooperation strengthens trade
Jan 02, 2007 Jan 14, 2010 Jan 28, 2013 Feb 01, 2016 Jan 25, 2019 Jan 14, 2022 mitigate them. Often, shocks transmission transparency and economic resilience,
occurs through investment and trade links. better preparing the world to deal with
Therefore, strengthening these links with a future crises. A more open, inclusive,
over the long term, exporter firms that (and often unpredictable) drivers in view to enhancing multiple forms of finance predictable, and coordinated trade
engage in digitalisation will continue to see demand, the current situation in Ukraine for economic development – will enable environment will ensure quicker recovery
high profitability driven by productivity may continue to exert an influence on the countries to be more economically resilient. from future shocks. Risk-reduction
gains. Given this, trade, policy, and trade market. High fuel prices have a knock-on Moreover, over the longer term, fostering measures and resilience policies in one
agreements will be critical in shaping impact on shipping costs, contributing to sustainability and innovation ensures both country can have positive spill overs
incentives to innovate and invest – with the backlogs across major supply chains, a income gains and structural improvements in elsewhere (WTO, 2021).
key mechanisms coming through to increase condition that may well continue. This will underlying growth.
market size, competition, comparative mean continued upside price pressures Global value-chain restructuring: Moves
advantage, and knowledge spill overs (Melitz (Figure 2). Trade will help build resilience in 2022, and towards digitalisation, regionalisation
and Redding, 2021). Several transformative beyond, though the following pathways: and localisation of production, and
technologies are emerging in unison and Strategic geopolitical considerations: diversification will reinvigorate a broader-
are self-reinforcing, which could create a Geopolitics will drive the need for further Mobilisation of resources: Trade based recovery in global growth and
global trade super-cycle. Digitalisation will bilateral trade to consolidate essential liberalisation can generate the resources in cross-border trade (ADB, 2021).
make trade and business more efficient and geostrategic ties, particularly for the major and knowledge spill over needed to prepare Increasingly, advanced economies are
transparent. Increased transparency will world economies (Zhang, 2018; Brzezinski, for crises and mitigate them by facilitating creating a growing share of value and
reduce risks for financial institutions and 1997). The need to protect countries’ the provision of goods and services. Owing employment in global value chains
lenders, and also enable companies to build own strategic interests and weaknesses to its interconnected nature, international through innovation, digitalisation, and
greater resilience and sustainability into their in specific sectors will continue to be trade can increase an economy’s exposure intellectual property (ibid.). Merchandise
supply chains. a decisive influence on the direction of to risks and contribute to the transmission trade has rebounded faster than gross
trade. Since the onset of the COVID-19 of shockwaves. But at the same time, it can domestic product, propelled by fiscal
Commodity and energy market pandemic, for example, the semiconductor bolster economic resilience, particularly and monetary stimuli, along with
developments: High fuel and energy prices industry has been facing headwinds due when backed by domestic policies and governments’ broad restraint in the use
will have mixed and multifaceted impacts to unanticipated surges in demand and effective global cooperation. of trade protectionism.
on cross-border trade, mainly benefiting persisting supply constraints.
exporters. In addition to continued large
11
https://unfccc.int/topics/resilience/resources/economic-diversification
32 33
Ultimately, building greater resilience is growth.12 Significant strains in global supply A resurgence in sustainable trade: and Kanellos, 2022; Coutts, 2022).
essential. Global COVID-19 infection rates chains that emerged in 2021 have abated, Climate change is driving increases in However, resource exporters are likely
remain intermittently high, driven in part by following the reversal of pandemic-related extreme weather events, such as droughts, to benefit from elevated energy prices,
the continued spread of virus variants. In the factory and port shutdowns, weather- cyclones, and floods, which can have which could, in turn, incentivise economic
light of this, several emerging and developing induced logistics bottlenecks, and an devastating effects. Safer production diversification and transformation within
economies are experiencing notably weaker acute shortage of semiconductors and processes have reduced the frequency of resource-dependent economies. This
and more fragile recoveries compared with shipping containers. The tourism industry, technological and industrial disasters. And would boost long-term sustainable growth.
advanced economies – a development particularly important for several smaller yet, rising inequality, increasing economic
that has now been exacerbated by oil- and developing economies, is now likely to fragility, and growing political uncertainty Strategic geopolitical considerations:
commodity-price developments, which stand strengthen, raising its contribution to and geopolitical tensions are augmenting Countries need to protect their strategic
to harm growth for resource importers. In the economic growth within conducive policy the risk of conflicts. A reorientation of interests. This will also influence trade in a
longer term, the economic scarring effects frameworks (Vu and Hartley, 2021). trade to products and services that are way that could foster more environmental
from the COVID-19 crisis on potential output geared to climate resilience constitutes a sustainability. One illustration of this is the
could continue to reflect the pandemic’s Debt forgiveness: Increases in private as key opportunity. realignment of India’s Vietnam policy with
adverse impact on physical and human capital well as public debt (Figure 3) have left a view to promoting trade and investment
for some time. many emerging and developing market Trade will help foster equity in 2022, and in line with the United Nations Sustainable
economies vulnerable to financial stress. beyond, though the following pathways: Development Goals (SDGs). It is, in part,
Trade will help foster equity in 2022, and Recovery has been further dampened by driven by a desire to counterbalance
beyond, though the following pathways: waning policy support and the start of Innovation: The virtuous circle between China’s geostrategic presence in Vietnam
policy-tightening in several economies, trade and innovation will strengthen and in the Indo-Pacific region more
Recovery in the tourism sector: So far, seeing a turn in financial conditions. in 2022 and beyond, with new and generally (Aswani et al., 2021).
the pandemic recovery has seen a global Initiatives such as the Debt Service ground-breaking technology continuing
boost in the trade in manufactured goods, Suspension Initiative13 are likely to have to dominate and shape the outlook.
particularly durable industrial goods. The helped stabilise the macroeconomic and Structurally, international trade will
increase in industrial production has been financial ecosystem in a few countries, thus continue to foster firms’ profitability over
mirrored almost one-to-one by solid trade enabling a recovery in trade and investment. the long term. Given this, trade, trade
policy, and trade agreements will be critical
in shaping incentives to innovate and
FIGURE 3
invest. In 2022, the four key mechanisms
General government debt through which international trade affects
PER CENT OF GDP innovation and growth – increasing market
size, boosting competition, comparative
Advanced economics Emerging market and developing economies
advantage, and knowledge spill overs –
140 are likely to take centre stage (Melitz and
Redding, 2021).
120
100
Energy market developments: High fuel
80 and energy prices will have several impacts
60
on global trade dynamics. For one, high fuel
prices are likely to continue to translate into
40
elevated shipping costs, something that
20 has already contributed to backlogs across
0 major supply chains that could continue
2017 2018 2019 2020 2021 2022 intermittently throughout 2022 (Schiffling
12
https://www.oecd.org/coronavirus/policy-responses/international-trade-during-the-covid-19-pandemic-big-shifts-and-uncertainty-d1131663/
13
https://www.worldbank.org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative
34 35
SECTION TWO
TECTONIC SHIFTS
AND THE DRIVERS
OF TRADE
There is a strong and well- First tectonic shift: Alternatively, lower trade barriers can
established link between Triggers for lower trade originate from policy, such as lower quotas.
Under a given set of trade barriers, policy
structural change and cross- barriers will increase changes also affect specialisation.
border trade. International trade
fosters transformation – and vice Protectionism is costly and distortionary Changes in export costs are particularly
(Kutlina-Dimitrova and Lakatos, 2017). By important for low-income countries, where
versa. In an underlying sense, contrast, easing trade barriers14 facilitates they are typically and comparatively higher
cross-border trade influences specialisation though creating comparative (Hoekman and Nicita, 2011; Waugh, 2010).
employment dynamics and advantages for both the demand side (the Additionally, the increase in preferential trade
importing country) and the supply side (the agreements among advanced economies has
value in multiple sectors. More exporting country). An essential implication made breaking into some of the most profitable
specifically, trade influences and of this is that each economy’s production markets even more challenging.
decouples from domestic demand and
shifts the allocation of labour becomes increasingly linked to foreign As for predicting future trade, economic gravity
across sectors in an economy and demand. This specialisation, in turn, can lead models – which forecast bilateral trade flows
can induce productivity changes to increased employment and greater value- based on the economic sizes and distance
added in manufacturing. between two units – are instructive but have
at the company level. There are several shortcomings. They are, for example,
several tectonic shifts ahead that Lower trade barriers come through two main based on a static theory rather than intra-
will influence trade dynamics. channels: technology and policy. cyclical trade or company dynamics. A key
challenge in making predictions, therefore, is to
This section covers three of those The trigger can be technological. Lower identify whether the low (observed) trade flows
shifts: trade barriers, inflation- shipping costs, for example, followed in low-income countries reflect current or future
induced policy changes, and the development and adoption of expected high trade costs (Alessandria, Choi
containerisation. and Lu, 2017).
adapting to climate change.
14
The direct impact of new trade barriers introduced since mid-2018 is estimated to have been modest. The direct effect of increased protectionism on world GDP
growth via trade flows, supply chains, and import costs appears to have been modest, reflecting the fact that tariffs to date have been largely contained to the US
and China (Bank of England, 2019).
36 37
Second tectonic shift: economy financing conditions have Third tectonic shift: shocks but play a particularly evident role
Inflation-induced policy tightened too, reflecting policy-rate hikes in Greater climate in climate-related and technological shocks
several large countries, including Brazil and (WTO, 2021). Policy responses to supply
changes Mexico, and by several Asian central banks,
adaptation shocks take different forms – and it is likely
such as Taiwan and South Korea. Of the that grants, loans, production subsidies,
Inflation continued to rise throughout the nearly two dozen emerging and developing The consensus recognition that climate- infrastructure investments, deregulation, and
second half of 2021 and into early 2022. It economies whose central bank announced change impacts are accelerating and that the increases in funding for training will take on
is being driven by several factors of varying or implemented asset purchase programmes world will be subject to further global warming increased primacy.
importance. in 2020, one third raised policy rates in 2021 means countries must adapt to confront the
(World Bank, 2021). crisis. Faced with supply shocks, government How a household, community, business, or
Fossil-fuel prices continue to accelerate, intervention may be needed to limit potential country adapts depends on their vulnerability
driving up energy costs and causing higher Higher interest rates make borrowing more economic losses. This will involve both re- to hazards, which is shaped in large part by
inflation. Rising food prices have contributed expensive worldwide, straining public incentivising the private sector and mobilising the capacities they have for managing climate
to higher inflation too. Meanwhile, ongoing finances and the ability of exporters to the public sector. Crucially, adapting to risks. In the light of this, in the years ahead,
supply-chain disruptions, in both ports and access credit and affordable finance to climate change is far more than a series of climate adaptation – and its structural impact
on land, and high post-pandemic demand transact effectively and easily. For countries technocratic measures aimed at changing on bilateral trade – will take on multiple forms.
for goods have all led to broadening price with high foreign currency debt, the practices; it is about changing the structural It is likely to involve changes in processes,
pressures, in both developing and developed combination of tighter financial conditions drivers of risk (Eriksen et al., 2021). practices, and structures (ranging from
economies. Higher import and producer prices and higher imported inflation will impact building higher bridges, to planting new
have heightened this impact through multiple firms’ investment and trading climate. This Adapting to climate change and economic varieties of more drought-tolerant maize, to
transmission mechanisms. could, in turn, have a significant knock-on growth are inherently connected; trade relocating coastal communities).
impact on cross-border trade – particularly policy will increasingly acknowledge this.
As a result of rising inflation, several central in the form of lower import demand and Establishing more resilient economies through Adapting will be essential in cross-border
banks, including the US Federal Reserve, have deteriorating export competitiveness. a process of structural reform will involve services trade, such as tourism. Trade in
started to tighten monetary policy multiple reducing dependence on climate-sensitive travel and tourism is affected by a wide range
times, and are likely to continue to do so. The activities and increasing green industrial of climate shocks (Rossello et al., 2020).
European Central Bank (ECB) has announced policies. This will diversify production away Individual travel decisions are influenced by
a phasing out of its asset purchase program from commodities, broaden the tax base, and various external factors, such as income and,
(APP). The ECB has also committed to generate new development finance. more recently, the COVID-19 crisis (Gossling
maintaining unchanged interest rates until et al., 2021). All types of disasters and
after the end of the Governing Council’s net Within the public sector, it is likely that unexpected shocks can trigger a decline in
purchases under the APP; it has intimated that there will also be moves to larger-scale international demand for tourism by impacting
any rate rises are likely to be gradual though public investment in renewable energy, a country’s asset base, reducing income,
guided by the bank’s commitment to stabilise green technologies, and green agricultural or increasing political or environmental
inflation at 2 per cent over the medium term. policy that protects small producers and the uncertainty. Crucially, natural disasters
environment. This is to protect against shocks. can destroy travel-related infrastructure,
Less accommodative US monetary policy Supply effects are common in all types of influencing consumer perceptions.
is likely to prompt tighter global financial
conditions. Emerging and developing
16
The global response to the climate crisis has taken place along two interdependent tracks of mitigation, or actions to prevent further global warming, by
avoiding or reducing emissions and adaptation, or actions to prepare for the negative impacts of climate change (de Coninck et al., 2018). The two strategies are
fundamentally intertwined, as the degree of adaptation needed ultimately depends on the degree of mitigation achieved.
15
https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp220414~d1b76520c6.en.html 17
TRenewable energy production, for example, can operate at a low scale, thus opening up business opportunities for small firms and in rural areas.
38 39
There is a need for greater financing

Interview: Kai Fehr to assist companies’ energy transitions
Global Head of Trade and Working Capital, but also to help SME grow. What are the
Standard Chartered challenges and opportunities here?
Let us start with the smaller SMEs. The

trade finance gap has grown by almost
60-70 per cent to 1.7 trillion dollars
Do you expect to see growth in trade reconfigure supply chains to allow for the and there are two solutions to address
and services, as we emerge from the efficient movement of money, energy, “Technology that. One is technology. At Standard
pandemic? And what is your view on the and goods within each cluster, but will can increase supply Chartered, technology has made it easier
future of growth or reduction in trade lead to the decline of the globalised trade to onboard suppliers. An Enterprise
globally? system that we know today. Some of chain transparency, Resource Planning (ERP)-based model
this reconfiguration was already being but it is also vital can help get financing to businesses
The answer here is multifaceted. In seen pre-pandemic, for example with the
to have insights at all nodes of the supply chain. Facial
terms of value, trade is increasing as movement of production from China into recognition can also replace the need for
inflation is causing prices for goods and Vietnam. regarding where SMEs to sign multiple documents in order
commodities to rise. But supply chain financing is needed to become a supplier. Secondly, to reduce
disruptions have led global trade volumes
to decline. Looking ahead, there are a
How are companies and countries
adapting as the world moves towards
and then providing it the trade finance gap we need to reduce
risk. Providing financing post-shipment is
few trends which will impact how trade net-zero? to specific tiers of a comparatively easier and less risky than
is conducted. Firstly, wealth asymmetry supply chain.” providing pre-shipment finance to help
is growing at a much faster rate than Net-zero is here to stay and the drive fulfil SMEs’ production and procurement.
we have seen previously, eroding the towards sustainability will be seen across Technology, such as smart contracts and
middle class and leading to two different all global trading clusters. Sustainability tokens can de-risk this financing, as it
types of supply chain emerging. One has become central in everyone’s mind, increases transparency throughout the
will produce affordable consumer goods and it is now almost mandatory for supply chain. The future will see these
for the mass market, and the other will organisations and companies to adopt technologies become more common
be for the luxury market. Secondly, you sustainable practices. Increasingly, globally.
have supply chain disruption caused companies will need to adhere to ESG
by COVID-19, such as ports closing and standards and demonstrate that their Broadly what you are talking about here
trade documents not being delivered, for products or services are sustainable in is decentralised finance - could you
example because couriers are ill. Thirdly, order to sell them. Consumers are also elaborate more?
global workforces will be fundamentally demanding these changes. Multinational
altered by an ageing population and the companies with complicated supply Technology can increase supply chain
advancement of new technologies, which chains and multiple suppliers will transparency, but it is also vital to have
will see lower-qualified workers replaced need to do greater due diligence. This insights regarding where financing is
by AI and robots. Fourthly, there is an is something that banks find quite needed and then providing it to specific
emerging fragmentation of global trading interesting, as it creates the need to tiers of a supply chain. Coming back to
relationships. New trading clusters may provide financial instruments that are the example of pre-shipment financing,
emerge, such as a Western cluster or a sustainable and encourage sustainability it is difficult to provide this finance as
Russia-China-India cluster, etc. This will within supply chains. there are multiple points in the supply
40 41
chain where finance is required. Banks One of the areas which we have been
will generally only have risk appetite to looking at is carbon trading and
finance the first and second tiers of a carbon borders. We’ve heard concerns
pre-shipment supply chain, so there is a that carbon borders could be used in
requirement for new financial institutions a protectionist fashion and that we
to emerge that can finance tier-three, might see the emergence of multiple
tier-four, and tier-five companies within different jurisdictions across the
supply chains as well. To overcome this, world with different carbon prices and
banks need to act as intermediaries mechanisms in place. What are your
“Sustainability for multi-channel financing platforms “Ultimately, views on this?
financing is here that pair a company’s credit appetite I believe we will
with the lenders who have the Ultimately, I believe we will see
to stay, but we appropriate risk appetite. It would see evolution evolution towards global and common
need more data really help SMEs to have platforms that towards global carbon standards. Carbon pricing
to help with its efficiently pairs credit and risk appetites

and common and borders could be used for
of manufacturers and funders in a protectionism, but consumers are
implementation transparent fashion. carbon demanding sustainable products,
and transparency.” standards.” so hopefully one standard that best
What about green finance? meets consumers’ demands will prevail
and be widely adopted. Predicting a
It is a separate issue, and we need a timeline for this is difficult, but I’m very
very clear green financing framework. positive that underlying currents are
Banks have traditionally focused on pushing sustainable design, sourcing,
financing renewable energy production. and production to be a permanent
This is great but does not solve the feature of sustainable supply chains.
problem alone. What we need is a This means there is no other alternative
framework for financing the entire except to agree to a global and
supply chain to enable every single common standard over time. From a
aspect of it to become sustainable. We finance perspective, it would certainly
need sustainability to be measurable in be much easier to navigate a global and
real-time at every node in the supply common standardised carbon market.
chain to provide accurate and widely
accepted sustainability certificates
and enable banks to make quick and
effective decisions as to whether a trade
instrument will receive financing or not.
We are proud at Standard Chartered
to be ahead of the curve and have a
sustainable trade finance framework in
place. Sustainability financing is here to
stay, but we need more data to help with
its implementation and transparency.
42 43
SECTION THREE
COMMODITY PRICE
DEVELOPMENTS AND Reductions in
AN UPDATE OF THE trade costs are
associated with
DMCC COMMODITY stronger trade
TRADE INDEX growth
Technology and competitiveness: From a

Trade will be a critical engine of growth in 2022 The importance of competitiveness standpoint, there is significant
and beyond – particularly for the economies trade costs for the trade variability between the ease at which costs
can be reduced from sector to sector. Some
that are yet to fully recover from the economic outlook is premised on sectors have the potential for significant cost
scarring associated with the COVID-19 crisis. the following: reduction (through gains from technology
creation and its impact on upgrading
And yet, there is rising inflation, which will mean and transforming production processes).
higher trade costs and prolonged supply-chain Faster relative export growth: This is linked Under the expansion of Industry 4.0 (the
disruptions that will creep into commodities, to countries that engage in reducing trade technology-driven fourth industrial revolution),
costs, generating cost competitiveness manufacturing has the potential for significant
including food and agricultural products. (Decramer et. al., 2014). Bigger reductions reductions in cost.19 This dynamic can also
in trade costs are associated with stronger apply to labour-intensive sectors.
trade growth. Therefore, policies to reduce
An increase in trade costs, including both Higher oil and energy prices present trade costs can be effective in boosting Distribution of productive resources: Trade
energy and non-energy components, will, in multidimensional risks. On the downside, integration into the global trading economy. costs are crucial in that they affect the
all likelihood, be a defining characteristic of one such risk, albeit a moderate one, is Additionally, countries with lower trade distribution of resources that are devoted to
the coming trade landscape. When it comes a return of COVID-19-related restrictions costs tend to participate more in global production. In a relative sense, trade costs
to trade, rising prices, trade costs, and energy (Patterson, 2022). But in the absence of value chains. Given this, the increase in affect the balance between sectors – one
costs could erode country (and counterparty) such a development, upside risks to the oil trade costs (and the composition of trade extreme being that, without trade costs,
financing limits that support trade and could and energy markets are likely to outpace costs) will be a core driver of relative trade countries specialise according to their
exacerbate trade financing gaps. There are downside factors for some time, particularly performance in the years ahead. This is comparative advantage.20 By contrast, when
other intermittent factors, such as the Suez amid a protracted Russia-Ukraine conflict particularly true for economies that need to trade costs are high, specialisation decisions
Canal toll cost increase, which could be and a general hesitancy to raise OPEC boost competitiveness. are distorted, leading to an anti-export bias
contributing factors in future.18 production limits. (Hoekman and Shepherd, 2015). For example,
14
https://www.reuters.com/business/egypts-suez-canal-increase-tolls-by-up-10-2022-02-27/?taid=621c0273af8d2b0001570206&utm_ 19
This is to a greater degree than, for example, in agriculture (where the impact is notable but not as significant).
campaign=trueAnthem:+Trending+Content&utm_medium=trueAnthem&utm_source=twitter 20
Comparative advantage is defined here as carrying out a particular activity more efficiently than another party.
44 45
high trade costs (which can be seen An expected FIGURE 4

as a form of protectionism) encourage
resources to flow into agriculture at
acceleration in energy Consumer price inflation in emerging and developed economies
ANNUAL PERCENTAGE CHANGE, END OF PERIOD
the expense of other high value-added costs will disrupt the
sectors, such as manufacturing, where
trade landscape Emerging market and developing economies World Advanced economies
they can sometimes support an anti-
export bias. 9
Oil prices are expected to continue
8
Global value-chain entry: The ease with to rise, owing to pent-up demand,
7
which manufacturers can participate in geopolitical factors, OPEC production
global value chains – the full gamut of cuts, and market dynamics.23 Both 6
how a product gets to market – is linked emerging and developed economies are
5
to lower trade costs. Such chains crucially likely to continue to see an acceleration
4
bring together businesses and different (Figure 4). Oil-price increases – and,
aspects of the manufacturing process. more specifically, oil-price shocks – can 3
Transport costs are, therefore, a key have multidimensional macroeconomic

2
input21 and border procedures need to be impacts, including on trade. Higher oil
1
fast, reliable, and cost-effective for the prices can also stifle economic growth
business model to be successful. Global through their effect on the supply and 0
value chains offer significant opportunities demand for non-oil goods. High oil prices 2000 2003 2006 2009 2012 2015 2018 2021
for employment, production upgrading also can reduce demand for other goods,
through inward investment and technology because they reduce wealth, as well
adoption and adaptation over time as induce uncertainty about the future
(Sampath, Padmashree, and Vallejo, 2018). (OECD, 2020). Interpreting movements of inflation and De-anchoring of
growth directly in relation to oil-price inflation expectations
High trade costs and currency One way to analyse the effects of higher shocks may be misleading, however. In
developments: Currency undervaluation22 oil prices is to think about the higher the past, they have tended to coincide
and trade prospects
as an industrial policy (as in China) prices as a tax on consumers (Fernald with other economic shocks. In the
can and has been seen in the past as a and Trehan, 2005). The simplest example 1970s, there were large increases in Global inflation has risen at a faster pace
means to foster domestic manufacturing, occurs in the case of imported oil. The commodity prices, which intensified than anticipated in recent months, resulting
largely by facilitating an external trade extra payment that US consumers make the effects on inflation and growth. By in steady upward revisions in forecasts.25
surplus (Rodrik, 2010). Yet, currency to oil producers can now no longer be contrast, the early 2000s were a period Further increases in commodity and oil prices,
undervaluation can harm a country’s spent on other kinds of consumption. of high productivity growth, which offset continued strong demand for goods amid
comparative advantage by altering the Despite the effects on supply and the effect of oil prices on inflation and persistent supply bottlenecks and disruptions,
composition of exports. Undervaluation demand, the correlation between oil- growth. Therefore, to determine whether and, in some economies, sustained currency
may promote specialising away from high price increases and economic downturns the relationship between oil prices and depreciation could compound inflationary
value-added manufacturing and, instead, in the United States is not perfect: not other variables has truly changed over pressures (Ha, Stocker, and Yilmazkuday, 2020).
favour specialisation in broader goods that every sizeable oil-price increase has time, one must assess the context.24 The
are more sensitive to price fluctuations been followed by a recession. However, current environment is one in which Additionally, large outbreaks of COVID-19 due
(Bergin, 2022). In other words, currency five of the last seven US recessions were there are upside pressures on the oil to new variants could further disrupt global
undervaluation may, in some cases, preceded by considerable increases in oil price from both the demand side and the supply chains and transport logistics, further
compromise economic transformation. prices (Sill, 2007). supply side. boosting global inflation pressures. A renewed
21
The OECD-WTO Trade in Value Added Database suggests that a country that has a higher participation index tends to export more of its goods as intermediate
goods that are used in other countries’ exports and imports more intermediate goods for use in its own exports. Both types of linkages are evidence of
participation in GVCs.
22
Currency undervaluation is defined broadly here as the level of the exchange rate that is below most estimates of long-term fair value for the particular currency. 24
https://www.frbsf.org/education/publications/doctor-econ/2007/november/oil-prices-impact-economy/
23
https://www.iea.org/reports/oil-2021 25
https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q1-2022
46 47
surge in energy prices could also result in provided, which ranks the most important The DMCC 5. Hub’s share of global commodity trade
sharply higher food prices, if it were to cause countries in terms of their clout regarding Commodity Trade for coffee, grains, sugar, gold, diamonds,
a sustained increase in the cost of agricultural the import and export of primary goods. soya beans, tea, cotton, silver, animals and
inputs, such as fertilisers. Since the last Future of Trade report,
Index animal products, and plastic
the world has been heavily impacted 6. Natural-resource rents as a share of GDP
Increasingly pronounced labour shortages, by the COVID-19 pandemic and the In this report, we produce the third
particularly in sectors facing strong demand associated supply-chain issues it has iteration of the Commodity Trade Index, Institutional factors
and tight supply, could further accentuate caused. As countries have imposed allowing us to reassess the performance 7. Financial services infrastructure
wage pressures that would, in turn, pass lockdowns at various points in time, of top trading hubs and compare how the 8. Attractiveness of the tax regime
through to consumer price inflation. Advanced manufacturing output has been limited relative rankings have changed over time. 9. Strength of regulatory enforcement
economies such as the United States, the United in certain locations, creating supply- 10. Logistics performance
Kingdom, and Canada are particularly at risk, chain bottlenecks that have affected The Commodity Trade Index assesses
as they are experiencing significant inflationary many businesses. The conflict in Ukraine the role of ten key commodities trading In order to create the index, the data for
pressures that could persist well into 2022. But has further caused a significant rise in hubs within global trade. The index each indicator were standardised and
among emerging and developing economies, commodities prices and increased political also assesses which global locations scaled within the 0 per cent to 100 per cent
inflationary pressures have also been rising. tensions across the globe. can expect to maintain their status as a range. They were also adjusted for outliers
trading hub. It incorporates ten indicators and then combined to create the composite
It is likely that a prolonged period of Despite these significant geopolitical to produce an index score for the US, index. Each of the three sub-categories
upward surprises to inflation could cause developments, this report shows that the Netherlands, Singapore, the UK, the UAE, is given equal weighting. For more detail
consumers and firms to reassess their inflation top global commodities trading hubs have Switzerland, Hong Kong, China, South on how the Commodity Trade Index was
expectations. In emerging and developing managed to maintain their positions over Africa, and Nigeria. This is the third created, please refer to the appendix later
market economies, a one-per centage-point the past two years. iteration of the Commodity Trade Index, in this section.
surprise in headline annual inflation has after it was first introduced in the 2018
been found to raise medium-term inflation The key findings of the report include: Future of Trade report and refreshed in
expectations by 0.2 of a per centage point a 2020.
year (Kose et al., 2019). Higher inflation, once The 2022 Commodity Trade Index results
embedded in expectations, could weigh on show that the US maintained its position The Commodity Trade Index looks at three
both consumer and business confidence (Rudd, as the top global trading hub. major factors important to commodity
2021). If inflation expectations rise above trade via ten individual sub-indicators. The
central-bank objectives, they could also lead Despite scoring best overall, the US didn’t data underlying the indicators are taken
to a potentially sharp adjustment of monetary record the highest score for any of the from sources such as the World Bank or
policy, causing a sudden rise in borrowing three pillars of the Commodity Trade Index: the United Nations.26
costs, particularly in emerging economies – commodity endowment factors,
(Arteta et al., 2015). – locational and trading partner factors, The ten indicators analysed are:
and
– institutional factors. Locational and trading partner factors
1. Headquarters locations of major
An update of the The UAE received the top score for the commodities trading houses
DMCC Commodity commodity endowment factors pillar, 2. Proximity to markets (based on

thanks to its large reserves of natural commodity export data)
Trade Index resources. 3. Commodity trade partner tariffs on
primary goods
The DMCC Commodity Trade Index examines Meanwhile, the Netherlands scored top
the current state of global trading hubs and for locational and trading partner factors, Commodity endowment factors
compares the results with previous Future while Hong Kong took the first spot for 4. Tonnes of oil exported annually
of Trade reports. An update of the index is institutional factors.
26
For a detailed methodology and list of sources and references, please see the appendix in this section.
48 49
Commodity Trade Index results Commodity Trade Index results 2018 and 2020
Country Commodity Locational Institutional Index score Country Index score Rank 2018 Index score Rank 2020
endowment and trading factors (%) 2022 (%) 2018 (%) 2020 (%)
factors (%) partner
factors (%)
United States 54 56 63 58 United States 47 5 53 1

of America of America
United Arab Emirates 74 2 72 50 United Arab Emirates 56 1 53 2
Netherlands 6 77 63 48 Netherlands 54 2 48 3
Switzerland 9 66 69 48 Switzerland 49 3 47 4
United Kingdom 19 45 70 45 United Kingdom 49 4 46 5
Hong Kong SAR, China 11 39 83 44 Hong Kong SAR, China 39 7 45 6
Singapore 2 49 74 41 Singapore 40 6 41 7
China 34 21 42 32 China 30 8 33 8
South Africa 10 24 30 21 South Africa 20 9 23 9
Nigeria 33 15 0 16 Nigeria 16 10 22 10
Source: See appendix Source: See appendix
As shown in the table, the USA stands as The USA ranked third out of the hubs The UAE placed second on the Commodity countries to which it is geographically close.
the top trading hub on the 2022 index, with studied for the locational and trading Trade Index, matching its performance in This has weakened its score for the proximity-
a score of 58 per cent. This is five points factors pillar, behind the Netherlands and 2020, despite performing relatively better to-markets pillar.
above the USA score of 53 per cent in the Switzerland. Many global commodities than the US for both commodity endowment
last report, when the country also took top companies are headquartered in the factors and institutional factors. In particular, The outlook is positive. Of particular
position by a very small margin over the UAE. USA. Cargill is located in Minnetonka, the UAE has the top score for commodity importance is the raft of emergent trade
Meanwhile, the UAE stands in second place, Minnesota and Koch Industries in endowment factors, driven by its large deals. There are plans for the UAE to sign
with a score of 50 per cent, down from 53 Wichita, Kansas, to give examples. Other natural supply of oil. Indeed, the UAE has 8 Comprehensive Economic Partnership
per cent in 2020. key cities for trading commodities in scored top for this pillar of the index in every Agreement (CEPA) deals in 2022 and 27 CEPA
the USA include Houston, New York, iteration of the Commodity Trade Index. deals in total as it looks to boost trade and
The USA maintained its position at the top of and Chicago. These dominant cities in foreign direct investment. The CEPA deals
the table thanks to its robust scores across commodities trade drive up the score for However, the score for the UAE has been form a key part of the UAE’s plan to double
the three pillars of the index, scoring above the USA overall. dragged down by locational and trading its economy from AED 1.4 trillion to AED 3
50 per cent across the board. The USA scores partner factors, for which it only receives trillion in seven years27, averaging 5-6 per cent
most strongly relative to other countries for The USA scored weakest for institutional a 2 per cent score. This is a drop of 13 per growth each year.
its commodity endowment factors, where a factors in the 2022 index, with a ranking centage points compared with last year,
score of 54 per cent puts it in second place. of sixth place for this pillar. The country’s driven by some of the UAE’s trading partners
The USA economy makes up a large share of relatively high rate of corporation tax raising tariffs on imports. Furthermore, the
global soft-commodity trade, where it comes weakens its score. Having said that, the data points to trade trends switching, so
top out of the ten hubs studied. In particular, USA scores well for its financial services that the UAE no longer exports as much to
the USA is dominant in the soya trade. infrastructure and logistics performance.
27
http://wam.ae/en/details/1395303024109
50 51
27
The India-UAE CEPA was signed in May at fourth place in the 2022 iteration of the Commodity Trade Index, thanks to its large
between India and the UAE. The UAE Ministry index, Switzerland has fallen from its third- oil reserves. However, its overall score was
of Economy has stated that, by 2030, the place position in the 2018 report. Like the dragged down by its locational and trading
UAE-India CEPA would add US$9 billion, or Netherlands, Switzerland benefits from low partner factors and institutional factors.
1.7 per cent, to UAE gross domestic product;
exports are expected to increase by $7.6
Trade tariffs on its exports to trading partners.
In fifth place, the UK’s score is driven by
Overall, despite the rankings between the
ten trade hubs remaining similar between
billion, adding 1.5 per cent, and imports are
expected to rise US$14.8 billion, adding 3.8
agreements its institutions with strong regulatory
enforcement in place and a good logistics
2020 and 2022, the spread between the top
and bottom hubs became wider in the latest
per cent. The CEPA agreement with India is currently performance score. This comes despite Brexit report. The USA pulled ahead to stand eight
expected to boost non-oil trade between the
two countries to $100 billion in five years,
underway making trade with partner countries more
challenging.
per centage points above the UAE’s score,
while in 2020, both countries scored 53
from US$60 billion currently. between the Hong Kong and Singapore came sixth
per cent (after rounding). At the other end
of the spectrum, Nigeria’s score fell by six
The UAE-South Korea CEPA is expected UAE and and seventh, respectively, dragged down per centage points to stand at 16 per cent.
to be finalised by the end of 2022.28 The
agreement with South Korea aims to enhance
other markets by their lack of commodity endowments.
However, these countries scored best when
UK, Hong Kong, and South Africa also saw
declines in their index scores.
the economic partnership between the two it came to institutional factors, with Hong
countries to a minimum of US $20 billlion in Kong receiving the top score for this pillar. This widening of the gap between the top
the next three to five years. Moreover, the Hong Kong benefits from strong financial and bottom scoring trade hubs over the
UAE-South Korea CEPA deal is to include services infrastructure and good logistics course of the pandemic could suggest that
deals to reduce greenhouse gas emissions, performance, while Singapore has very the pandemic has widened pre-existing
and crucially, to develop green technology. strong regulatory enforcement. gaps between countries in terms of their
importance for commodities trade. Looking
The UAE-Turkey CEPA is expected to double The UAE also placed third place on the Despite good commodity endowments, ahead, 2022 is likely to see countries
bilateral trade from US$13.7 billion to US$27.4 institutional factors pillar, driven by its China ranked in eighth place on the continue to struggle with supply-chain issues
billion. This CEPA is geared to facilitating business friendly tax framework and Commodity Trade Index. China only scored as trade is heavily impacted by continued
trade, easing access to credit insurance and strong performance for logistics of trade. 21 per cent and 42 per cent on the locational measures to control the coronavirus.
affordable finance for investment projects and trading partner factors and institutional
that are jointly undertaken by the two The Netherlands placed third overall on factors, respectively. However, this is a slight In the future, we may see the UK suffer more
countries. There is also an explicit policy the Commodity Trade Index in 2022. improvement on the 2020 index scores of 20 impacts from its decision to leave the EU.
agenda to diversify trade and promote Although the country scored relatively per cent and 39 per cent, respectively. Since the end of the Brexit transition period
knowledge and talent exchange between the weakly for its commodity endowments South Africa placed ninth on the index, with in December 2020, the full impacts of Brexit
two countries.29 and institutional factors, it is best for a score of 21 per cent, down from the 2020 have been overshadowed by the effects
locational and trading partner factors. As score of 23 per cent. South Africa scores of the pandemic. However, as countries
The UAE is currently in negotiations part of the EU, the Netherlands benefits poorly for commodity endowment factors, recover from COVID-19, and following the
with Indonesia, Israel, Georgia and the from free trade with neighbouring with the natural-resource rents indicator introduction of border checks and tariff
Philippines. A CEPA between the UAE and countries and also conducts most of its falling since the last report. South Africa’s barriers after the end of the transition period
Israel will follow buoyant growth in bilateral trade with other EU countries, meaning it institutional factors pillar has also fallen by in January 2021, we may soon be able to see
trade between the two countries which is scores highly for the proximity-to-markets seven per centage points since the 2020 the impact on trade of the UK’s decision to
estimated to have exceeded US$ 1 billion indicator. report, with its logistics performance score leave the EU single market.
in the first quarter of 2022, according to weakening, showing that it became more
statements by the UAE Minister of State for Switzerland saw an index score of 48 per difficult to transport general merchandise to The impacts of the Russian invasion of
Foreign Trade during the World Economic cent on the 2022 Commodity Trade Index, and from South Africa. Ukraine and associated sanctions on Russia
Forum in Davos. just below the Netherlands. Coming in are also likely to persist over the course
Nigeria came in fourth place for its of 2022, which will continue to impact
commodity endowment factors on the 2022 commodity prices across the world.
28
https://www.reuters.com/world/uae-south-korea-agree-talks-trade-deal-2021-10-14/
29
https://www.mofaic.gov.ae/en/mediahub/news/2022/4/28/28-04-2022-uae-turkey
52 53
Appendix to the DMCC Commodity Trade Index
Commodity Trade Index methodology Commodity Trade Index data sources
The ten commodities trading hubs analysed are: Indicator Summary Source Year
Headquarters locations Locations of global and regional Various 2022
Locational and trading partner factors

1. United States 6. Singapore of major commodities headquarters of the largest commodities commodities
2. United Arab Emirates 7. Hong Kong trading houses trading companies are analysed and used trading companies’
to assign points to each hub websites
3. Netherlands 8. China
4. United Kingdom 9. South Africa Proximity to markets The sum-product of the share of each hub’s Commodities export Latest
5. Switzerland 10. Nigeria (based on commodity commodity exports by trading partner and data: UN (2020–2021)
export data) distance to trading partner is calculated Distance data: CEPII
and then assigned an index value
Each hub is scored based on its performance as measured by the particular indicator. For
each indicator, the same set of steps is followed, allowing us to assign a value between 0 per Commodity trade The sum-product of the share of each hub’s Commodities export Latest
partner tariffs on commodity exports by trading partner data: UN (2020–2021)
cent and 100 per cent to each hub: primary goods and each trading partner’s average tariff Primary goods tariff
on primary goods is calculated and then data: World Bank
assigned an index value
In order to account for outliers, each data point is checked to determine if it falls outside of
the mean +/- 2 standard deviations range. Tons of oil exported Total annual crude-oil exports by weight, UN 2020
annually by hub
Commodity endowment factors

The min-max approach is used to assign an index value to each hub. Specifically, the
Hub’s share of global Total annual coffee, grain, sugar, gold, UN 2020
following formula is used (data point – series min) / (series max – series min). soft-commodity trade diamonds, soya bean, tea, cotton, silver,
for key commodities animals and animal products, and plastic
trade by value, by hub
For indicators where a lower figure signified a better performance, the inverse of the data
point or its negative equivalent is used. Natural-resource rents Total natural-resources rents are the sum of World Bank 2019
as a share of GDP oil rents, natural gas rents, coal rents (hard
and soft), mineral rents, and forest rents.
Once scores between 0 per cent and 100 per cent are assigned to each hub within each Estimates are calculated as the difference
between the price of a commodity and the
indicator based on the previous steps, the indicators are assigned to one of three sub-indices average cost of producing it
(locational and trading partner index, commodity endowment index, and institutional index),
which are weighted equally to give the overall index score. Financial services The extent to which domestic lenders are World Bank 2020
infrastructure willing to lend to the private sector is used
(measured by domestic to analyse hubs
credit to private sector)
Methodology changes Attractiveness of the tax

regime (measured by
Analyses the rate of tax businesses must
pay to operate in each trading hub
Tax Foundation 2021
rate of corporation tax)
In previous years of the DMCC Commodity Trade Index, the Centre for Economics and
Strength of regulatory This indicator measures how the rule of law World Justice 2021
Institutional factors
Business Research (Cebr) has used Doing Business Indicators from the World Bank as the enforcement is experienced and perceived worldwide Project
based on household and expert surveys in
basis for the institutional factors pillar of the report. However, these indicators have since 139 countries and jurisdictions. In particular,
been shown to have methodological issues and have been discontinued. Therefore, Cebr has we focus on regulatory enforcement
replaced these indicators with alternative sources. Updates have also been made to the two
Logistics performance Measures how easy or difficult it is in each World Bank 2018
previous iterations of the Commodity Trade Index, the results of which are referenced in this country to transport general merchandise
report, with the new sources for data.
54 55
SECTION FOUR
THE DRIVERS
AND DYNAMICS
BEHIND TRADE
RECOVERY
Despite the multitude of There are five factors in particular that are bulk of the strength should be seen
likely to ensure a recovery in the global more towards 2023 than this year,
geopolitical and economic risks – economy in general, and cross-border trade as social distancing measures are
including those in relation to the in particular: eased globally.30 Global leaders will
energy market – trade growth have to consider the economic and
Pent-up demand for energy: Oil exporters employment benefits of boosting
is still likely to gain momentum are expected to reap the benefits of consumer confidence by allowing fully
in 2022 and beyond. Overall, higher global oil prices and positive vaccinated travellers to move freely.
pent-up demand in key sectors COVID-19 developments, including high

vaccination rates in Gulf Cooperation Rebounding trade in manufactured
will be a key driver of trade, Council (GCC) economies. Some goods: Firing up the manufacturing
including the rapid recovery economies will also benefit from record- sector will be the top priority for
high natural gas prices. China, Japan, India, Russia, Germany,
in global goods consumption Turkey, the UK, and the USA, which,
since mid-2020. The sectors Activity and employment in the tourism together, account for about 60
that are particularly important sector: If the right conditions exist, the per cent of world GDP (Temel and
travel and tourism sector will continue Phumpiu, 2021). The real-estate and
to watch in the years ahead to rebound to deliver economic and wholesale sectors come next.
are manufacturing, energy, and employment benefits we have not seen
maritime trade. since before the pandemic, although the
30
https://www.un.org/en/coronavirus/it-imperative-we-rebuild-tourism-sector
56 57
11bn 50%
Maritime trade-led growth. More than 11 Looking ahead:
billion tonnes of cargo were carried by Resilience and
sea in pre-pandemic 2019, including vital
food and medical goods, energy, and
strength within the
raw materials, as well as manufactured Tonnes wider Middle East Size of UAE’s
of cargo oil and gold
goods (Vicente, 2021). The disruption
of shipping-related services31 due to
COVID-19, however, led to delays in
border crossings and increased port
carried by There is broad-based optimism in
relation to the outlook for trade in
trade as a
congestion. Despite this, digitalisation sea in pre- the Middle East, and for the UAE’s share of its
of port- and logistic-related services
boosted the ability to deliver essential pandemic trade outlook in particular, with rising
commodity prices expected to increase total trade in
port activities, and fast lanes, for
medical cargo, food items, and other
2019 the value of the UAE’s oil and gold trade,
which, together, made up almost half of
2020
essential services (UNCTAD, 2021). Crisis UAE trade in 2020. Rising oil prices will
management also involved coordinating increase UAE government expenditure,
with key stakeholders and increasing providing another boost for UAE trade.
communication channels (Wignaraja Finally, the UAE government’s openness
et al., 2021). These should continue to to digitalisation, crypto currencies, and
enhance growth. new technology could also boost trade.
DMCC’s crypto centre was cited as a
Maritime trade transformation: Larger safe environment for blockchain and
container ships and autonomous ships crypto companies in which to operate
(or e-navigation)32 are an additional and grow.
promising trend. Several ports are also
investing in renewable energy, which Within the wider Middle East, trade could
will increase resilience in cross-border be further boosted, particularly in the
trade. Investment in solar capacity and in pharmaceutical industry, if governments
cleaner fuels for their operations will be invested in R&D and encouraged local
of critical importance. Global shipping, production through regulatory changes
from container ships to cruise ships, is and incentives. States in the Middle
also investing heavily in new energy- East and North Africa are more focused
efficiency technologies and cleaner fuels on negotiating free-trade agreements
(IRENA, 2021). This initiative further bilaterally, rather than on brokering
supports resilience-building. Although multilateral regional agreements. There
shipping and port activities are mature is broad-based concern that rising
industries, technological innovations raise food prices, exacerbated by current
long-term growth prospects for business developments in Ukraine, could lead to
and employment. economic and financial market volatility.
31
Shipping-related services such as freight forwarding, warehousing, transit, and trans-shipment of cargoes and in logistics.
32
https://www.imo.org/en/OurWork/Safety/Pages/eNavigation.aspx
58 59
Global trade will continue to prove resilient. liberalising transport services markets, 5 Trade dynamics will be influenced 6 Upside risks to the oil and energy
Although services trade growth remains including through relaxing restrictions on by big trends: changes in trade markets are likely to persist. Both
muted, the scope for a re-acceleration foreign direct investment, can promote barriers; inflation-induced monetary the ongoing Russia-Ukraine conflict
is significant. Trade openness matters consolidation and productivity upgrading, and fiscal policy changes; and more and a general hesitancy to raise
in shaping the strength of economies’ as well as knowledge spill over. climate change adaptation on the OPEC production limits are likely to
recoveries. GDP growth has recovered faster part of government and business. contribute to price pressures.
in countries with strong pre-existing trade Appropriately calibrated policies are
links to countries with few COVID-19 cases, essential for trade promotion, particularly
underscoring the circuitry between trade, when the overriding goal is for cross-
economic growth, and risk management. border trade to contribute to speeding up
economic recovery, especially amid multiple Recommendations for businesses:
Continued trade liberalisation can and shocks. Trade promotion and facilitation are
should be introduced. Examples of important important recovery mechanisms for many
policy initiatives include infrastructure developing and least-developed countries, 1 Amid the current geopolitical and Enhanced coordination between
development at key gateway facilities which have limited ability to spur economic economic shocks, firms should firms and financial intermediaries,
such as ports and airports. Additionally, recovery through fiscal stimulus packages. increase strategic emphasis on particularly through greater
economic diversification to support intercompany credit, would help
sustainable initiatives against climate- cushion against shocks.
related uncertainty in production.
3 Boost trade facilitation processes
Key takeaways 2 For greater promotion of supply through increased digitalisation,
chain resilience, firms should look to enabling faster customs procedures,
diversify their sources of financing. to help offset increases in trade costs.
1 Global trade growth is expected 3 Global GDP growth is expected
to remain resilient, at 3 per cent to be driven by resilient cross-
annually, in 2022. This would, border trade in 2022 and beyond,
however, mark a slowdown following underpinned by recovery in
9.8 per cent growth in 2021.33 services trade, innovation and Recommendations for governments:
Despite downgrades to 2022 global trade integration. Countries’ energy
growth forecasts, sector-specific transitions are likely to support
pent-up demand should continue, in import and export demand in 1 Continue to prioritise filling trade economic shocks. Additionally,
spite of the impacts of the current both developed and developing financing gaps, that represent these guaranteed loans could be
conflict in Ukraine. economies. shortfalls in required trade finance securitised and financed by central
for SMEs, including through export banks.
2 Global trade should also remain 4 Global supply chain restructuring credit agencies and the expansion
robust over a five-year period will continue to be a source of of working capital programmes. 4 Prioritise digitalisation efforts in
despite the economic upheaval of trade normalisation as firms seek order to promote greater supply
soaring inflation, rising interest rates new markets and investment 2 Make trade promotion a key policy chain efficiency and resilience. This
and slower growth. An increase is opportunities to build resilient and priority. would continue to reduce trade
digital trade and trade is services, flexible supply chains. This is likely costs by promoting more efficient
as well as the drive for sustainability to reinforce long-term growth in 3 Government-guaranteed bank customs and border clearance,
and a general push for a reduction bilateral trade relationships. loans should be used to inject improved quality of trade and
in trade barriers, should underpin cash into supply chains during transport logistics.
global trade. times of financial uncertainty and
33
https://www.wto.org/english/news_e/pres22_e/pr902_e.pdf
60 61
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62 63
CHAPTER II
THE
GEOPOLITICS
OF TRADE
CHAPTER II: The geopolitics of trade CHAPTER II: The geopolitics of trade
FIGURE 5 FIGURE 6
Net foreign direct investment Exports of goods and services

US DOLLARS ANNUAL PERCENTAGE CHANGE
Advanced Emerging market and Middle East Advanced Emerging market and Middle East
economics developing economies and Central Asia economics developing economies and Central Asia
400 15
200 10
0 5
-200 0
-400 -5
-600 -10
-800 -15
2013 2014 2015 2016 2017 2018 2019 2020 2021 2013 2014 2015 2016 2017 2018 2019 2020 2021
Capital flows The recovery in economic growth in the first

half of 2021 lifted merchandise trade above
its pre-pandemic peak.34 However, since the
by pandemic-induced economic scarring
and vaccine inequality, aggravating
policy tensions across countries (Antras,
have decreased start of 2022, growth in international trade

has started to lose some momentum. While
2020). In addition, the spectrum of
tensions associated with recent oil-
since the Great there is little systematic evidence indicating

that the world economy has entered
price developments is likely to feature
prominently.
Recession. an era of de-globalisation (BIS, 2018),

there are political challenges ahead. This
section presents some of the geopolitical
The world trade-to-GDP ratio – a standard
measure of globalisation – has recovered
headwinds and pivots that are likely to from its late 2008 low, as has export
underlie the trade outlook. growth. But there is also a worrying trend
in the collapse in cross-border investment
Geopolitical tensions in relation to the (Figures 5 and 6). The relative dominance
current situation in Ukraine are likely to of capital flows and multinational activity in
exacerbate the slowdown in trade growth, overall economic activity has declined since
in part through fuelling protectionism the Great Recession, even if they remain at
in certain sectors, including in food and high levels in comparison with those in the
energy. The shift away from globalisation early 2000s. Cross-border trade is likely to
to new norms such as “friend-shoring” or remain strong, in contrast to developments
“ally-shoring”35 could take multiple forms. pertaining to finance-led globalisation and
The geopolitical shift will be further shaped cross-border investments.
34
https://www.wto.org/english/news_e/pres21_e/pr889_e.htm
35
https://www.bloomberg.com/news/articles/2021-06-24/-onshoring-is-so-last-year-the-new-lingo-is-friend-shoring
66 67
SECTION ONE FIGURE 7
GLOBAL PIVOTS
General government debt in China (gross)
PER CENT OF GDP
WILL DEFINE
80
70
THE NEAR- 60
50
TERM TRADE 40
LANDSCAPE
30
20
10
0
1995-99 2000-05 2006-10 2011-2018 2019 2020 2021
There is strong evidence Global and regional economic stability.

China has, in recent years, driven near 30
that new economic and per cent of global growth (Kemp, 2019).
political paradigms are Given this, a slowing Chinese economy
underway, with explicit could significantly influence regional
and economic growth around the world,
implications for trade and while potentially also disrupting financial
investment. The global markets and supply chains. The attendant
landscape is likely to be Pivot 1: loss of wealth and employment could

spark tensions. Additionally, a sharper than
characterised by multiple The politics behind expected slowdown, or an economically
pivots, which include: slower growth in China struggling China, could also unravel global
financial stability and political relations
with regional partners.
President Xi Jinping’s policies to restrain
the domestic technology sector and, Labour strikes. Chinese prefectures
increasingly, the property sector, highlight that have experienced a more severe
significant downside risks to the outlook. export slowdown witnessed a significant
Longer-term underlying concerns also increase in the incidence of labour strikes
include energy shortages (particularly (Campante et al., 2019). This has been
in relation to current tensions), China’s accompanied by a heightened emphasis in
demographic downtrend, subdued such prefectures on upholding domestic
productivity, and, crucially, accelerating stability. The literature suggests that in the
debt (Figure 7). China’s overall debt is well past, China’s local leaders have been held
over 250 per cent of GDP. Additionally, to account on yardsticks related to political
there are internal and external implications. stability (ibid.) as well as economic metrics.
68 69
FIGURE 8
Annual retail sales growth in China

20
Pivot 2:
Oil at, or above
15
record levels
10
The price of oil could remain elevated in the associated political tensions. The direct
5 light of current geopolitical developments effect of a high oil-price shock on the GDP
and particularly if OPEC+ supply does not growth rate of oil-exporting countries
change significantly from current levels. An is positive. The largest oil-exporting
0
oil-price pivot – essentially, a resetting of countries (Iran, Russia, UAE, Indonesia,
the “normal” level – would be disruptive not and Kazakhstan) are likely to benefit
-5
just because of the higher cost but because in terms of a positive terms-of-trade
Apr Jun Aug Oct Dec Feb of what it could signify: structurally lower adjustment – although the impact is not
2021 2021 2021 2021 2021 2022
net production and a decisive shift in the always unambiguous, given country-
terms of trade for oil- producing economies. specific petroleum import dynamics (as
well as sanctions regimes).
China’s faltering consumer confidence fosters newfound strength – and a structural Production developments in non-OPEC
and demand for consumer goods. This shift higher – in consumption-led growth. oil states – the United States and Russia,
has been muted, owing in part to the This would strengthen the government’s in particular – will warrant attention. The
economic, health, and social impacts mandate and bolster cross-border trade. two states together produce 30 per cent
of the COVID-19 crisis. Faced with this, Import demand would likely follow suit, which of the world’s oil. Production rises in the
the Chinese government has not made would have knock-on effects for major global former, or cuts and/or continued sanctions
enough progress in transitioning to a exporters. This would be one side of China’s in the latter’s production as a result of the
consumption-led economy. Consumption stated “dual circulation strategy”, with the war in Ukraine, will be significant for cross-
and retail sales growth have decelerated other being support for greater domestic border trade. We explore the key drivers
on the whole (Figure 8). Strengthening economic autonomy. behind the oil pivot that could define the
30%
purchasing power, either through geopolitical landscape:
the renminbi, or boosting wages and
the social safety net, would support OPEC+ is critical for current global oil-price
household sentiment, potentially along stability. Concerns over spare capacity have
with uptake of the digital renminbi. amplified the effect of geopolitics, making
the market highly sensitive to anything that United States
Looking ahead, China’s policymakers are
likely to continue a policy of promoting
could be perceived as a supply threat. Over
the past months, that sensitivity has been
and Russia’s
economic stability and managing a slower, shown in response to the war in Ukraine combined
albeit resilient, growth rate in the economy.
A significant part of the growth story will
and the subsequent global sanctions that
have been imposed on Russia as a result. share of the
be China’s trade and investment position. A
key global pivot will be the degree to which The impact of higher oil prices on trade
world’s oil
the government’s renewed focus on stability will fuel sharp growth disparities and production
70 71
FIGURE 9
Japan’s fuel import share in context

PERCENTAGE SHARE OF TOTAL IMPORTS
2010 2020
35 Pivot 3:
30
A rise in debt
defaults
25
20 The COVID-19 crisis and the pandemic- Private debt from non-financial corporations
induced global recession of 2020 have led and households has also reached new highs.
15
to a surge in global debt levels to US$226 Debt increases are particularly striking in
10 trillion.36 The rise in debt has led to several advanced economies, where public debt rose
countries initiating debt restructurings, from around 70 per cent of GDP in 2007 to
5
while many others are in, or at high risk of, 124 per cent of GDP in 2020. Private debt,
debt distress and may also eventually need on the other hand, rose at a more moderate
0
India Korea, Rep. Japan Lower middle High China World debt relief. pace, from 164 to 178 per cent of GDP over
income income
the same period.
More than half of low-income countries
are in debt distress or at high risk of debt
significant oil importers and play a major A number of overlapping factors is likely to distress; some countries have already
role in the global oil market in their influence the future market for oil, linked to defaulted on their debt; and restructurings
respective choices of oil providers economic and geopolitical consequences, have been completed in some, or are
(Figure 9). They have shown varying while cross-border trade and investment will underway in others (World Bank, 2022).
degrees of diversification in sourcing their be shaped by which countries have primary Debt was already elevated going into the
oil imports (Vivoda and Manicorn, 2011). resources and which don’t. Inevitably, current crisis, but in some cases, it is now at a
Japan’s resource dependence is likely developments and how they are resolved record high, complicating responses to new
to continue to inform its long history of will influence the trajectory for energy, virus mutations and accelerating inflation.
resource diplomacy in relation to the Middle commodity, and food prices. In addition,
East and other oil-exporting economies the capacity of households, businesses, and In 2020, total global debt reached 263
more generally (Thorarinsson, 2018). governments to adapt and engage in climate- per cent of GDP, its highest level in half a
change mitigation strategies, together with century (Kose, Nagle et al., 2021). The build-
Shifting trade balances, and the political the characteristics of the energy system, up has been broad-based, with rapid growth
263%
response to them, typically manifest will have a decisive influence on the energy in both government and private debt; in
most in economic terms in small market. This will also serve to develop more advanced, emerging market, and developing
open economies and oil-importing robust energy policies and strategies to economies; and in external and domestic
countries. A temporary oil-price increase anticipate and prevent geopolitical tensions. debt (ibid.).
unambiguously improves the trade balance
for resource-rich economies (Le and Borrowing by governments has accounted
Global debt
Chang, 2013). But the nature of any oil-
price change – whether it is demand- or
for slightly more than half of the global debt
increase, with the global public debt ratio
level against
supply-driven – is significant for global jumping to a record 99 per cent of GDP. GDP in 2020
trade balances, particularly when financial
interdependence is high.
36
https://blogs.imf.org/2021/12/15/global-debt-reaches-a-record-226-trillion/
72 73
9%
In the coming years, state-owned enterprises will also have The long-term effects of the international
debt will impact increased (Melecky, 2021). debt situation will be difficult to resolve.
The need for high-debt countries to
trade and geopolitics Rising borrowing costs will add increase exports, while managing their
as follows: to debt instability. Interest-rate
rises to combat inflation will further
respective (and for some, unfavourable)
debt-to-reserve ratios, will prove particularly to
63%
A “debt standstill” will mitigate impinge on exporters’ sentiment and challenging. Increasingly, industrialised
the impact of a fragmented creditor willingness to invest and engage in countries may see a loss of their export
base. Historically, several umbrella trade. In many emerging markets, markets while absorbing more imports
frameworks coordinated debt relief policy rates have already increased – thus leading to increased protectionist
to multiple debtor countries from and further rises are expected. Central pressures. A concerted effort by all
multiple creditors on common
principles. They offered substantial –
banks are also planning to reduce
their large purchases of government
industrialised countries will be required to
avoid this.
The rise of
but protracted – debt stock reductions debt and other assets in advanced debt levels
that were typically preceded by a
series of less ambitious debt-relief
economies – how this reduction is
carried out will have implications for
Additionally, high-debt countries will
be under pressure to avoid economic
against GDP
efforts. However, future umbrella
frameworks for debt restructuring
economic recovery and fiscal policy.
Monetary policy is now appropriately
adjustment (in the form of austerity), given
the already entrenched social, political,
for emerging
will face greater challenges than shifting focus to rising inflation and and economic consequences of the markets in
those in the past, owing to the more
fragmented creditor base.
inflation expectations. COVID-19 crisis, which has already resulted
in a disproportionate amount of economic
2020
scarring in the emerging and developing
A growing link between political and economies. They will want to avoid
debt instability. Debt instability will prolonging – or exacerbating – conditions of
impact the ability of debtor countries poor and deteriorating growth and loss of
to foster an adequate investment cross-border trade.
climate for trade promotion and is
likely to increase political instability. Looking ahead, the degree to which highly
The global political environment indebted economies continue to liberalise
may continue to be less reliable for their trade regimes will be of particular
sovereigns (Smith, 2019). Emerging importance. These countries could hamper
market debt is a particular risk. In their own chances for recovery. Failure to
these economies, government debt liberalise, increase cross-border trade, and
rose by 9 per centage points to 63 adopt more outward-looking economic
per cent of GDP in 2020, the fastest policies will mean a continuation of
one-year increase in the past three structurally lower economic growth rates,
decades. Contingent government lower productivity, and less efficient export
liabilities are likely to have risen production. At the same time, failure of
because of loans and loan guarantees these economies to institute reforms and
to corporates, while debt incurred by to further liberalise trade regimes could
undermine the industrialised nations’ efforts
to tackle protectionist pressures, ultimately
leading to decreased access for the high-
debt countries’ exports.
37
At the start of the pandemic, the World Bank and the International Monetary Fund urged the G20 to set up the debt service suspension initiative (DSSI).
Established in May 2020, the DSSI helped countries concentrate their resources to tackle the COVID-19 crisis: https://www.worldbank.org/en/topic/debt/brief/
covid-19-debt-service-suspension-initiative.
38
The G20 Common Framework provides a structure to initiate debt restructuring for low-income, IDA-eligible countries, but largely avoids the issue of outright
debt reductions.
74 75
SECTION TWO FIGURE 10
REGIONALISM,
MULTI- European Union China United States
LATERALISM,
100
90
80
AND THE NEW

70
60
TRADE ORDER
50
40
30
20
10
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Both the economic and political Regionalism will reshape trade and Any re-ordering of global trade would
investment, owing in part to structural continue to include the United States
landscapes will shift considerably in changes in global supply chains and risk and China (the G2) as the key economies
the coming years, with implications management in relation to health, climate, within the global trading system, with a
for global cross-border trade and financial, and economic shocks. The political stabilisation in their overall trade shares
will of the middle powers will fuel a dynamic (Figure 10). Their respective and joint
investment. Actions by middle powers39 whereby locational advantage could positions will be counterbalanced by the
(such as South Africa, the UAE, and increasingly dominate trade patterns. new and multiple trading agreements that
Australia) and local trade agreements will gain in prominence in the next few years.
In addition to the rise of regionalism, a The Regional Comprehensive Economic
will lead to greater regionalism. new multilateralism is likely to take hold. Partnership, the Trans-Pacific Partnership,
Old forms of multilateralism are likely to and a host of other regional trade
fade, while new forms of multilateralism agreements will challenge the dominance
will be catalytic in driving cross-border of individual economies. Crucially, the new
trade in new sectors, including in the trade order will likely see a shift from the
arenas of digitalisation and sustainability. predominance of the oil/non-oil dichotomy
This multilateralism is likely to spur cross- to cross-border trade in digital goods and
border trade and investment where there services (UN, 2021).
is a political will to do so. It may pertain to
certain sectors that are the most innovative
and where there is an overlap in priorities of
the major economies – particularly the United
States, China, and the European Union.
Regionalism and a new multilateralism

are likely to give rise to a new trade order.
39
Middle powers are thought of as countries that shape regional or global geopolitics in collaboration with others but lack the capabilities associated with
superpowers (Chapnick, 1999).
76 77
The rise of regional zone. Significantly, RTAs have The risks and challenges of RTAs need to
regionalism emerged between countries and entities be monitored:
in different regions and continents (for
Middle powers are likely to expand their example, the EU-Mexico or the US-Israel RTAs sometimes result in inward-looking,
influence in 2022 and beyond. This is in part trade relationships). In most cases, discriminatory protectionism. They can
because the larger, great powers are likely to these agreements are bilateral in nature, compete for spheres of influence and
be more domestically focused. Additionally,
the great powers focus largely on each other,
concluded by two entities, including
RTAs themselves, as with the EU-
become self-contained. Large RTAs – those
whose membership covers a large share
Increased
allowing for other regional actors to grow Mercosur pact. of global trade – can potentially have regionalism will
in importance. In 2021, some of the G20
middle powers – including Japan, Australia, RTAs will have a knock-on effect on
harmful effects for non-members, leading
to net trade diversion rather than net trade
lead to expanded
and India – accelerated collaboration with
the United States on their shared goal of a
policy agendas. New-generation42 RTAs
increasingly cover trade in goods and
creation (Liu, 2016). Technology transfer,
investment flow, and how they interact
influence for
free and open Indo-Pacific.40 Early vaccine relevant regulatory areas, including trade with net trade creation, crucially impact the middle powers
rollouts by middle powers (including Israel, in services, cross-border investment, degree to which trade agreements impact
Chile, and Singapore) were also instrumental competition policy, intellectual property economic growth (ibid.).
in generating insights and policies in relation rights, and environment and development
to the COVID-19 crisis. cooperation. This is deeper integration RTAs may reduce incentives for lesser-skilled workers, can be lost if there
than previously. Developing countries multilateral approaches to trade is only a regional focus (Enderwick and
The Indo-Pacific will continue to be the have also adopted RTAs as the core of liberalisation. This could inhibit policy areas Buckley, 2020). The costs of establishing
foremost arena in geostrategic competition, their national development strategies. linked with market access and standard regional supply chains can be considerable,
so middle powers in this region will be most setting. Developing countries might have to particularly in locations that lack
consequential in 2022. Japan, under a RTAs are already spreading. Developing contend with a lesser degree of flexibility supporting services, specialist suppliers,
new prime minister, will leverage its trade countries have actively participated in and policy space under RTAs that function or efficient transport and communication
relationships and international development RTAs within their respective regions largely as negotiating forums (Gleeson et links. Even when established, such chains
programmes throughout Asia. Australia (South-South) and with developed al., 2018). This could threaten the viability of can bring higher costs.
will continue to bolster its traditional countries (North-South). In Africa, on the multilateral trading system.
alliances (for example, through its security average, each country has belonged to Looking ahead, the systemic interaction
partnership with the UK and the United four RTAs over the past decade (Yang Overlapping RTA membership could cause between multilateralism and regionalism will
States via AUKUS41). India will leverage its and Gupta, 2005). In the Asia-Pacific inadvertent and unnecessary conflict define global trade. Although there are some
“Act East Policy” to engage ASEAN. ASEAN region, ASEAN, SAARC (the South (Jakobeit et. al., 2005). With increasing downsides, RTAs promote quicker, freer, and
countries are likely to strengthen economic Asian Area for Regional Cooperation), numbers of countries being members of deeper integration with strong discipline on
relations with one another and key middle and ECO (the Economic Cooperation several RTAs simultaneously, this could trade-related policies. Asia’s economies have
powers, to counterbalance overdependence Organization) already exist. ASEAN was create competing and possibly antagonistic started to strengthen their supply chains’
on either the US or Chinese economies. a precursor to the ASEAN Free Trade blocs that would erode multilateralism. resistance to future shocks by engaging
Area (AFTA), which is likely to grow Overlapping membership could also pose in regional diversification and by reducing
Looking ahead, regional trade agreements in membership. Considerable gains significant administrative burdens for small supply-chain redundancies. Tokyo, for example,
(RTAs) are likely to boost regional trade in are likely to result from a lowering of countries with limited capacity to negotiate has announced a US$2.2 billion stimulus
the following ways: barriers, including on labour mobility. and weak institutional memory. package to help Japanese companies move
Involvement in global value chains then production lines out of China. Given South
The political will to participate in RTAs becomes easier because of increased Regionalism can come at an economic Asia’s availability of labour-intensive services,
will grow. RTAs are likely to involve regional specialisation and the reduced cost. Some of the benefits of recent its young population, and a supportive policy
more countries beyond their traditional importance of scale (OECD, 2013). globalisation, such as high growth rates, environment, the region could replace China in
reduced poverty, and opportunities for its manufacturing capacity.
40
https://www.whitehouse.gov/briefing-room/statements-releases/2021/09/24/joint-statement-from-quad-leaders/
41
https://commonslibrary.parliament.uk/research-briefings/cbp-9335/
42
https://www.oecd.org/trade/topics/regional-trade-agreements/ 43
https://www.bloomberg.com/news/articles/2020-04-08/japan-to-fund-firms-to-shift-production-out-of-china
78 79
The future of likely to ensure that the agreements are FIGURE 11
multilateralism effective instruments for promoting more

Fixed broadband subscriptions (per 100 people)
equitable trade liberalisation. But the
A new era of geopolitical polarisation has proliferation of RTAs has generated calls for European Union China United States
begun. The degree to which the great powers the multilateral system and rules affecting United Kingdom East Asia & Pacific World
cooperate – rather than compete – with RTAs to be strengthened, to minimise the
each other will have a decisive influence on possible harmful effects of RTAs on third 45
how dominant multilateralism is likely to be. countries and to avoid practices that are 40
Cooperation and dialogue are all the more deemed to be discriminatory.
35
important if competition outpaces working
together. In any scenario, multilateralism is Promoting South-South trade agreements. 30
important, as a means of stabilising relations The link between developing and developed 25
and preventing conflicts among the great economies (North-South) will remain 20
powers (Ruggie, 1992). of particular importance when it comes
15
to multilateralism. But the development
The COVID-19 crisis has underscored the dimension needs to be taken into account 10
importance of multilateralism and how it – which is not always reflected in the 5

needs to change to accommodate shifting multilateral trading system (Weinhardt 0
trade patterns and changing geopolitical and Schofer, 2021). Market access, entry 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
relations. There is the increasing notion that opportunities, and domestic policy in
China’s economy is becoming the single-most developing economies is of primary
important juncture in global and regional importance in the promotion of long-term Deeper digitalisation. Looking ahead,
supply chains – and, as it continues to liberalise growth in cross-border trade (ibid).
New and diverse forms a key question is the way in which
its financial system, as a financial centre of of multilateralism digitalisation will reinforce multilateralism,
gravity. But the dynamics of the pandemic Development objectives in RTAs. Specific and particularly the degree to which
highlighted the unsustainable nature of Asia’s policies targeting the development, trade, Increased fragmentation in global supply digital and information gaps will be
heavy dependence on China for its trade needs. and financial needs of developing countries chains, increased digital connectivity, covered by policymakers and the private
In 2019 alone, eight of China’s top 15 trading is necessary to mould RTAs into effective and growing environmental volatility sector in coordination with each other.
partners were economies in Asia.44 instruments for sustainable development. are likely to mean that local disruptions A recalibration in globalisation towards
Policies touching on special- and differential- have unpredictable wider impacts. Digital exponential growth in digital exchange
An open, equitable, rule-based, predictable, treatment issues to ensure country-specific ties and coordination of such systems could bring about a more equitable and
and non-discriminatory multilateral trading development are necessary. simply accelerate the transmission of inclusive global economy (OECD, 2017).
system represents the best ecosystem to shocks (Reeves and Varadarajan, 2020). Globalisation has already been undergoing
ensure broad-based development for other RTAs are effective instruments in extending The management of global value chains, a transformation (through digital depth
developed and emerging economies. the breadth and depth of trade liberalisation too, has contributed to the risk of costly (Figure 11) that will address some of
to areas not covered multilaterally, such disruptions. The governance of such its perceived failings and yield a new
Looking ahead to the next decade, there are as intellectual property rights, investment, networks has focused on social and multilateralism. This could occur through
key markers for whether regional integration and government procurement. Additionally, strategic mechanisms (Kano et al., 2020). increased transparency, information
constitutes a building block or an obstacle to regional integration informs development Value chains have increasingly been exchange, and technological innovations
multilateralism: strategy for many developing countries. Given managed with a view to anticipating that enhance connectivity.
this, developing policy coherence between adverse shocks and coordinating
A stronger rules-based system. The multilateralism in cross-border trade and effectively in response to them. Greater regionalism. This will have
evolution of the multilateral trading system deeper regionalism is a major challenge and significant implications for foreign direct
to RTAs poses a major policy challenge. opportunity to be addressed by countries, their A new multilateralism in trade is likely to investment (FDI) and could perpetuate
The rules affecting RTAs are increasingly regional organisations, and the WTO. be characterised by: recent weaknesses. The likely reductions in
44
https://www.worldstopexports.com/chinas-top-import-partners/
80 81
interregional knowledge and cross-border China in a new light of the growing concentration of political
FDI flows would correspond with increases multilateralism power and centrality in decision-making
in intraregional flows. A move to a more within China’s Central Communist Party.
regionally based international economy As China’s expansionary Belt and Road
offers the possibility of a better balance Initiative (BRI) projects pick up again over US regionalisation is occurring as it seeks to
of national and international interests, the next few years, they could constitute a decouple from China in certain sectors (Joshi,
helping to counter growing populism,
nationalism, and protectionism. Although
Cross-border new framing for the BRI,48 with a sequence
of projects that will be more sustainable,
2020). This has manifested in a number of
ways, including by limiting access to assets
regionalisation may lower global welfare investment and green, in nature. Rebounding post- such as technology and the ability to finance
by reducing the scale of production
and raising costs versus multilateralism,
to become COVID-19 economics and trade are likely
to help mobilise and channel finance into
market access. As with a number of other
economies, these initiatives are framed as
emerging technologies could be used to
increase resilience and maintain efficiency.
increasingly sustainable initiatives. It could be that in the
short-term, some infrastructure projects will
a means through which the United States
aims to safeguard its national security, also
Global supply chains might be physically market- be put on hold. Despite this, the longer-term reflecting US-China tensions. A number of
shorter, but regional specialisation would
increase.
seeking rather outlook is still likely to be characterised by
China’s outbound investment projects, both
countries have broadened their interpretation
of critical assets and infrastructure,
Re-shoring and near-shoring. Moving

than efficiency- regionally and internationally. effectively ruling out any further foreign
investment in certain sectors (OECD, 2020).49
production home, or nearby, is likely seeking. Asian infrastructure and connectivity projects
to continue at a modest pace and has will find themselves at the intersection of China could fuel “chained globalisation”.
largely been limited to specific sectors.45 competition and cooperation between China Chinese firms will expand their operations in
Global trading hubs, including China, and other investor economies. Illustrative of East Asia, where producers of intermediate
Germany, and the United States, are likely this is Japan, that has decades of experience products will then bolster Chinese
to dominate (Enderwick and Buckley, in infrastructural investment (Hong, 2018). manufacturing (Farrell and Newman,
2020).46 Cross-border investment and It is an economy that is well-known for high 2020). New trade agreements, such as the
trade will become increasingly market- standards in infrastructure development, Comprehensive and Progressive Agreement
seeking (expanding market share) rather transparency, and its willingness to cancel for Trans-Pacific Partnership and the Regional
than efficiency-seeking (driven by low- loans to smaller nations in need (Kriss Comprehensive Economic Partnership,
costs).47 Vertical FDI, i.e. expanding existing and Marcelo, 2021). Japan’s interventions offer future potential for the region as a
projects, will be complemented by growing could prove to be an important and reliable counterbalance to (already established)
horizontal investment, or expanding alternative to China’s when it comes to institutions. Despite being the engine of
by buying existing projects. Increased asserting its presence in cross-border growth for the East Asia region, China faces
competition for FDI means there will be a investment and trade. a challenge that other regional members
need for effective regional coordination, do not: how to balance interregional sales
investment promotion, and targeted China-centred global growth will continue as to markets, including the United States
industrial policy aimed at economic a key theme. If post-pandemic globalisation and Europe, with growing intraregional
diversification. The higher efficiency costs accelerates, it is possible that the United production systems.
of increased regionalisation and re-shoring States may reject it, while China continues
must be offset against the opportunities to embrace it (given the huge growth As a counterbalance to the East Asia region,
to create a more inclusive and equitable benefits China has enjoyed). A more China- the United States has already reinstated
global trading system. centric focus is likely to emerge in Beijing, its trade agreement with Mexico and
underpinned by an acceleration of the Belt Canada, offering access to complementary
and Road Initiative. This could occur in the resources, including raw materials. Asia
45
https://www.europarl.europa.eu/RegData/etudes/STUD/2021/653626/EXPO_STU(2021)653626_EN.pdf
46
Survey evidence by Kearney indicates that there is a growing willingness for reshoring back to the US by American companies, driven by manufacturers placing
higher importance on supply chain resilience when compared to cost considerations: https://www.kearney.com/operations-performance-transformation/us-
reshoring-index.
47
Market-seeking foreign direct investment is driven by an interest in serving domestic or regional markets. Efficiency-seeking investment denotes investment that 48
https://www.china-briefing.com/news/the-green-belt-and-road-initiative/
seeks to benefit from competitive factors in international markets (Fruman, 2016). 49
The implementation of tariffs across a wide range of sectors implies a deeper level of uncoupling.
82 83
leads in digitalisation and the region is likely inexpensive exports and low-efficiency
to couple innovation with labour-intensive investments. Not only has China
and Industry 4.0 tech-driven production. The demonstrated its plan to steer away
North America region will see private-sector from labour-intensive industries to high-
innovation-based growth (based, in part, on tech manufacturing, it has also showed
more diversified forms of funding). its ambitions by releasing the national
Other nations – including India, the United

A multi-polar blueprint “Made in China 2025”,50 which
highlights that China aims to be a world
China aims
Kingdom and Japan – could play a decisive world may be leader in scientific and technological to lead
role in shaping the multilateral world
order. India may provide an alternative to
dominated by innovation by 2050.
scientific and
China for the production of such goods as
pharmaceuticals, auto parts, and possibly
North America, China has increasingly become
a proactive participant in global
technology
electronics (Govindarajan and Bagla, 2020). Europe and a economic governance. The trade- and innovation by
The position of the United Kingdom in a global
economy that may be moving towards greater
China-centric investment-expanding Belt and Road
Initiative and China’s founding of the
2050
regionalisation would need to be further
strengthened by further bilateral trade deals.
Asia. Asian Infrastructure Investment Bank
to fund infrastructural projects across
multiple countries are clear examples.
Of particular importance for the nature
of cross-border trade will be the degree
to which both institutions are used
as a complement to institutions such
as World Bank and the International
Monetary Fund, or, more likely, used
as a counterweight to the largely
US-dominated order of financial and
economic governance.
Looking at the new 1 THE US-CHINA TRADE RELATIONSHIP
trade order China’s upgrading from labour-
After both countries weathered the financial intensive exports to more capital- and
Finance-led globalisation has been in crisis, the United States and China became technology-intensive products has
transition since the 2008 financial crisis. An increasingly competitive. China’s domestic brought it into more direct competition
essential global relationship that helps, in part, economic reforms and growing ambition with advanced and industrialised
to explain this change is the evolving and in global economic governance were economies. China’s increasingly
multifaceted US-China economic relationship, among several factors to drive this. After he sophisticated trade structure has meant
which is increasingly characterised by consolidated and centralised power within that China’s complementarity with
competition. In tandem with this, localisation China’s political system, President Xi Jinping industrialised countries (the United
and regionalisation have been filling gaps was more confident and capable in carrying States, Japan, and Germany) has been
inherent in the global economy as it has out substantial reforms in both the domestic diminishing. Conversely, competition
retreated (Wang and Sun, 2021). and international domain. with newly industrialising economies
(India and Indonesia) and resource
Indeed, we may be facing a multi-polar world Domestically, China’s administration countries (Australia and Russia) has
dominated by three large regions: North has clearly aimed to change China’s been decreasing.51
America, Europe, and a China-centric Asia. growth model to one driven by domestic
There are three catalysts for this: consumption and innovation, instead of
50
https://english.www.gov.cn/2016special/madeinchina2025/
51
https://www.rieti.go.jp/en/china/13060502.html
84 85
54%
FIGURE 12
Global GDP growth

6
Share of the
5 world’s GDP
4
produced
by countries
3
1 occupying just
0
10% of the world’s
land area
-1
-2
-3
-4
1980 1984 1992 1996 2000 2004 2008 2012 2016 2020
2 GLOBAL PRODUCTION MECHANISMS approximately 70 per cent of international 3 ECONOMIC HUBS This owes to the fact that high-
trade involves GVCs.53 It is likely that income regions are almost entirely
Economic globalisation has been, to the increase in regionalism will translate Typically, the three major hubs of concentrated in temperate zones.
a great degree, driven by complex into shorter, potentially simpler and traditional trade are Germany, China, Additionally, over half (54 per cent)
transnational global value chain (GVC) more flexible value chains in countries’ and the United States,54 along with the of the world’s GDP is produced by
activities,52 the share of which grew production processes. This will then mean links between them. Simple global value countries occupying just 10 per cent
faster than that of traditional and simple that trade could become more regional in chain activities are, to a great extent, of the world’s land area (Henderson
GVCs. The 2008 financial crisis was a nature and in scope in certain sectors in concentrated within each of the three et al., 2000). This concentration
watershed moment, accounting for a the years ahead. regions, except for the United States’ makes economic re-clustering likely.
significant decline in GVC activities. and Germany’s indirect link through the
After the decline of international trade Netherlands. Complex GVC activities,
in 2009, GVC activities took two years meanwhile, are more often found among
to return to the pre-crisis level, which regional trading partners, supporting
aligned with the sharp V-shaped recovery the idea that while some aspects of
of the global economy (Figure 12). After globalisation are in retreat, localisation
2011, the relative importance of domestic and regionalisation could become more
production activities was increasing dominant.
significantly, while traditional, simple, and
complex GVCs were in decline. New economic hubs will be formed
in relation to a changing economic
How GVCs change in the years ahead will geography. This is likely to occur
underpin the political economy on which in lower- and lower-middle income
the global trading system is predicated – emerging and developing economies.
52
https://iap.unido.org/articles/what-are-global-value-chains-and-why-do-they-matter
53
https://www.oecd.org/trade/topics/global-value-chains-and-trade/ 54
This can be arrived at through network analysis (see Huggins and Thompson, 2017, for example).
86 87
SECTION THREE
NATIONALISM
IN 2020s
TRADE
From the start of the COVID-19 The response appears to make citizens’ mobility, in the rise of biases
nationalism a salient solution as many against some groups perceived to be
crisis in early 2020, there have populations look to support their own associated with the pandemic, in the
been concerns around rising communities (ibid.). strengthening of borders, and in the
nationalism (Wang, 2021),55 push for de-globalisation.
Although liberalised trade has been the
particularly when it comes to trade basic premise in the last 70 years, the Turning to protectionist policies will
of the protectionist variety. The pandemic reshaped trade policies in ultimately not prove beneficial. Turning
global pandemic and the response many countries. The reasons are both to inwards will not help tackle health crises
ensure enough supply and to mitigate and will exacerbate the generally weaker
by governments in most countries price increases in certain instances. economic and financial state of emerging
have created an emergency on The EU, for example, regardless of its and developing trading economies.
a scale like few other events in common trade policy, allowed individual
countries to introduce export limits in
Ultimately, more protectionism will
hinder the collaborative spirit that the
modern history. the special case of protecting health human race will need to defeat the
outcomes.56 COVID-19 crisis – as well as future crises
and shocks (Baldwin and Evenett, 2020).
The rise of exclusionary nationalism Trade is not a part of the problem – it is
might not be the inevitable consequence an essential part of the solution (ibid.).
of the pandemic. It has, in some cases,
reinforced pre-existing nationalist
dynamics (Bieber, 2022). The recent
trajectory of nationalism can be seen in
governments suspending or reducing
55
Nationalism is defined here as an ideology and set of practices that value membership in a nation more than belonging to other groups (Bieber, 2022).
Nationalism here can also constitute de-globalisation, and the politics of fear. 56
https://www.europarl.europa.eu/factsheets/en/sheet/38/free-movement-of-goods
88 89
Looking ahead, protectionism and Nationalism and Nationalist economic policies bring
nationalism could impact the trade and protectionism will not lower levels of economic activity and
investment landscape in the following ways:
hinder trade income. An exploration of two versions
of the global economy – whereby,
The erosion of a global rules-based firstly, there is production fragmentation
trade mechanism does not augur Looking ahead, intermittent nationalism in global value chains, and, secondly,
well. But the new economic order will
nonetheless be defined by standard-
FDI restrictions is likely to continue and be seen in
different areas. It is unclear whether the
where production is more localised (and
businesses and consumers rely less
setting that pertains to cutting-edge more than world will continue to be confronted on foreign suppliers) – unambiguously
technologies. China is using all the levers
of industrial policy to gain technological
doubled with with what some have termed
“coronationalism” (Ozkirimli, 2020) or
highlighted the benefits of trade. The
findings were that localised systems
primacy in areas such as AI and quantum
computing.
the COVID-19 whether a renewed global solidarity will
be an offset.
(with less trade, less fragmentation of
production, and fewer interconnections,
crisis i.e., less internationalisation) are
There is likely to be greater control Ultimately, however, nationalism will not characterised by significantly lower
of foreign direct investment. This will hinder cross-border trade to a significant levels of economic activity and incomes.
be alongside heightened oversight degree, given that the significant
and regulation of some types of cross- economic costs of protectionism are not Re-localisation results in less efficiency
border investment. Several governments, sustainable in the long term. Mitigating and less stability on a global level.
including those of the United States, factors for the rise in protectionist International (fragmented) production is
Australia, and Japan,57 have tightened tendencies are likely to increase, exposed to country-specific and sector-
their screening of FDI.58 2020 was a particularly as the global economy generic shocks – as in the case of the
record year for FDI restrictions; 50 stages a recovery, albeit a moderate and COVID-19 pandemic – but the impact
new measures were approved globally uneven one. of the pandemic is more negative for
compared to the 21 measures recorded GDP, consumption, and production
in 2019.59 The COVID-19 crisis and its Mitigating factors against nationalism when production is localised. The shift
associated economic scarring weakened could include the following: towards a localised regime would
companies in strategic sectors at risk of reduce welfare and global real GDP
foreign takeover. Self-sufficient production and by more than 5 per cent, on average
import-substitution are vulnerable (Arriola et al., 2020).
Domestic economic security could to shocks (Bonadio et al., 2021). In an
form the overriding policy agenda. This analysis of 64 countries, the drop in Looking ahead to the outlook for trade,
is particularly likely in economies that economic activity from the pandemic there is an important distinction between
have rapidly liberalised or have been was just as large (and in some cases risk management and protectionist
subject to increased downside risks. larger, at 30 per cent) when supply decoupling. When international companies
Governments are likely to expand their chains were renationalised. The shift map out their business strategies,
toolkit to restrict trade and investment to available domestic goods did not they must factor in heightened risks –
flows in order to focus on risk mitigation increase resilience; the domestic protectionism, national security controls,
and the management of shocks and economy was also affected by and economic lockdowns.
volatility – particularly when it comes to lockdowns. In addition, localised
commodity price (and financial market) production is more vulnerable to
volatility, given the direct pathways to shocks, because it takes on most of
growth. the pressure from crises.
57
https://www.mofo.com/resources/insights/200522-japan-restrictions-foreign-investment.html
58
https://www.investmentmonitor.ai/analysis/top-fdi-locations-continue-to-tighten-their-screening-regulations 60
This analysis includes 64 countries and 33 sectors to calculate the economic effect of the COVID-19 pandemic (Bonadio et al., 2021).
59
https://unctad.org/system/files/official-document/wir2021_en.pdf 61
These scenarios correspond to simulations in the OECD METRO model: https://www.oecd.org/trade/topics/metro-trade-model/
90 91
SECTION FOUR
THE POLITICS
OF SUPPLY
CHAINS
94%
A defining characteristic of the The response from multiple firms was that a
continued disproportionate reliance on foreign
COVID-19 crisis has been the suppliers (particularly to source basic inputs)
disruption to global supply chains: was imprudent and that a switch to local supply
94 per cent of Fortune 1000 networks was needed to manage risk.
Share of Fortune
companies reported experiencing
supply-chain disruptions from the
Several factors – spanning the political, financial,
and economic realms – are likely to shape how
1000 companies
crisis, with approximately three much supply chains now normalise, or at least reporting
quarters reporting negative or
see less, disruption than of late.
supply-chain
strongly negative impacts. Since the COVID-19 crisis struck, entrenched
practices, such as just-in-time delivery and lean
disruption from
manufacturing have prompted supply shortages the pandemic
in multiple sectors (including electronics, textiles,
and manufacturing goods).
55
Nationalism is defined here as an ideology and set of practices that value membership in a nation more than belonging to other groups (Bieber, 2022).
Nationalism here can also constitute de-globalisation, and the politics of fear. 56
https://www.europarl.europa.eu/factsheets/en/sheet/38/free-movement-of-goods
92 93
68%
Core economic drivers behind normalisation defined as one that does dual sourcing both regionally and globally. They will
and resilience in global value chains: and increases supplier resiliency. Many continue to operate within expansive policy
organisations (62 per cent) now say frameworks that include hard laws and soft
The changing role of automation in increasing supply-chain resilience is a laws (IGLP, 2016), including macroeconomic
production processes. Global supply
chains are likely to continue to change.
Share of key priority.66 and FDI policies that are constantly being
changed in response to shocks.
Automation and digitalisation play a
key role and make reshoring (bringing
companies Organisations’ expansion of their
supplier base and manufacturing The role of the public sector will be important
manufacturing home) easier. For GVCs reported to be footprint. The COVID-19 crisis has in normalising supply chains. Public-private
to change their geographical scope
and move manufacturing closer to the
diversifying highlighted the risks inherent in supply
chains that have been optimised
relationships underwent a remarkable shift
during the COVID-19 crisis (Gereffi, 2020),
point of consumption is a matter not their supplier for cost at the expense of resilience including governments acting as buyers of
base (Capgemini
only of responding to recent disruptions (Shih, 2020). The focus on cost has medical supplies and facilitators of local
but also of using new technologies to meant organisations frequently relied industry. Of particular importance in future
exercise more management, strategy,
and foresight.
2020) on single sourcing or sourcing from
specific geographies that offered cost
is government support for unprecedented
collaborations for R&D and innovation.
advantages. Businesses will now have
Demand forecasting will strengthen to expand their sourcing to make their
GVCs. The role of machine learning is networks more resilient: as many as 68
important when it comes to forecasting. per cent of organisations in one study
Machine-learning tools can pick changes are now actively investing in diversifying
in retail trends in a short timeframe their supplier base and 62 per cent are
and swiftly adjust demand projections. diversifying their manufacturing base
Investing in in-house machine-learning (Capgemini, 2020).
capabilities will be important for supply-
chain resilience (Belhadi et al., 2021). Reshoring tends to be costly. Most firms
More broadly, investment in automation are tending to veer towards developing
to bolster such technologies as the a more diversified supplier base (OECD,
Internet of Things, cloud computing, and 2016) rather than reshoring, given that
5G, can make it possible to create new the process of doing the latter is too
sources of data for forecasting.64 costly for capital-, knowledge-, or natural
resource-intensive sectors.67 Choosing
Greater risk management. Activity in a location is based on a unique blend
semiconductor supply chains can trigger of geographical and resource-based
a knock-on effect in a large number advantages, some of which are not easily
of prominent industries (Panwar et al., replicated elsewhere (Sharma et al.,
2022). A well-prepared (downstream) 2004). This leads to other businesses
firm in the semiconductor supply chain trusting one foreign subsidiary to
will experience only a 5 per cent decline maintain supply, even when the
in sales due to a supply-chain disruption. pandemic hit (Ryan et al., 2022).
In contrast, an unprepared company will
suffer a 35 per cent decline, according to Looking ahead, the changing economic role
McKinsey Global Institute Analysis.65 In of GVCs will be profoundly important in
this sense, a “well-prepared” company is social, economic, and industrial development,
64
Splice Machine, a San Francisco-based company, has created a predictive platform that follows a learn-predict-plan-and-act cycle to inform inventorying decisions. 66
https://www.capgemini.com/wp-content/uploads/2020/11/Fast-forward_Report.pdf
65
https://www.mckinsey.com/business-functions/sustainability/our-insights/could-climate-become-the-weak-link-in-your-supply-chain 67
https://www.cips.org/supply-management/news/2020/august/report-highlights-1tn-cost-of-supply-chain-reshoring/
94 95
Geopolitics, and particularly the tendency renewable-energy companies will generate – and
of governments to prioritise economic be most affected by – feedback loops generated Recommendations for businesses:
independence in strategic products, could by these policy and geopolitical dynamics.
complicate traditional cross-border trading
relationships in the years ahead. Supply Geopolitical dynamics will continue to be 1 Much of the work in dealing with 3 Firms should upgrade investment
chains will inevitably be reshaped as a result, felt within cross-border trading relationships shocks means being prepared for in, and the promotion of, digital
and because of other factors, including rapid through such factors as asset prices (including them. To ensure robust, resilient technologies that can improve
digitalisation. oil prices and exchange rates), as well as in real production, risk management and information systems for risk
economic activity and changes in trade policy production models should shift from management (such as with
Technology companies, manufacturers, and shifts to regional trading priorities at the just-in-time systems to having a applications of the Internet of
automakers, life sciences companies, and expense (at times) of globalisation. greater focus on long-term strategic Things.); this would, in turn, help build
considerations and effective response and forecasting mechanisms
partnerships. in relation to shocks.
Key takeaways 2 Firms should further combine the 4 Amid new forms of multilateralism,
advantages of sourcing domestic and an increased trend to regionalism,
inputs to production with the firms should both diversify supplier
1 The global political landscape is likely 5 In this context cross-border opportunities offered by offshoring connections and utilise and further
to be shaped by key global pivots investment and trade could become and international trade; an build long-term relationships. The
in 2022 and beyond: these will likely increasingly geared to “ally-shoring” overarching policy objective should latter are typically associated with
include the politics and economic rather than bilateral investment flows be grounded in domestic economic increased firm resilience and faster
pathways of a slowing China, oil at being efficiency-seeking and driven by diversification for sustainability. recovery after shocks.
elevated levels, and the potential for cost considerations.
disorderly debt dynamics.
6 OPEC+ is critical for current global
2 Slower growth in China, and the oil-price stability. Concerns over
politics of this, as well as oil price and declining spare capacity could add to Recommendations for governments:
emerging market debt dynamics, the inflationary oil price shock, which
could signal new paradigms that have has been linked to the current conflict
implications for trade and investment. in Ukraine. 1 Governments should elevate 3 The prospect of unsustainable debt
economic diversification within dynamics means that governments
3 The global economic and political 7 As a result of the pandemic, global policy agendas, to both build should build financial buffers in key
landscape will shift considerably debt levels have surged. In 2020, total resilience against shocks, and to sectors with a view to protecting
with implications for global cross- global debt reached 263 per cent of promote sustainable growth over affordable trade finance. Targeted
border trade and investment. Middle GDP, its highest level in half a century. the long term and strength in stress tests should also be put in
powers’68 growing economic clout will Disorderly debt dynamics would limit cross-border trade. place, including for supply chains.
boost regionalism through emerging debtor countries import demand.
trade agreements. 2 In the light of the shift to “ally- 4 China’s economic slowdown is likely
8 More than half of low-income countries shoring” by some policymakers, to be felt both regionally and globally.
4 A new multilateralism is also likely to are in debt distress or at high risk governments should not lose In order to ensure continued and
take hold. Old forms of multilateralism of debt distress; some countries sight of the benefits of trade durable investment and trade growth,
will fade, while new forms, such as have already defaulted, while debt liberalisation in the promotion policymakers need to continue to
increased regionalism, will drive cross- restructurings have been completed or of stronger and broader-based diversify their trade relationships
border trade in new sectors. are underway in some countries. growth. through emerging trade deals.
68
Middle powers are thought of as countries that shape regional or global geopolitics in collaboration with others but lack the capabilities associated with
superpowers (Chapnick, 1999).
96 97
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98 99
CHAPTER III
TECHNOLOGY
AND THE
FUTURE OF
TRADE
CHAPTER III: Technology and the Future of Trade CHAPTER III: Technology and the Future of Trade
Technology The COVID-19 crisis has underscored

the value of digital networks as a
means of connecting during crises and
Open trade increases the spread of profits
via increased export opportunities and
foreign competition, induces more rapid
will offer unexpected shocks. They are and will

continue to be of primary importance
technology adoption, and generates faster
growth (ibid.). Trade-induced productivity
opportunities to global trade: the increase in scalable

digital tools and technologies to promote
effects are widely documented, particularly
at the company level (Holmes and Schmitz,
for countries to broader connectivity will be essential.

Digital expansion and transformation
2010; Pavcnik, 2002).
diversify their
will promote the prospects for structural Countries seeking to reduce their
economic growth, make old modes of dependence on traditional hubs could
trade and business easier, and enable the use technology to diversify their supplier
supplier base and creation of entirely new ways of trading

(Ciurak and Ptashkina, 2018).
base. Technology will continue to offer
opportunities to restructure supply lines
reduce dependence
(as an example, frontier technologies, such
Trade liberalisation and digital as 3D printing, will facilitate reshoring
transformation will continue to be and/or providing complementary supply
on traditional hubs defining meeting points for policymakers,

government, and the private sector.
sources). New technologies may also
prompt companies to seek greater internal
To start, trade openness leads to flexibility, including work practices and
productivity gains at the company level the use of virtual technology, transient
(Perla et al., 2015). This applies both outsourcing, and pop-up enterprises, also
when scaling up existing technology known as asset-light strategies (Casella and
and when adopting new technology. Formenti, 2018).
102 103
SECTION ONE
IMPLICATIONS OF
TECHNOLOGY FOR
THE GLOBAL TRADE
OUTLOOK
Transparent, compatible, For example, the widespread use of Open trade and technology will create a
blockchain platforms could facilitate the self-reinforcing cycle in the years ahead.
and connective trade integration of disparate networks. Trade-technology drivers are likely to
networks will continue include the following:
to be supported by The spectrum of developed and scalable
tools and digital technologies will Blockchain technology could further
a spectrum of new continue to be a core driving factor for improve efficiency and market access.
and innovative digital trade. Opening up to cross-border trade Blockchain technologies are helping to
technologies. Just as with typically increases profits and market maintain the operation of key sectors
depth and breadth by increasing export primarily through easier cash-flow
the COVID-19 crisis, the opportunities; it induces more rapid management and by ensuring payment
likelihood of economic technology adoption and generates systems are functioning. Blockchain
and political shocks will faster growth (Perla et al., 2015).69 technologies have the potential to
be disruptive features in areas such
continue to underscore as market penetration and tackling
the value of digital competition barriers, particularly in the
technology. Trade and technology: energy sector (Andoni et al., 2019).
a self-reinforcing cycle
A company’s incentive to adopt
technology depends on two competing
forces: the expected benefit and the cost.
69
There are welfare effects in this analysis linked to the loss of variety and reallocation of labour away from production.
104 105
FIGURE 13 FIGURE 14
A multidecade view of productivity A multidecade view of productivity

GROSS DOMESTIC PRODUCT PER CAPITA, CURRENT PRICES GROSS DOMESTIC PRODUCT PER CAPITA, CURRENT PRICES
Emerging market and developing economies Advanced economies Advanced economies (Right hand scale) Middle East and Central Asia
60 15,000 2
50 1
10,000
40 1
5,000
30 0
0
20 -1
-5,000
10 -1
0 -10,000 -2
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
Trade openness will influence the

spread of technology and the growth
foreign competition, particularly set
against the raising of trade barriers
Looking to future digital technologies could also dampen
goods trade, while, instead, increasing
of economies. There are significant (Egli and Westermann, 2003). R&D pathways between trade in services and cross-border data
reallocation effects of trade liberalisation subsidies help national firms compete digital technology exchange, as found in previous research
(low-productivity firms exit, high- without giving up gains from trade. (Freund and Weinhold, 2002).
productivity exporting firms expand). Optimal trade policy crucially depends
and trade
On the whole, trade leads to faster on maintaining export markets and The following sections outline recent
productivity gains. The pace of boosting productivity; R&D subsidies The next generation of digital technologies developments in core digital technologies
productivity gains accelerated in both lead to welfare gains owing to stands to reshape trade in multifaceted and and the degree to which digital skills
emerging and developed economies as accelerated domestic innovation unprecedented ways. Digital innovations development and digital infrastructure will
trade liberalisation increased, at, or just in intermediate goods production will have both a more varied and complex feed through to cross-border trade.
following the start of the ‘00s (Figures 13 (Akcigit et al., 2018). effect on trade in the years ahead (Lund
and 14). In both the Euro area (19) and the and Bughin, 2019). Specific developments
United States, productivity growth was 10 pertaining to digital platforms, blockchain,
and 8 per cent respectively between 2000 and the Internet of Things will continue
and 2006.70 In emerging economies, trade to reduce transaction and logistics costs,
liberalisation has spurred productivity and thereby supporting trade (WTO, 2018).
innovation (Shu and Steinwender, 2019).
The full impact of new technologies, in their
Increasing technology R&D ensures gains entirety, is still unclear. Some technologies
from trade. R&D subsidies have tended may reduce trade flows by changing the
to be effective as a policy response to economics and location of production. New
70
Estimates are taken the Organisation for Economic Co-operation and Development (OECD) database.
106 107
Blockchain technology access to blockchain finance, particularly in At its core, the widespread adoption of digital Additive manufacturing
will continue to be Africa (Benjelloun, 2021). technology is intimately linked with economic offers a powerful impetus
of benefit for cross- An illustration of the success of blockchain-
transformation, which brings a multitude of
challenges. Chief among these challenges
to trade
border trade. based trade finance can be found with is acquiring and building the investment
emergent innovative firms; Consensys handles and mechanisms required to adopt and Recently, increasing attention has been paid to
Given its broad capacity for data recording in and has unlocked billions of dollars in digital scale a new technology. Implementing a the growing role of additive manufacturing,74
a secure and encrypted digital format through assets through global blockchain technology; new technology, integrating it with existing or 3D printing. These printing mechanisms play
providing real-time information on transactions Hyperledger has revolutionised program systems, and maintaining blockchain a similar role to those applying to automation
between different parties, blockchain use management for open source blockchain technology infrastructure over time all require more broadly. The direct trade effects of
in the global financial system has grown. projects. significant investments for countries with 3D printing can be trade-reducing, because
It has spread from its application in the limited resources (Choi et al., 2020). they allow for easier domestic production
crypto-currency sector to a broader range of Blockchain will improve trade by solving (Freund et al., 2019). But 3D printing has,
activities,71 including some that are directly or existing problems efficiently (faster As this disruptive technology continues nonetheless, positive impacts on trade through
indirectly related to foreign trade. implementation) and satisfying the core need to mature, blockchain will penetrate the both increased productivity and higher input
for trust. The technology continues to make economic infrastructure of trade in multiple demand (D’Aveni, 2015), with China’s aviation
When it comes to trade, blockchain makes inroads in global supply chains, providing ways through efficiency gains. The lack of industry an example of growing demand and
goods traceable, guarantees the security lower transaction costs, easier customs interoperability with other systems, however, application of the technology.75
of payments and financing, facilitates the clearance, more efficient delivery, and raises the risk that, because of diverse data
verification of digital quality and origin increased exports. formats and security protocols, trading partner There are also cost and environmental benefits
certifications, enables real-time sharing of countries may not be able to “speak” to each to additive manufacturing, in that the process
information at different stages of trade, and Blockchain has brought about a reduction of other. Additionally, as blockchain systems can reduce waste and energy use (Cook, 2020).
helps improve how related public and private up to 80 per cent in data entry requirements scale and add users, data transmission can
services operate. (Ganne, 2018), which has, in turn, supported slow (Casino et al., 2019). However, significant Additive manufacturing will boost trade via:
trade facilitation. This will have the knock- progress has been made, with companies,
Crucially, blockchain can both simplify and on effect of allowing for greater depth and such as R3, creating computing platforms for Accelerated prototyping. Additive
increase cross-border trade, contribute to breadth in markets as smaller participants are direct multi-party applications and secure manufacturing expedites product
competitive improvements, and help reduce able to enter the market at lower cost. Smaller cross-institutional data sharing.73 development by enabling the creation
transaction costs. This will continue to be emerging and open economies will continue of prototypes that can be produced
the case in complex areas such as logistics, to see aggregate benefits (ADB, 2020). Looking ahead, blockchain technologies faster and at lower cost, compared
transportation, customs, financing, and will continue to streamline the ways in with lengthier traditional production
administrative procedures between companies. As well as reducing transaction times, which organisations can track and verify the methods. Several prototypes can be
blockchain commissions are lower and authenticity of trade documentation, reducing printed before committing to production,
without maximum limits, which is especially transaction time and cost. This is likely to yield leaving less room for error. Additionally,
advantageous for exporting SMEs and specific benefits for micro, small and medium- any changes to original specifications are
Innovative uses of other entities that would normally not have sized businesses that have less administrative made digitally, reducing the modification
blockchain in the next affordable access (OECD, 2021).72 capacity and lower access to the working costs to achieve the desired result. This
capital to weather payment delays. Blockchain mechanism stands to continue to disrupt
few years: Blockchain technology allows for traceability; will significantly help tackle bottlenecks to open trade in manufacturing in a significant
the ability to accurately track cross-border trading as a viable option for a wider group of manner through faster product
Blockchain-based trade finance will shipments is crucial to the verifiability of businesses, therefore driving inclusive growth. development (Rapid, 2021).
continue to increase and grow in standards and certifications, as well as the
importance for developing and emerging reliability and timeliness of delivery (UNECE,
economies. This will, in turn, help unlock 2020). 73
https://www.r3.com/trust-technology/
74
Additive manufacturing (AM) is defined here as the technological process of building 3D objects by adding substances to manufacture or create an object.
AM uses computer-aided design (CAD) software to guide digital hardware that produces detailed geometric shapes. Through the deposit of layer upon layer
of material, AM enables the creation of lighter, stronger parts and systems that bring digital flexibility and efficiency to manufacturing operations: https://
71
https://blogs.iadb.org/integration-trade/en/blockchain-technology-a-new-opportunity-for-international-trade/ additivemanufacturing.com/basics/.
72
This includes, for example, access to finance for smallholder farmers without bank accounts. 75
https://www.computerweekly.com/news/450419631/Chinas-aviation-industry-to-boost-demand-for-3D-printing
108 109
Customisation. Manufacturing with 3D Digital twin Access to a detailed, intricate view Digital twin technology will change
printers offers design innovation and technology will boost of a distant physical asset. It enables and mature, producing outputs
creative freedom in product design. The
ability to easily alter original designs means
cross-border trade stakeholders to foresee maintenance
failures (through recreation models
that are increasingly fine-tuned
and valuable. This will increase
that AM offers greater opportunity for that capture risk factors). Digital the reliability of equipment and
businesses to provide customised products, Digital twin technology – the ability to twinning also helps companies develop production lines and have knock-
at different price points, to their clients. create a real-time virtual representation of innovations in manufacturing, R&D, on effects in the form of improved
Product customisation becomes a simple and a physical object – will enhance and shape supply-chain management, service, and productivity, reduced risk, and
scalable proposition that harnesses both time cross-border trade in manufacturing at logistics (Kersten et al., 2017). Some of lower maintenance costs (through
sensitivity and economies of scale (Lacroix, multiple levels.76 It gives insights into the leading players in the digital twin predictive analysis on maintenance
2021), thus boosting the scope for cross- the production process that, over the sector are Oracle, General Electric, issues). Faster production times and
border trade significantly. longer term, benefits trade, particularly Microsoft, PTC, ANSYS, Siemens, IBM, new business opportunities will be
in manufacturing sectors. It applies and Dassault Systèmes. paradigm-shifting for global trade.
Energy savings and environmental to distribution and the use of finished
benefits. 3D printing offers an advantage to manufacturing products by customers Digital twinning allows for the safe
businesses seeking to improve manufacturing throughout the entire life cycle of the removal of unnecessary products,
sustainability – particularly in terms of waste product, as well as for the development of functionality, or components, saving
reduction and energy savings. Additive future goods.77 time and resources.80 Manufacturing
manufacturing has less need for ancillary companies are already using digital
equipment and reduces the amount of raw Survey data reveals that 13 per cent of twins to augment industrial processes
material required for manufacturing, resulting organisations implementing Internet of and offer better approaches to
in a lower environmental impact (Walter and Things projects – creating physical objects decrease costs, monitor assets,
Marcham, 2020) whilst presenting significant embedded with sensors, software, etc. – streamline maintenance, diminish
cost savings. already use digital twin technology, while downtime, and empower the
62 per cent are either in the process of making of connected products.81 For
Looking ahead, the scope for additive establishing it or plan to do so.78 instance, German packaging systems
manufacturing to impact trade is likely to manufacturer Optima digitally maps
grow significantly by virtue of its capacity to The growing use of digital twin and examines its transport system using
create nearly any geometric form, to reduce technology has been significant across digital twin technology developed by
the weight of an object while still maintaining several industries and sectors (Botin- Siemens.
stability, and to include flexibility in the Sanabria et al., 2022), particularly through
production process. Additive manufacturing cloud computing. By using a blend of Offering sector-wide benefits. In the
methods help reduce the number of component cognitive technologies and computing in automotive sector, a digital twin can
defects and improve part availability (Coro the testing phase of a product,79 digital enable the convergence of existing
et al., 2019). It also allows manufacturers to twins can determine which products gaps between physical and virtual
print entire components with unprecedented companies should concentrate their versions of product prototypes, shop-
precision. These technological innovations efforts on and which products need to be floor production, and the actual vehicle
create new markets, and they will also continue phased out. on the road. Companies are also
to expand and facilitate domestic and cross- using it for predictive maintenance by
border market access for firms that are able to Digital twin technology impacts the future identifying deviations and anomalies in
function efficiently and competitively. of trade through: company operations.
76
https://www.networkworld.com/article/3280225/what-is-digital-twin-technology-and-why-it-matters.html
77
At the component level, it is focused on a single, highly critical component within the manufacturing process. At the asset level, it creates a digital twin of a
single piece of equipment within a production line. At the system level, it uses a digital twin to monitor and improve an entire production line. Finally, at the process
level, digital technology looks at the entire manufacturing process – from product and process design and development, to manufacturing and production: https://
slcontrols.com/benefits-of-industry-4-0/
78
https://www.gartner.com/en/newsroom/press-releases/2019-02-20-gartner-survey-reveals-digital-twins-are-entering-mai 80
https://www.ascm.org/ascm-insights/scm-now-impact/real-benefits-from-digital-twins/
79
https://www.ibm.com/topics/what-is-a-digital-twin 81
https://www.analyticsinsight.net/understanding-the-importance-of-digital-twin-and-its-applications/
110 111
The digital era envisioned by UAE’s

Interview: Craig Burchell National Agenda and “Projects of the 50”
Senior Vice-President of Global Trade Affairs, is supported by UAE’s Energy Strategy
Huawei 2050 to transition to clean energy. Supply
chain ecosystem nodes will increasingly
switch to renewable energy sources
such as solar. China’s Qinghai province
hosts the world’s largest photovoltaic
Craig Burchell is a trade lawyer with 30 wide energy management that enables power plant, covering an area of more
years’ experience advising governments
and stakeholders around the world
operators and industry to reduce their
carbon footprints as they embrace digital
Data volume than 20 square kilometres and delivers
clean energy to the east coast of China
on law, business, and policy in the and green transformations. We expect may increase where some of the world’s largest port
technology sector. Craig is a selected
member of the B20/G20 Trade &
that 3,000 GW of solar panels will be
enough to power 80 per cent of ICT
14-fold over the ecosystems are located. In Ningxia
Province, the world’s largest agrivoltaic
Investment Global Task Force, the
WEF Advisory Board on Digital FDI,
infrastructure in 2030. next decade plant, adds 3.8 billion kilowatts of
electricity to the national grid. Both are
the OECD-EMNet Advisory Group, So sustainable technologies are needed built on Huawei cutting edge photovoltaic
and the International Expert’s Group to ensure the increased data storage technology.
on the WTO’s Investment Facilitation required to facilitate future trade flows,
Agreement. will not have as large an environmental The COVID-19 pandemic increased the
impact? uptake of digitalisation. How will this
Which technology will have the greatest impact the Future of Trade?
impact on driving growth in global trade Yes, and there is much more. Take DMCC
over the next five years? in Dubai; the world’s most interconnected Greater working from home certainly
free port, part of a global hub for trade accelerated the adoption of many
I believe digital power and intelligent and tourism made possible by UAE’s new digital applications and brought
power clouds will have the greatest visionary leadership investing in cutting digitalisation forward by several years.
impact in the coming years. We are edge 5G infrastructure, The Jumeirah As economies recover after COVID-19,
facing a future with twin transitions; Lakes district is a wonderful example of we can expect to see an evolution to
digital and green. A bright green digital a digital modern whole port ecosystem. digital smart and sustainable supply
future if we manage it properly. Both will Supply chain nodes across the world can chains. Digitalisation will open up new
influence the evolution of supply chains increase their competitiveness through export opportunities for companies
tremendously. Consider data networks digitalizing and hyper automating benefitting from high-speed broadband
where electricity is 60 per cent of the the entire port infrastructure with networks and good connectivity. Certain
total cost of ownership (“TCO”) over new technologies such as AI, IoT, 5G, countries are working on implementing
10 years. From 2016-20 data volume autonomous in-port driving, automated bilateral digital corridors; A pioneering
increased 30 per cent year on year. If loading / unloading. Green Sites, Green example is the new Singapore-UK Digital
that trend continues there will be a 14- Equipment Room, and Green Data Center Economy agreement, and I believe this
fold increase over the next decade. So, solutions all help save energy and reduce sort of bilateral collaboration will become
reducing the footprint of data networks carbon emissions, and enable operators more common, especially across the
and international supply chains is a key across the world to advance their own Middle East and South East Asia as trade
issue. Huawei is pioneering network- net-zero targets. volumes pick up.
112 113
How will digitalisation impact the Future “All-digital transactions” is a low- US, European and China approaches.
of Trade? cost / high return investment that The key to resolving differences
can unlock multi-million US dollars and creating business certainty is
DMCC findings suggest digitalisation of value. Global Container Shipping convergence wherever possible
could enable over 350 million more generates 28.5 billion bills of lading on digital ecosystem governance
businesses to export goods and services a year globally but only 0.1 per cent and to embrace co-existence and
through digital commerce, boosting are electronic. Digitalising the supply interoperability where convergence is
global trade significantly. UAE leaders chain ecosystem could increase not possible.
plan to increase investment in ICT physical trade values by nearly 14 per
“...digitalisation infrastructure by 8 per cent each year to cent, reduce trade related business How do you see US-China tensions
could enable reach US$23 billion by 2024. With this costs by 80 per cent over 5 years, evolving over the next five years? Do
they aim to make UAE a global testbed cut trade financing costs 70 per cent, you believe there will be decoupling
over 350 million for advanced technologies and innovation. reduce cross-border compliance in certain sectors?
businesses to In my estimation, two examples of cost by 80 per cent and processing
export goods and digitalisation that will have a great impact times by 75 per cent. All together Evidence suggests they will have
on the Future of Trade are: “Smart Ports” transaction costs could fall to 0.7 per only a modest impact overall on the
services” and “All-digital transactions” cent of total trade (from the current Future of Trade. Data for 2021 shows
3 per cent). This would create an US-China trade rebounded in 2021
Ningbo-Zhoushan Port, near Shanghai enormous amount of value. These are to surpass its pre-pandemic levels.
has ranked No1 in the world for 13 findings are from new independent The data on 2021 trade volumes
consecutive years. It has the World’s No research conducted for Huawei also shows very little evidence of
1 Private 5G Network which contributed and ICC to support a project for a regionalisation and that globalisation
to Ningbo handling 1.22 billion tonnes of “Modern Digital Trade Ecosystem”. involving long-distance supply chains
cargo in 2021. Ningbo Port has invested is continuing strongly. Globalisation
heavily in Smart Port digitalisation with Could data localisation increase in is far from dead in my view; it is
fully integrated solutions involving the future, reducing data sharing evolving again.
5G, AI, IoT, energy, power and other across borders and these potential
new technologies. This has improved gains? Decoupling is not the best way
competitiveness and energy efficiency forward because it leads to wasted
through high-speed, high-capacity real The key question for me is access resources, global inefficiencies, less
time 5G networks for remote control, HD rights to data and how this is choice, more expensive devices,
video, automated driving, high-precision regulated. I do not believe the so- and limits the sharing of technology
positioning and others. Gantry cranes are called “data localisation” issue will for all. Having said that, there are
remotely controlled though high-speed be of the magnitude or difficulty signs of decoupling in advanced
cloud technology. Over 120 5G Smart that many say it will be. Especially technologies. The answer is more
trucks auto-navigate the port. 5G tugboat when looked at in the wider context global collaboration to build a global
piloting increased turnover by 10 per and when you factor in the gains digital ecosystem based on common
cent, and berthing efficiency by 70 per from advanced cloud infrastructure, global standards. The next generation
cent. Ningbo Port digitalisation is built on on fast 5G data networks. Broadly of data networks, 6G, will only achieve
a Huawei’s cutting edge advanced private speaking there are three approaches its full potential with 6G unified global
5G network and SmartPort solution to data management. For standards. That should be the priority
specially designed for the port scenario. convenience they might be called focus, not talk of decoupling.
114 115
SECTION TWO
DIGITAL
ENABLERS FOR
COMPETITIVENESS
AND RECOVERY The former is a subset of e-commerce. In How digital trade
2020, 24 per cent of firms received orders
online and more than 40 per cent of firms builds resilience to
placed orders online (UNCTAD, 2022). trade shocks
Upgrades to digital depth and
connectivity in emerging and developing Firms that engage in digital trade are
countries will be essential for the future more resilient to crises, as seen during the
of trade, particularly as they recover from COVID-19 pandemic. First, digital trade has
the COVID-19 crisis. But countries, notably increased the scale, scope, and speed of
those in Asia, continue to vary in their trade (López-González and Ferencz, 2018).
economic readiness for digital trade (Asia Second, countries and firms engaged in
House, 2022). digital trade appear to have been able to
implement and cope with containment
Digital trade is increasingly Progress in digital depth is key: in 2020, measures imposed to curtail the spread
important for trade – particularly global services exports fell by 20 per

cent compared with 2019, but exports of
of the virus, such as physical-distancing
policies, closures of schools and shops, and
when it comes to the promotion digitally deliverable services (those that travel bans.
of productivity and competition. can be delivered remotely) contracted
by a comparatively muted 1.8 per cent.83 Digital trade can help offset some of the
In broad terms, digital trade Digital uptake varies by company size. economic losses in traditional sectors as
comprises both digitally ordered On average, large firms are twice as likely a result of COVID-19. Using data from the
trade in goods and services, to sell online compared with small firms. 2020 World Bank Enterprise Survey of 23
Meanwhile, an estimated 1.5 billion people countries, Banga and te Velde (2020) found a
i.e., cross-border e-commerce, (27 per cent of the global population aged positive correlation between the per centage
and digitally-delivered 15 and older) shopped online in 2019. of firms in a country that have adopted a
trade (services delivered Within the OECD, the share of people digital response to the crisis (increased online
shopping online increased by 5.2 per business activity) and the per centage of firms
internationally through the centage points in 2020 – the largest rise that have increased exports compared with
internet or other networks).82 since records began in 2005.84 the previous year (2019).85
83
https://unctad.org/news/trade-data-2020-confirm-growing-importance-digital-technologies-during-covid-19
82
Digital trade is defined here as “all trade that is digitally ordered and/or digitally delivered”. Under this definition, digitally delivered trade is “international 84
https://www.statista.com/topics/871/online-shopping/#topicHeader__wrapper
transactions that are delivered remotely in an electronic format, using computer networks” and digitally ordered trade is “the international sale or purchase of a good 85
Moreover, using data from 1,182 firms across four African countries – Niger, Togo, Zambia, and Zimbabwe – the authors found that more than 70 per cent of firms
or service, conducted over computer networks by methods specifically designed for the purpose of receiving or placing orders” (UNCTAD, 2022). with a digital response reported having adjusted or converted production.
116 117
FIGURE 15 (UNCTAD, 2022). However, the share that inputs from trading partners, and border
is international, and therefore forms part of restrictions. The magnitude of the supply-
The digital divide across high income and middle income economies
FIXED BROADBAND SUBSCRIPTIONS (PER 100 PEOPLE) digital trade, has not yet been determined side shock to ICT goods manufacturing
(ibid.). Given this, there is a need to agree is likely to be higher in some developing
High income North America World on measurement methods for cross-border countries where finding substitutes for
Middle East & North Africa Upper middle income e-commerce. imports is difficult (ibid.).
40 The depth of use of robots. In terms of Digital transformation will reduce the
robot density, Singapore, Canada, and costs of engaging in international
35
Australia are above the world average trade, changing both how and what
30
(of 74 units), with Singapore having the we trade, and contributing to growing
highest level by far, at 918 units per 10,000 competitiveness (Lopez-Gonazalez and
25 employees in 2019. The electronics industry Ferencz, 2018).
(particularly semiconductors) is the primary
20
driver for industrial robots in Singapore. Well-established policy areas, such as with
15 Some consumer electronics segments have trade facilitation, will be disrupted, but,
also witnessed a positive demand shock equally, developed and streamlined with
10
from the COVID-19 crisis.87 digitalisation. New issues such as cross-
5
border data flows can, however, raise new
challenges.
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 More internet penetration leads to a
Looking ahead: Digital greater degree of trade openness; on
drivers for the post- aggregate, a 10 per cent increase in
The ability to shift and trade logistics) are important areas to

COVID-19 recovery bilateral digital connectivity raises goods
trade by nearly 2 per cent and services
activities online and to tackle in order to close the access gap. trade by more than 3 per cent.88
engage in digital trade Fostering effective cross-border usage of

Digital trade is increasingly seen as the key
means to mitigate economic losses from Digitalisation is important for all sectors,
depends on a range data. Digital trade is underpinned by the the COVID-19 crisis and to help aid recovery including agriculture, natural resources,
of factors or digital cross-border exchange of data. Crucially, from the pandemic. On the one hand, the and textiles; however, it is essential
data serve multiple purposes. Not only pandemic has accelerated the scope of a for exports in higher value-added
enablers86 can data be traded themselves, they also digital-led recovery; on the other, the existing manufacturing and digitally deliverable
ease the route of digital trade. Data are digital divide across (and within) countries services.
Closing the digital divide. There exists at the core of new and rapidly growing has been exacerbated (Banga and Raga,
a continued digital divide between high business models around cloud computing, 2021). Digitalisation is also associated with
income and middle-income economies, in the Internet of Things, and 3D printing countries drawing greater benefits from
terms of access to and uptake of digital (Yang and Gu, 2021) In certain instances, Supply-side shocks from the pandemic are regional trade agreements (RTAs).89 When
infrastructure and technologies (Figure geopolitical tensions may make cross- illustrative. Information and communications combined with an RTA, a 10 per cent
15). Lower income economies are even border use of data more difficult. technology (ICT) goods manufacturing increase in digital connectivity gives rise to
further behind in terms of their digital E-commerce data availability. The suffered heavily from lockdowns, social- an additional 2.3 per cent growth in goods
depth. Broader digital infrastructure, availability of consistent e-commerce distancing policies, shortages of material exports.90
digital access, and funding digital-skills statistics is currently limited. Business-
development (in e-commerce, mobile to-business transactions account for
financial services, online payment systems, the bulk (82 per cent) of e-commerce
87
https://ifr.org/ifr-press-releases/news/robot-race-the-worlds-top-10-automated-countries
88
https://www.oecd-ilibrary.org/sites/89a7542c-en/index.html?itemId=/content/component/89a7542c-en
89
https://www.oecd.org/trade/topics/regional-trade-agreements/
86
https://www.oecd.org/coronavirus/policy-responses/leveraging-digital-trade-to-fight-the-consequences-of-covid-19-f712f404/ 90
https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TAD/TC/WP(2018)3/FINAL&docLanguage=En
118 119
The important question to address is to

Interview: James Emmett what extent are we prepared to reduce
Senior Advisor Digital Assets, our dependence on carbon-intensive
Oliver Wyman fuels, whilst we wait for renewable
energy sources to come online. The
reality is that we need renewable energy
sources online and increased energy
storage infrastructure before completely
James Emmett is a seasoned advisor a stronger push towards renewables, divesting from carbon-emitting fuels.
and executive within finance, technology, which we are already seeing in Western “...we need Energy storage is particularly important
regulation, and law. He was previously markets as a reaction to global renewable energy as there will be times when the wind
Group General Manager of HSBC and commodity price increases. does not blow or the sun does not shine,
CEO of the bank’s Europe operations. sources online meaning energy will need to be drawn
James has also served on the UK’s Will this inflationary pressure lead to a and increased from storage terminals. Technological
Payment Strategy Forum, the UK’s demand shock, and therefore reduced
energy-storage advances in battery technology will be
International Trade & Industry Group, the trade going forward? needed to improve energy storage, but
Banking Commission of the International before completely before then we will be confronted by
Chamber of Commerce, the WTO Expert Will we see a demand shock? Yes, divesting from whether we respond to renewable energy
Advisory Group on Trade Finance, and
the B20 Trade & Investment group.
undoubtedly, and you will see
consumers budgeting and reducing
carbon-emitting shortages by burning more fossil fuels
or by making energy savings through
demand due to inflation. But what fuels” cutting production.
We have recently seen geopolitical impact will that have on trade volumes?
disruption from Russia’s invasion of It also depends on how things change Which technology will have the greatest
Ukraine, including rising commodity on the supply side. I am particularly impact on driving global trade over the
prices. What impact will this have on worried about wheat exports from next five years?
the Future of Trade? Ukraine and Russia. Some of the supply
shocks we will see are going to be felt We have already discussed the risks of
The regionalisation of trade is already most acutely in emerging markets, regionalisation to global trade and the
a trend and will accelerate. This is and that will have knock-on effects on need for greater sustainability. There
likely to lead to regional trade blocs. global trade. needs to be greater data standardisation
Companies will also look to regionalise and interoperability to provide end-to-
supply chains to improve their resilience. Regarding price increases for end transparency within global supply
The important questions for firms commodities such as oil and natural chains. This will help increase supply
to ask is how do you evaluate risk gas, there are two sides of the debate chain resilience, increase sustainability,
in supply chains? And how do you currently playing out. On one hand you increase efficiency, and enable greater
identify critical components within have oil producing nations saying they financing. The WTO needs to focus on
supply chains? Regionalisation will need more investment in oil to increase how we can drive international policy
undoubtedly cause some changes in supply, and on the other hand you have coordination in this area. Distributed
flows on the commodity side, but also policymakers arguing that this is a great Ledger Technology (DLT) is one way
on the consumer side. Supply chains for opportunity to now decarbonise and to increase transparency within supply
certain commodities will be restructured, make supply chains more sustainable. Is chains. Trade is a function of various
which will increase prices. You will see the latter now inevitable? conditions and obligations placed on
120 121
producers and suppliers, and collateral There are trends towards data play a critical role in international of the most interesting aspects of
is needed to facilitate transactions. localisation, particularly in financial trade and indeed, a more efficient DeFi for international trade are smart
Whether this collateral is backed up services and the requirement for and transparent trading system. contracts. What are smart contracts?
by a Central Bank Digital Currency Personally Identifiable Information (PII) One advantage is the instantaneous They are contracts that are wrapped
(CBDC) or stable coin, et cetera, DLT to be stored in one location. Generally, of settlements in CBDCs. Another on blockchain that cannot be revoked
enables this collateral to be placed on trade related commercial information advantage is that the currency is and will do certain things subject to
the blockchain and made visible to all has not been subject to the same levels represented by a claim on a Central certain actions taking place. There
parties involved, increasing confidence. of data localisation. The bigger issue Bank. But currently it will take some is other interesting activity taking
DLT can create conditionality, and here is how to ensure common data time before CBDCs are used in trade. place in the DeFi world from which
confidence, and encourages trade, standards across jurisdictions and Regarding stable coins, there are real benefits can occur, but those
which could help close the US$1.7 perhaps more importantly, how do you different types. There is a group benefits are going to arise when they
trillion trade finance gap. Additionally, ensure different customs and other that are linked to a very transparent can bridge into either a regulated or
DLT should lower the cost of trade related bodies are interfacing, so that reserve which is audited, providing a more visible world. What do I mean
finance instruments, and therefore we can share trade data to increase confidence and minimising the by that? There is a lot of financing
could lead to higher trading volumes. transparency and interrogate it better to stablecoin risk. These have the greatest capability that is being developed.
uncover inefficiencies. That is a very hard potential together with CBDCs to be You have heard of yield farming and
What are the obstacles to job to do, but it would remove several used in international trade. There are staking, and while all of that is great,
implementing blockchain and DLT at trade frictions and allow global trade to also stable coins without a reserve are we seeing real benefit coming
scale? function in a much smoother manner. (algorithmic stable coins) which or material different from these
use different algorithms to try and new means of getting financing to
We need access to consistent, Which digital currency do you create the stability required to create individuals? There is going to be real
accurate, and interoperable data anticipate will have the greatest aspect confidence to trade in it – these have innovation that comes out, but there
that is not specific to one platform. on global trade? CBDCs, stable coins, or a greater risk profile and are therefore is going to need to be a bridge into
When using data, if garbage comes in, cryptocurrencies? less likely to be used. Finally, regarding some form of regulation, to mitigate
then garbage will come out. We are crytpoassets such as bitcoin, there risks and increase certainty. The
seeing governments move forward I think the jury is still out. Trading is often volatility which makes them real issue with DeFi’s uptake will
on digitising trade, including customs counterparties are looking for two very less desirable for use in any form of come from trading counterparties’
procedures, inspection certificates, clear things. Firstly, the availability of substantial real-world trade, but we aversion to the risk of potential
and introducing single windows for finance, which makes using conditional may see them used in smaller trades, volatility and operational risk. The
exports. So, managing any frictions payment structures and digital trade in particular in markets where there more interesting component is the
between countries that come from instruments to facilitate trade important. is a constraint on the availability of underlying blockchain technology.
the uptake of these digital solutions Secondly, counterparties want to use correspondent banking. Blockchain has been around for
will be important, and ensuring data currency that is not significantly volatile several years now, but so far in
is standardised and can move and and that does not have credit risk Finally, where do you stand on terms of trade, we have always
be moved across multiple different associated with them. In its simplest Decentralised Finance (DeFi)? used it to digitise documents and
pathways and systems will also be form, the central question is can I get Particularly in terms of offering an to centralise data. DeFi allows us
important, especially to reduce paid in the currency and is it going to alternative to blockchain plugging the to put value and identity in there
trading costs. be the amount I expected? Starting global trade finance gap. as well, marrying data with value,
with CBDCs. CBDCs reflect physical fiat in a way that automatically makes
Do you believe future trends are currency, but are currently not really DeFi has many different meanings to and reconciles payments subject to
pointing towards greater data being used for trade, but could be many different people and blockchain certain conditions, which is quite
sharing or greater data localisation? useful in the future. I think CBDCs could is an inherent foundation to DeFi. One transformative.
122 123
SECTION THREE
DIGITALISATION,
FREE-TRADE
PACTS, AND
TRADE POLICY
Over time, digital As a result, there has been increasing Digital commitments can be divided
inclusion of digital provisions in free- into three categories:
commitments within trade agreements at the multilateral,
trade agreements have regional, and bilateral levels (WTO, 2021). Market access. Provisions covering
expanded. Increasingly, Eighty-six countries, accounting for 90 customs duties, valuation issues,
per cent of global trade, are currently movement of service providers, and
they have included issues engaged in WTO negotiations on a Joint access to data.
of market access and Statement Initiative on e-commerce.91
the governance of the Rules and regulations. Provisions that

Digital provisions in trade agreements include covering intellectual property
cross-border movement are likely to continue to expand in rights, protection of personal
of digital goods and breadth and scale as the importance of information, and consumer protection
services. the digital economy grows – both in the

exchange of digital services and goods,
competition.
and in the way digitalisation eases trade Trade facilitation commitments.

itself. Between 2001 and 2016, there Provisions that would include
were 69 regional trade agreements commitments covering paperless
(RTAs) that included a standalone trade, e-signatures, and digital
e-commerce chapter or article(s). authentication.
There were also 21 other RTAs that had
provisions addressing paperless trading,
digital rights management, or general
promotion (Wu, 2017).
91
https://www.wto.org/english/tratop_e/ecom_e/joint_statement_e.htm
124 125
Digitalisation uphill task, given the current disparity in Defining challenges

and Asian trade respective national digital economies.95 ahead for digital
pacts Trade agreements with robust
e-commerce chapters nonetheless have
commitments
the potential to increase trade in goods
Preferential trade agreements (PTAs) and in digital services among member Categorisation of goods and services.
that include digital trade rules will
be a dominant and crucial driver of
countries. While empirical evidence
suggests that such PTAs may promote
This is a core issue within e-commerce
that is blocking progress on digital trade.
Digital
future relationships. In Asia-Pacific, the deeper digital commitments, there is WTO members have differed as to whether sovereignty
Regional Comprehensive Economic
Partnership (RCEP)92 has expanded
also a growing body of evidence of
the economic value added of digital
products that can now be delivered online
should be categorised as goods (under
remains
to include commitments on customs
duties, unsolicited commercial electronic
commitments. This is the case globally
and particularly in developing and
GATT) or as services (under the GATS). highly
messages, and non-discrimination of emerging economies where e-commerce Disparate developmental stages. Economic contested
digital products. The Comprehensive and is growing in importance. The African integration is affected by the different
Progressive Trans-Pacific Partnership Union’s Digital Transformation Strategy stages of development within ASEAN and
(CPTPP) also includes non-discrimination 2020–2030 identifies negotiations on the the need to balance national ambitions and
of digital products, source codes, African Continental Free Trade Area as a regional integration. Given this, the pace
principles on access to and use of unique platform to discuss harmonisation of integration – and digital adoption – is
the internet for electronic commerce, and the reduction of the regulatory often determined by the slowest-growing
online consumer protection, electronic burdens on cross-border services trade economy.
authentication, electronic signatures, and and e-commerce across the continent
personal information protection.93 (Banga et al., 2021). Digital skills development. For several
ASEAN economies, this will be crucial in
The digital provisions in other agreements fostering broader and deeper digitalisation,
(for example, the Digital Economy given the significant share of jobs in Asia-
Partnership Agreement between Chile, Pacific that are likely to be impacted by
New Zealand, and Singapore, and the digital innovation – for example, automation
Singapore-Australia Digital Economy (OECD, 2021a).
Agreement94) exceed those of the CPTPP.
They include provisions on electronic Digital sovereignty. Digital sovereignty Further international architecture is
invoicing, electronic payments, cooperation remains a highly contested, politically likely to emerge, aimed at optimising
on competition policy, submarine sensitive issue (Pohle and Thiel, 2020). Of the benefits of data exchange within the
telecommunications cables, the location of particular interest will be how it is translated framework of individual public policy
computing facilities for financial services, and transformed in practice into the objectives. A range of commonalities
data innovation, open government data, functioning of institutions and legal practices. will continue to emerge within and
digital identities, standards and conformity between policy instruments (OECD,
assessment for digital trade, artificial Tackling data restrictions. Data restrictions 2021b). Whether through unilateral
intelligence, and fintech cooperation. can affect a local economy negatively mechanisms, trade agreements, or
Despite this, adding more and meaningful through their impact on the productivity multilateral arrangements, there appears
provisions to such agreements can be an and job-creation ability of local companies. to be consensus on the dual goals of
Digital trade is facilitated by and dependent safeguarding data and enabling its flow
on the cross-border movement of data.96 across borders (ibid.).
92
On 1 January 2022, the RCEP agreement entered into force for Indonesia, Australia, South Korea, Malaysia, Myanmar, Philippines, Brunei Darussalam, Cambodia,
China, Japan, Lao PDR, New Zealand, Singapore, Thailand, and Viet Nam. For further details, see: https://asean.org/rcep-agreement-enters-into-force/
93
https://www.mfat.govt.nz/assets/Trade-agreements/TPP/Text-ENGLISH/14.-Electronic-Commerce-Chapter.pdf
94
Singapore-Australia Digital Economy agreement (SADEA) is Singapore’s second digital economy agreement (DEA): https://www.mti.gov.sg/Improving-Trade/ 92
A range of unilateral mechanisms for safeguarding cross-border transfers exists. Governments have been using a range of instruments to ensure that, upon
Digital-Economy-Agreements/The-Singapore-Australia-Digital-Economy-Agreement crossing a border, data are granted the desired degree of protection or oversight. However, there is no one, single mechanism to enable what has come to be called
95
https://www.dfat.gov.au/trade/services-and-digital-trade/australia-and-singapore-digital-economy-agreement “data free flows with trust”. Governments pursue different, or even multiple and complementary, approaches (Casalini et al., 2021).
126 127
SECTION FOUR FIGURE 16
CRYPTO
The continued rise of Bitcoin
1 BTC PER USD
CURRENCIES,
70,000
60,000
DIGITAL
50,000
40,000
CURRENCIES,
30,000
20,000
AND CRYPTO
10,000
ASSETS
April 2016 April 2018 April 2020 April 2022
The emergence and growth of virtual currencies98 High price volatility. This limits their ability
will continue to challenge the traditional model of to serve as a reliable store of value. The
fiat currencies, given that they are issued without volatility of bitcoin prices, for example, is
the involvement or backing of governments. extreme and almost 10 times higher than the
Some are based on so-called distributed ledger volatility of major exchange rates (Baur and
technologies that provide complete and secure Dimpfl, 2021). Virtual currencies are neither
transaction records without using a central state nor (for the most part) private-entity
registry. These, therefore, allow for direct peer- liabilities. What’s more, prices and volatility
to-peer transactions and eliminate the need for a appear to be unrelated to economic or
New forms of digital money and central clearinghouse. financial factors, making them hard to
varied payments systems have been Crucially, distributed ledger technology can
hedge or forecast (Yermack, 2013). At the
time of writing, Bitcoin’s value has reversed
instrumental in making cross-border strengthen efficiency by reducing transaction its past gains against the US dollar over the
trade and investment more efficient times and costs, especially across borders (BIS, past year (Figure 16).
2017). In the longer term, these technologies have
and secure. Secure online-payments the potential to deepen financial inclusion by Comparatively small (but growing) market
systems are changing the ways in offering secure and lower-cost payments options capitalisation. At approximately US$1.3
which payments for goods and (ibid.). Beyond payments systems, the technology trillion currently,100 global crypto-currency
can impact a wide range of markets (including market capitalisation is growing. This
services are made (Bezhovski, 2016); through equity exchanges and settlement compares with the global foreign exchange
crypto currencies97 and central bank systems), thus helping financial-market integration market, which is now likely to have
digital currencies stand to transform (ECB, 2017). exceeded estimates of US$6.6 trillion per
day.101 The still-limited acceptance of virtual
cross-border trade further in the Virtual currencies do not fully correspond with currencies significantly restricts their use as
years ahead. the traditional function of money (He et al., 2016). a medium of exchange or as a store of value.
98
Virtual currency schemes comprise two key elements: (i) the digital representation of value or currency that can be transferred between parties and (ii) the underlying
payment and settlement mechanisms, including the distributed ledger system (He et al., 2016).
99
Fiat money is defined here as government-issued currency that is not currently backed by a physical commodity (such as gold) but is guaranteed by the government.
For further details, see: https://corporatefinanceinstitute.com/resources/knowledge/economics/fiat-money-currency/
97
A crypto currency is defined here as a type of crypto asset that is electronic cash based on a decentralised distributed ledger technology (DLT). 100
https://coinmarketcap.com/
For further details, see: https://www.bankofengland.co.uk/knowledgebank/what-are-cryptocurrencies 101
https://www.bis.org/statistics/rpfx19_fx.htm
128 129
US$1.7tn
FIGURE 17
Digital currencies
Global (OTC) foreign exchange turnover
and trade
7
Digital currencies are ultimately designed as

Global trade
financing gap
6
mediums of exchange, using cryptography,
to keep transactions secure and to control
in 2020
5
further creation of additional units of the

4
currency (Gerba and Rubio, 2019). As such,
3 they could increase efficiency in cross-border
payments. The crypto system presents new Traditional financial institutions’ settlement
2
opportunities for cross-border trade, given its and cross-border payments via digital
1 capacity to provide a faster, and cost-effective currencies. Digital currency use on a large
cross-border payment system (ibid). For digital scale is still some way off, particularly in
0
currencies that rely on distributed ledger the cross-border setting. There are multiple
2004 2007 2010 2013 2016 2019
technology, money could be sent and received technical and regulatory drivers, including
almost instantaneously and at any time. a link to financial sector development
Virtual currencies do not function as an has grown significantly in terms of new (Saiedi et al., 2021). Crucially, a basic level of
independent unit of account. In other currencies, an expanding consumer base, and Digital currency developments could continue interoperability between central bank digital
words, they are not an independent store of greater overall foreign exchange transaction to boost trade, including as follows: currencies (based on access and settlement
value. Illustrative of this is that retailers who frequency (Figure 17). So, digital currencies arrangements) would be needed to facilitate
accept payment in virtual currencies will comprise a growing and competitive market, Speed and efficiency in cross-border cross-border use in two (or more) jurisdictions
quote a price in fiat currency. Rather than where many players enter and compete. Bitcoin, payments. Human interaction is often required (BIS, 2021). Such arrangements can connect
being used to measure the value of goods for example, has shown signs of being an in the process of verifying the sender’s and both wholesale and retail central bank digital
and services directly, a particular basket of effective financial hedging mechanism as a digital recipient’s information – for example, for anti- currencies across borders and necessarily
goods and services will be valued in a fiat asset (Rudolph et al., 2021; Dyhrberg, 2015). money laundering and combating terrorism- would require strong cooperation among
currency that is then converted to virtual financing purposes (FSB, 2021). As a result, central banks, and include technological,
currencies (EBA, 2014). Free entry into the market has possibly induced the speed of payment is often determined market-structure, and legal aspects (ibid.).
network effects where one currency could by the extent to which the business hours
dominate (Gandal and Halaburda, 2016). When of the sending institution and the receiving While the potential benefits may help increase
one particular currency becomes more popular institution overlap, and whether the sending trade volume for certain countries, the structural
Recent developments (easily and expediently attracting new users and receiving institutions rely on the same impact of digital currencies on trade is still in
in crypto currencies amid a perception that it has become useful),

there is a circular reinforcement effect, which
messaging standards (ibid.). question. The fundamentals of international
trade, which depend, in part, on comparative
leads to greater use and circulation (ibid.). Alternative credit information for trade advantage, take a while to experience
In addition to the exponential growth in crypto finance. In the light of the US$1.7 trillion longer-lasting change. Some economies, for
currencies,102 where digital assets are traded Most existing literature has often assumed that global trade financing gap (ADB, 2020), example, are challenged by development or
in the US dollar, bourgeoning crypto-currency crypto currencies are only traded directly for which heavily impacts small and medium- diversification. These challenges will continue,
markets in emerging market economies also the US dollar, thereby potentially foreclosing sized businesses that typically don’t have notwithstanding a higher level of digitalisation.
continue to grow. In Russia, India, and China, the understanding of peculiar dynamics in other established credit histories, public ledgers
digital assets are expanding (Anisiuba et al., economies or markets where they are traded of digital currencies could be used to share Signs of greater breadth and depth in the
2021). But the transmission and spill over directly for other conventional currencies. payment and financial history to underwrite crypto-currency market would include a higher
between crypto-currency markets is still at an Despite this, competition between bitcoin and loans for importing and exporting. At the level of market capitalisation, increasing interest
early stage of development (Huynh, 2019). its rivals is increasing to be traded with other, same time, strong privacy protocols would in emerging technologies (such as Ethereum),
The market for computer-generated currencies particularly emerging-market, fiat currencies. need to be enforced to facilitate effective and other “smart contract” blockchains, and
transparent functioning. decentralised finance.
102
There are more than 10,000 crypto currencies worldwide. For further details, see: https://www.statista.com/statistics/863917/number-crypto-coins-tokens/
130 131
If greater digitalisation is to promote most pressing concerns – including financial

sustainable cross-border trade and integrity, consumer/investor protection, and Recommendations for businesses:
investment, it will require a multifaceted, tax evasion.
coordinated, and targeted policy approach.
Both businesses and government should Effective policy coordination will be 1 Firms should collaborate of scale in innovative technologies,
respond to potential future shifts in innovation required at both national and international with government to scale up including in additive manufacturing,
and technology, and align strategies and levels. Virtual currencies combine different investments significantly in order such as 3D printing.
policies to gain competitive advantage. elements of electronic payment systems, to build out more robust digital
currencies, and commodities that span the infrastructure ensuring accessible 3 Firms should help government
Any policy response to virtual currencies will responsibilities of several types of regulators and affordable connectivity. implement and manage broader
need to strike a balance between addressing at the national level. Developing international trade facilitation digital systems
risks and abuses, while also avoiding over- standards and best practices is needed to 2 Firms’ resources should be and platforms; this would ensure
regulation that could stifle innovation (He et provide guidance on the most appropriate devoted to developing production more efficient interactions between
al., 2016). The initial focus should be on the regulatory responses and harmonisation. processes that promote economies importers, exporters, and authorities.
Key takeaways Recommendations for governments:
1 Connectivity will be key to a more both digital transformation 1 Governments should reinvigorate 4 Governments (and businesses)
effective trade system in future, and and improvements in structural their investment climate through need to incentivise ICT use among
technology will be the great enabler economic growth. facilitating imports of capital smaller firms to enable their
of that. The continued build-up of equipment, and through trade effective integration into global
transparent, interoperable networks 4 Blockchain technologies have the facilitation and reduced import digital value chains. This would
will be of primary importance to the potential to be disruptive for firms duties on information and include enshrining privacy and data
global trade outlook. facing competition barriers, and for communications technology (ICT). protection standards.
households that want to exercise
2 There are opportunities for countries more control and efficiency in 2 Governments should adapt 4 New types of trade agreements
to use technology to diversify their their energy sources, with direct their economic development should be designed to enable
supplier bases. Emerging market implications for the energy sector. strategies to elevate the role of growth of digital currencies
economies becoming involved in digitalisation and to meet growing which, in time, would promote
global value chains will need to demand for goods and services in interoperability between payments
ensure that they have stable and digital economies, with a view to systems and facilitate an ecosystem
attractive operating environments. enhancing trade facilitation. that would foster growth in digital
trade.
3 All of this means increasing the 3 Greater breadth and application
amount and availability of scalable of ICT should be integrated at all
digital tools and technologies to levels of education with a view to
promote broader connectivity. promoting economic clustering and
Digital scalability will promote industrial collaboration with firms,
to foster export promotion.
132 133
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CHAPTER IV
SUSTAIN-
ABILITY AND
THE FUTURE
OF TRADE
CHAPTER IV: Sustainability and the Future of Trade CHAPTER IV: Sustainability and the Future of Trade
Trade If left unchecked, climate change will leave

millions of people facing uncertain water and
requires a global response, and global trade
has a key role to play.
for older, dirty technology fades.
Failure to collectively tackle the climate crisis
can be an
agricultural conditions, as well as coping with would have profound impacts on the future of
dangerous levels of heat and rising ocean To meet the commitments made in the trade. It would range from extreme weather
levels (IPCC, 2022).103 Paris Agreement to limit the levels of global events causing damage to commercial property
essential Expansions of trade in its current form

warming, the world is going to have to move
away from a model of energy consumption
and impinging on supply chains, to shifting
weather patterns impacting the traditional
tool in the will have a negative impact on the climate

through greater emissions, more pollution,
generated by the burning of fossil fuels towards
one that uses less energy generated from
agricultural products and exports of vital
regions, to the political instability that would
fight against
and increased environmental degradation. different and more environmentally friendly arise from climate breakdown and the mass
An illustration of this lies within the shipping sources. What we do and how we do it will movement of climate refugees.
industry. Currently, shipping is responsible for need to change, and that will require huge
climate 4 per cent of greenhouse gas emissions and

the air-cargo sector accounts for an additional
amounts of green infrastructure to be built and
financed, creating opportunities for those able
This is being recognised by consumers, who
are looking to use their purchasing power
change 2.4 per cent (EESI, 2019). It is vital, therefore,

that global trade becomes more sustainable,
and that the trade in goods and services with
to meet this demand.
The world has pledged to boost the amount

to promote greener practices, and among
investors, with several notable firms using their
shareholdings to vote against practices that
beneficial environmental impacts increases of green finance available to low- and middle- are not aligned with environmental and social
dramatically in the coming years. income countries to help them adapt to governance goals. Government regulations also
and mitigate climate change. At the same look set to increase as the decade progresses,
Crucially, trade can also have a positive time, major industrial nations are striving to meaning that companies that don’t get ahead of
impact, in that open markets can aid the decarbonise their own domestic economies. the curve risk not only reputational damage but
transfer of technology, goods, and capital This is creating and driving supply and demand also being left behind by more environmentally
that are vital to the mitigation of climate for environmental goods and services that will innovative competitors.
change. Trade can also support wider reshape global trade patterns.
environmental, social, and governance goals Being green is no longer a “nice to have” way
(OECD, 2022). Trade can be an essential tool This is not a short-term trend. Demand will of connecting with socially minded consumers
in the fight against climate change – from continue to increase as legacy infrastructure – it is quickly becoming a requirement of doing
providing the raw materials for sustainable is decommissioned and replaced by greener business in the 21st century. It provides huge
technology to getting the latest practices alternatives, which, once they are in place, will opportunities for companies to invest in new
and climate data from intellectual hubs out need to be maintained before being replaced markets that will grow dramatically in the coming
onto the front line. This is a global issue that by more sustainable technology, as the demand years and help protect the planet as they do so.
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IPCC (2022), Climate Change 2022. Impacts, Adaption and Vulnerability. Summary for Policymakers: https://www.ipcc.ch/report/ar6/wg2/downloads/report/
IPCC_AR6_WGII_FinalDraft_FullReport.pdf
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implications for carbon pricing, carbon

Interview: David Hone credits, and the carbon trade.
Chief Climate Change Adviser,
Shell There is global focus on rising energy
costs and inflation. Can energy markets
play a role in stemming this?
The oil and gas industry is a very price

The energy industry has been crucial What will the impact of green responsive industry. Periods of low
to global economic growth over the technologies, such as hydrogen, “The energy prices result in reduced investment
last century. What should the role of oil Carbon Capture Utilization and transition will not and the reverse is true during periods
majors be during the energy transition? Storage (CCUS), have on the energy of high prices. For example, Shell has
transition as well as greening global happen overnight recently announced a major acquisition
It is a pivotal question and there are trade? and what is in India which would have been more
two main things to point out. Firstly, we
challenging is that difficult two years ago when oil prices
should not forget the word ‘transition’, Apart from the actual change in the were around US$30. We are going to
which is different to the word ‘change’. energy that we use, there will be a there is misalignment need fossil fuels for some time as the
A new global energy system will not change in the way in which energy is between society’s energy transition gathers pace, but
emerge tomorrow. This is a generational
shift that will take between twenty-
supplied. The energy transition looks
set to be focussed around local and
energy needs and the license to produce fossil fuels is
being challenged, which risks creating
five years to a century to complete, regional solutions. For example, it the carbon budget” a shortfall in energy and price rises. A
particularly if the complete transition is unlikely that electricity generated more thoughtful discussion is required
away from fossil fuels is the goal. During in South America will be used in across society about everybody’s role in
this transition we must make sure China, but electricity will likely be the energy transition.
there is a continuous energy supply to shared within regions. This could
meet society’s needs. We may already encourage the greater regionalisation Does the energy transition and
be feeling some of the effects of the of trade. As for hydrogen, it is not sustainability increase the risk of
energy transition on energy supplies. In clear whether the business model for inflation?
general, we have seen a period of lower the hydrogen sector will gravitate
investment in oil and gas. Today’s tight towards a local or global model. There No, I do not think that is necessarily
market is more a result of the COVID-19 is still not yet a full understanding the case. It is about finding balance.
pandemic than the energy transition, of whether shipping hydrogen as a The energy transition will not happen
but highlights the need for oil majors to fuel (as we do with LNG) is viable. overnight and what is challenging is that
ensure there are energy supplies to meet CCUS is an interesting area. We’ve there is misalignment between society’s
future demand. In the long-term, oil seen it implemented on a local level energy needs and the carbon budget
firms need to decide what services they where the requisite geology for it is that is remaining in terms of the carbon
want to supply as non-fossil fuel sources available. But we are also moving into that we can emit. The carbon budget
of energy are secured. In Shell’s case the the complex world of carbon removal, suggests that emissions must be halved
discussion is shifting towards becoming where carbon dioxide is removed this decade, which effectively means
a company that provides energy from a from the atmosphere in one place halving fossil fuels by 2030. This puts
more diverse mix of sources than just oil to balance emissions somewhere enormous pressure on where we get
and gas. else. This could have interesting energy from.
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border adjustment mechanisms are

Where do you see the future of a positive concept, but I doubt how
carbon borders and pricing in terms of quickly they can be implemented in
regulating energy markets? A concern practice. For example, the benchmarking
we frequently hear is that the future mechanism that evolved into the EU
could see multiple different carbon Emissions Trading System took years to
trading regimes, which businesses emerge and many iterations to fine-tune
will need to navigate, increasing costs it before coming into use. Alterations
of doing business. Is this where the to this mechanism are still ongoing. An
“Carbon border future is heading? Or will we be able “Were every country additional challenge arises if different
adjustment to negotiate a comprehensive global moving along the regions have different carbon border
carbon pricing architecture that will be adjustments, as it could lead to higher
mechanisms are a easier to navigate? same ambitious trading costs.
positive concept, pathway to a green
but I doubt how The Carbon Border Adjustment
transition, then you Another problem is that carbon border
Mechanism (CBAM), whilst good adjustments result from a failure of
quickly they can in theory, is going to be difficult to would not need the Paris process. Were every country
be implemented implement in practice. If you look carbon border moving along the same ambitious
in practice” around the world, countries are

following different pathways to mitigate
adjustments.” pathway to a green transition,
then you would not need carbon
emissions. Some have very transparent border adjustments. Carbon border
carbon prices, while other countries adjustments are only needed because
have mandates that cloud carbon you have different levels of ambition
prices. For instance, if the EU looked globally.
at a producer in British Columbia,
who have an explicit carbon pricing Your comments on the Paris process
system, the EU can then equate that leads on nicely to my next question.
to their price and decide on what the We’ve got COP27 and COP28 coming
adjustment mechanism might look like. up in Egypt and the UAE respectively.
On the other hand, a similar producer What should we be on the lookout for
in Texas, has no explicit carbon price during these conferences?
to report, but faces other implicit costs
and requirements around renewable These two COPs are going to be entirely
energy and green technologies. So how different. COP28 is when we will see the
do you equate those two? Should it be global stocktake on the implementation
judged based on whether they have the of the Paris Agreement, which could see
same pledge for net-zero emissions? finger pointing between countries. In my
Or do you go by the explicit carbon view, COP28 will therefore be a more
produced? landmark event than COP27. COP27
will be more process-oriented and will
Creating a system that considers all focus on setting the agenda for future
those variabilities is challenging. Carbon environmental action.
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US$275tn
SECTION ONE
GREEN FINANCE Spend required
AND IMPACTS on energy and
ON THE TRADE land-use systems
to achieve net
LANDSCAPE zero by 2050
The diversion of resources into managing was agreed to extend that deadline to 2025.
continued shocks will have persistent, Unfortunately, so far, the world has fallen
cumulative, and diverse impacts on the ability short of the goal – not least because of the
to engage in cross-border trade. Climate recent economic scarring from the COVID-19
policies are therefore needed to safeguard pandemic. But the latest estimates suggest
bilateral trade. that only US$79.6 billion was pledged in
The transition to low-carbon, pre-pandemic 2019 (OECD, 2021). Donor
more sustainable trade requires Climate finance has therefore been a major countries, however, remain largely committed
significant upfront capital topic of negotiation at multiple United

Nations Conference of Parties meetings,
to the target of US$100 billion, giving some
hope that in a post-COVID world, the funding
investment. To achieve net zero by including COP26, held in Glasgow, Scotland, will at least increase.
2050, the world will need to spend in November 2021. The discussions were both
practical – with many countries stipulating The demand for capital in this sector will only
US$275 trillion on energy and land- they simply did not have the money to pay increase. The United Nations Environment
use systems (McKinsey, 2022). This, for the transition – and moral – with others Programme (UNEP) estimates that the
however, pales into insignificance arguing that those who had benefited from costs of adapting to climate change will be
the availability of cheap fossil fuels should between US$140 and US$300 billion a year
against the potential costs of either come to the aid of those now unable to use by 2030 and between US$280 and US$500
inaction or delayed action, which fossil fuels for their own development. billion a year by 2050. The demand for capital
could range from 5–20 per cent to fund environmental goods and services is
At COP15 in Copenhagen, it was agreed that there and is expected to increase over time,
of global GDP by the end of the climate financing should reach US$100 billion which presents huge market opportunities to
century (Stern, 2006). a year by 2020, and at COP21 in Paris, it generate the supply.
144 145
Driving green suggests jurisdictions seek to enact their Taken as a whole, the Working Group
finance forward own policies to prioritise international Report provides indications of where
compatibility. It also calls on international the current issues in mobilising green
bodies to improve their technical financing lie, together with insight into
There is widespread acceptance among knowledge of both the interlinkages of the areas that policymakers are looking
countries that the levels of green established and soon-to-be-established at to try to make the system more
finance being made available need to
increase to meet the demands for trade
frameworks, but also of the science
underpinning it all, to ensure widespread
How will green efficient.
in environmental goods and services. best practices. finance meet The G7, which met in June 2021 in
In addition to providing capital, high-
level multinational bodies are developing Focus Area 2: Consistent, comparable,
the demands Cornwall in the UK, commissioned a
report on economic resilience. In it, the
structures to help scale up both public and
private investments and to help ensure
and decision-useful information on
sustainability risks, opportunities, and
for trade in authors noted that different finance
streams were appropriate for different
multiplier effects for both environmental impacts. Focus Area 2 backs the work environmental technologies, depending on their current
outcomes and economic development. of the International Financial Reporting
Standards Foundation, including its
goods and stage of development. For more mature
technologies, such as solar and wind,
At its 2021 summit in Rome, the G20 re-
established the Sustainable Finance Working
proposed International Sustainability
Standards Board, to provide a baseline
services? the report recommended guaranteed
public purchases and clear regulatory
Group, with the aim of setting priorities for for the quality and transparency of standards to drive the economies of
sustainable finance and suggesting policy sustainability-related information to scale required to make the technologies
actions to G20 members to help scale up help investors make decisions based on competitive globally.
green-finance initiatives. accurate information.
Other technologies, such as hydrogen
Although none of its recommendations are Focus Area 3: Assessment and Focus Area 4: The role of international and fusion, still require large-scale public
binding on national governments, the Group management of climate and sustainability finance institutions, public finance, and funding for research and development,
will report every year and its publications risks. Although there is increasing policy incentives. Focus Area 4 suggests which, the report said, could be financed
will provide a forward-looking analysis awareness of the scientific risk associated there is untapped potential to gear many through green bonds (see below).
that identifies current issues and suggests with climate change and the need to multilateral institutions to fighting climate
directions of travel for member countries, take action to prevent the worst-case change. The report says the G20 should The report raised the effectiveness of
should they wish to establish specific scenarios from unfolding, Focus Area encourage multinational development banks carbon pricing but stopped short of
policies covering these areas. As such, the 3 suggests there is comparatively little to increase their ambitions to fight climate making a policy recommendation to
report provides regular insight into the understanding of the economic risks change and use not only their resources to its members to implement it. Nor did it
immediate future of green finance globally associated with a heating planet. The fund projects but also their clout to de-risk suggest the most effective level at which
and its potential impacts on global trade. report suggests major institutions, investments for the private sector. to price carbon (G7, 2021).
The five key areas of focus were: including central banks, need to
investigate the climate-based financial Focus Area 5: Cross-cutting issues, such As with the G20 roadmap, the G7’s
Focus Area 1: Market development risks they face and then take actions to as financing the climate transition and report gave a clear direction for
and approaches to align investments mitigate them. These include investments digital solutions (G20, 2021). Focus Area future policy and a steer on how the
to sustainability goals. Focus Area 1 in both dirty and clean industries, damage 5 calls for international organisations to governments of seven of the largest
identifies the numerous initiatives and to physical assets because of extreme pay more attention to the potential of global economies are thinking about the
methodologies, policy goals, and use cases weather, exposure to government policies digitalisation when it comes to tackling challenges and opportunities of trade
that have proliferated in an attempt to aimed at tackling climate change, and climate change. It makes no specific and sustainability.
align investments with sustainability goals. potential changes to growth expectations, recommendations on how to do so, but
To prevent a patchwork of regulatory inflation, income distribution, and highlights sustainable reporting, the
or certification frameworks, which may economic outlays brought about by a identification of products, assets, and
increase transaction costs, the Group transition to a low-carbon economy. transactions as areas of future interest.
146 147
FIGURE 18 (excluding China) were Japan (US$31.7 Detailed reporting: The proposal sets out
billion), India (US$16.5 billion), South Korea some detailed requirements, particularly
Green bonds: A regional snapshot
(US$15.4 billion), and Singapore (US$14.6 on pre- and post-issuance reporting.
billion) (ibid.).
Supranational Europa Latin America Africa
Review and supervision: The proposed
North America Asia-Pacific A greener Europe. Europe is home to the standards set out detailed provisions
largest market for green, sustainable, and regarding external reviewers. They are
600 social-issue bonds, with the European Union required to register with the European
the largest issuer (Climate Bonds Initiative, Securities and Markets Authority and
500 2020). It is an area of robust growth, and will need to meet the conditions for
in addition to green bonds being issued registration on an ongoing basis (Herbert
400
by individual sovereign countries, the EU Smith Freehills, 2022).
as an entity began green bond issuance
in 2021 to support the NextGenerationEU The proposals are currently being considered
300
recovery programme, further diversifying by the European Parliament and will need
the market with high-quality bonds. The to be signed off by the European Council
200
issue was 11 times oversubscribed and of national EU governments. The current
the final order book exceeded €135 billion proposals stipulate that the standards will be
100
(Sivaramakrishnan et al., 2021), suggesting mandatory for all green bonds – a tightening
continued high demand in the future. of original proposals, which suggested a
0 Further driving demand for environmental voluntary approach. Note, nonetheless, that
2014 2015 2016 2017 2018 2019 2020 2021 goods and services in Europe is a stipulation the proposal to make the standard mandatory
in the EU’s Recovery and Resilience Plan, is causing some pushback amid concern that,
which requires that 37 per cent of the funds with the market still in its infancy, the move will
allocated to member countries are devoted spook investors.
Key developments in by 2023 and US$5 trillion by 2025 (Climate to green transition projects (ibid.).
green finance that stand to Bonds Initiative, 2022). Some critics are also concerned that the EU’s
bolster sustainable trade Globally, 36 per cent of the proceeds

In addition to issuing bonds, last year,
the European Commission published
drive to ensure a “gold standard” will mean
it has set the bar so high that many issuers
from green bonds have gone on energy, proposals for the EU Green Bond Standard will be unable to meet it, thereby stifling the
Greater depth and breadth in the green bond 28 per cent on buildings, 18 per cent on aimed at improving the transparency and market. The International Capital Markets
market.104 The first green bond was issued by transport, 8.8 per cent on water, 3.36 per accountability of the financial instrument. Association, for example, argues that the
the World Bank in November 2008 – and since cent on waste, 3.83 per cent on land use, The EU hopes to create a gold standard, proposals could lead to a contraction and
then the growth of such instruments has been 0.46 per cent on industry, 0.33 per cent which ensures that investors can be concentration of the market and potentially
“explosive” (World Bank, 2021). Analysis by on ICT, and the remaining 1.59 per cent on confident about the projects their money drive prospective investors to other less-
the Climate Bonds Initiative estimates that the unspecified projects (World Bank, 2021). will be spent on, spurring future activity. The regulated markets (ICMA, 2022).
green-bond market was worth just over half a From 2014 to Q2 2021, the cumulative top proposed standards would require:
trillion dollars in 2021, which is the highest on green bond-issuing nations were the United Despite these headwinds, the EU green bond
record and continues a trend of 10 consecutive States (US$261.3 billion), China (US$151.6 Alignment with EU definitions: The market is expected to show robust growth this
years of expansion. Over the past five years billion), France (US$148 billion), Germany standards would require that issuers year and into the future. The EU has pledged
alone, the market has seen significant growth (US$122.4 billion), and the Netherlands must allocate 100 per cent of the to issue up to €250 billion in green bonds to
(Figure 18), which is set to continue, with (US$65.8 billion). In Asia over the same proceeds raised by green bonds to support the bloc’s pandemic recovery fund,
annual issuance predicted to top US$1 trillion period, the highest green-bond issuers economic activities that meet the EU and EU green bond issuance is predicted
taxonomy (categorisation) requirements to grow by €50–75 billion in 2022 over the
by the time the bonds mature. previous year (NN Investment Partners, 2021).
104
Green bonds allow investors to funnel capital directly to environmental projects. For example, when considering where to invest, the World Bank focuses on the
following areas for its green bonds: renewable energy, energy efficiency (including energy-efficient buildings), sustainable waste management, sustainable land use
(including sustainable forestry and agriculture), biodiversity conservation, clean transportation, sustainable water management (including clean and/or drinking
water), and climate-change adaptation.
148 149
FIGURE 19 The emergence of a green private sector. In the run-up to COP26 in Glasgow,
Driven, in part, by the emergence of new the former governor of the Bank of
Green bond issuance: A snapshot
US$, BILLIONS environmental markets, as well as consumer, England, Mark Carney, also established
shareholder, and reputational pressure, the Glasgow Financial Alliance for Net
the private sector has generated its own Zero, bringing together existing and new
35
environmental momentum. Despite some net-zero finance initiatives in one sector-
concerns about the short-term returns on wide coalition. It is designed to help
30
such investments, this looks set to continue to leading financial institutions accelerate
grow in the short, medium, and long terms. the drive towards net zero.
25
In recent years, a plethora of alliances, Although efforts to agree a complete

20 initiatives, and organisations has sprung up ban on investment in new fossil-fuel
aimed at helping steer private companies projects ultimately failed at COP26, there
15 through the climate-change transition and to are signs that private companies are
use their commercial strength to help push it pushing for stricter environmental and
10 forward. social criteria. This trend will continue,
particularly in Europe and North
Last year, the Principles for Responsible America.
5
Investment, a UN-supported network of
international investors, passed 3,500 signatories More broadly, pay tied to corporate
0
with combined control of more than US$120 social responsibility has jumped above
USA China France Germany UK Japan Norway S. Korea
trillion in assets. The principles are: 20 per cent at Russell 3000 companies,
up from 7 per cent in 2018, according
Principle 1: Incorporation of (environmental, to Institutional Shareholder Services
Asia’s green expansion. Asia is also home There is still significant room for increased social, and governance) criteria into ESG. More than 1,500 pension funds,
to a dynamic and growing market (Figure demand. China has set itself a target of investment analysis and decision-making. universities, and other organisations
19) in green bonds, one which is expected to peaking its carbon emissions by 2030 and then managing approximately US$40 trillion
grow and diversify over the coming decade. becoming carbon-neutral by 2060. This will Principle 2: Being active investors and have announced that they will divest
The market is expected to broaden, with require more than US$14.7 trillion to be invested incorporating ESG issues into policies and from fossil-fuel assets, doubling from five
more private-sector involvement alongside over the next 30 years (Colenbrander et al., practices. years ago (Nikkei Asia, 2022).
increased public-sector supply. Asia-Pacific 2021). Of particular concern will be high energy-
is ranked the third-largest region for total use industries, such as construction and steel. Principle 3: Seeking appropriate ESG While this shows the long-term
green bond issuance, behind Europe and disclosure by the entities in which signatories direction of investment, there may be
North America, but significantly ahead of Japan and South Korea are the other two mature invest. some short-term turbulence. Oil prices
Latin America. markets in the region, and both have set a target have spiked recently, because of supply-
of becoming carbon-neutral by 2050. Principle 4: Promotion, acceptance and chain issues and geopolitical tensions.
Asia’s financing needs are significant. The UN implementation within the investment As a result, oil and gas may look
Economic and Social Commission for Asia South Korea’s issuances have remained industry. attractive in the short term to investors.
and the Pacific estimates the region requires relatively stable in recent years, but, after But the overall trend away from fossil
US$1.5 trillion a year in funding to achieve its unveiling a Green New Deal last year, which set Principle 5: Working together to enhance fuels looks certain to continue, although
UN Sustainable Development Goals – a third out the country’s path through the transition effectiveness in implementing the there are likely to be corrections in
of which are directly related to clean energy to a low-carbon economy, the country’s principles.105 global markets between now and Global
and climate change – by 2030 (UNESCAP, Ambassador for Climate Change, Yoo Yeon- Net Zero, due for 2070, by when India
2019). Last year, the demand from investors Chul, promised to set out policies to achieve Principle 6: Reporting activities and progress has announced it will catch up with
outstripped supply and green bonds were the transition, which may help direct and scale towards implementing the principles. others to be carbon neutral.
5.7 times oversubscribed. up investment.
105
Principles for Responsible Investment: https://www.unpri.org/about-us/about-the-pri
150 151
We would agree that it is good for nations

Interview: Aik Hoe Lim to diversify their energy sources. In trade,
Director, Trade and Environment Division, your risk exposure tends to decrease the
World Trade Organization more you diversify. Renewable energy
reduces the dependency on fossil fuel
supply chains. Geopolitical risks will not
completely disappear, but they may
change in nature. To develop the necessary
We have recently seen geopolitical do have a crisis going on right now, but renewable energy infrastructure there
disruption from Russia’s invasion of it does not mean that we should shift “...seventy needs to be access to certain raw materials,
Ukraine, including rising commodity course on the sustainability agenda. jurisdictions have as well as relevant goods and services
prices. What impact will this have on rather than a constant supply of fossil fuels.
the Future of Trade and on greening There has been some commentary or are considering Trade policy and multilateral co-operation
global trade? that the energy transition and implementing some play a critical role in ensuring greater
sustainability agenda might increase
form of carbon pricing. transparency and certainty in supply chains.
We have witnessed a large shock to inflation, for example by increasing Lowering trade barriers to environmental
the global system but have to remain costs on businesses having to navigate What businesses and goods and services would also further
optimistic and look at how we can resolve carbon borders and carbon prices. governments fear is reduce the cost of renewable energy and
the current crisis. Keeping supply chains
open, secure, stable, and predictable,
What is your view on how the drive
towards sustainability will impact the
a fragmented global lower the capital costs of building climate-
resilient infrastructure.
particularly relating to food, has become Future of Trade? system where different
even more critical. To address likely food jurisdictions have How will carbon trading and pricing
price rises, we need to work to minimise Sustainability impacts trade in several impact the future of trade?
obstacles and restrictions. This will be a ways. In terms of transporting goods
different types of
big challenge and requires governments, across borders, one question is how can pricing and regulatory Approximately seventy jurisdictions have or
the private sector, and other stakeholders, we decarbonise trade logistics, including mechanisms” are considering implementing some form
to come together to address supply transport? Another focus needs to be of carbon pricing. What businesses and
chain shocks. What may seem appealing on production, and how we produce governments fear is a fragmented global
in the short term is not going to work goods in a carbon efficient manner. system where different jurisdictions have
in the longer term. And we should look While decarbonising these areas will situation, but the cost-savings involved in different types of pricing and regulatory
towards more trade facilitation measures increase costs in the short-term, they introducing new technologies could also mechanisms. Some jurisdictions have
to overcome the current crisis, not less. can also reduce costs over the long term. be very high. very advanced plans on carbon border
More specifically on sustainability and Renewable energy, for example, is one adjustment mechanisms, but they have not
the greening of global trade, which has sector where we are seeing costs fall One interesting impact arising from yet been implemented. The future carbon
advanced so much over the last few quickly and energy specialists believe adopting renewable energy is that it trading landscape is not completely clear
years, we are seeing governments moving costs could fall even further. At the same can insulate countries from geopolitical at this moment in time, so it is difficult to
forward on the green agenda, announcing time, green investment on the scale we risks. For example, once you have a wind say with great certainty what the future
dates, plans and pledges to meet net-zero need could lead to supply bottlenecks turbine producing energy domestically, impact will be. The WTO wants to see less
targets. International trade can be a key and upward price pressures that have you become more energy self-sufficient fragmentation and more global alignment,
enabler to help governments meet their been dubbed ‘greenflation’. So, there and less dependent on other countries to and is calling for more collaboration between
targets. So, I remain optimistic and believe is need for some policy-management deliver oil and natural gas to you. Is this governments and international organisations
that trade can help provide solutions. We in terms of avoiding a high-inflation something that the WTO sees as well? to reduce fragmentation. More international
152 153
co-operation on carbon pricing would be climate objectives. Trade frictions and to find carbon alternatives, but also the One emerging trend is the need
more effective from a climate perspective increased trade costs do sometimes arise financing for them to leapfrog the dirty for global supply chains to source
and also reduce costs for businesses because systems are different. Countries infrastructure stage and directly build goods sustainably, for example,
operating across jurisdictions, and help may also be tempted to protect certain sustainable alternatives. In fact, this should ensuring products are not leading to
avoid frictions, or place disproportionate industries by using carbon pricing. We be viewed as an investment opportunity. deforestation or a loss of biodiversity.
burdens on poor countries. must work hard to avoid disguised Two-thirds of Africa’s infrastructure is yet This is leading to increased uptake of
protectionism. And that is why the WTO to be built, and there is every opportunity certification and traceability solutions
But is global alignment on carbon system is, here. To try to avoid such to build this infrastructure greener and within supply chains. Some of these
pricing realistic? Will the future be one situations from arising. WTO experience better and trade can be instrumental in changes are being pushed by legislation,
of multiple carbon jurisdictions that of dispute settlement cases has been making this happen. while the rest are being pushed by
businesses will have to navigate, or an that by avoiding unjustifiable or arbitrary the private sector. Consumers are
overarching global system that reduces discriminatory elements, the resulting Clearly, technological advances will be also demanding better environmental
complexity for businesses? environmental measures were often more required to measure and analyse large performance and due diligence in
coherent and effective in protecting the carbon data sets. What technology do supply chains.
A global carbon system or global carbon environment. you believe will have the greatest impact
price would be the ideal scenario. Will we on greening global trade over the next Do you expect poor ESG performers to
get there? At this moment in time, not How are developing nations going five years or so? be dumped from supply chains over the
easily, but it does not mean that we should to cope in a world of carbon borders next five years? If so, are the standards,
try to get more international cooperation. and pricings, and how can we scale up Digitalisation is progressing very quickly, technologies, and metrics available or
We need, for instance, greater green finance to assist these nations’ and its impact can already be seen in advanced enough to allow companies
regulatory dialogue and cooperation decarbonisation strategies in a practical different parts of international trade. to assess the ESG performance of their
between different jurisdictions to and efficient way? Digitalisation enables efficiency gains in suppliers?
reduce divergences and to standardise trade, which translates into environmental
carbon accounting methodology Finance is going to be a big factor. The gains. Digitalisation enables goods to There are gaps that need bridging,
across jurisdictions. Attempting to investments needed to mitigate against cross borders more efficiently, reducing and this will be a challenge, especially
achieve alignment of standards and and adapt to climate change will add congestion and waiting times, and these for large companies. It is possible that
methodologies is not something new to up to trillions. We are still far short of reductions can provide solid gains in suppliers who cannot show that they
the global economy and we need to utilise the financing which countries need to terms of reducing carbon emissions. meet certain standards are excluded
international standards organisations to achieve their Nationally Determined But digitalisation will also increase the from supply chains. One challenge is
help find alignment on the standards that Contributions. For carbon pricing or volume of trade, which poses a challenge ensuring SMEs and developing nations
are needed for carbon pricing. The private carbon border adjustment mechanisms to environmental sustainability, so are not left out. The costs associated
sector will also play an important role in to work, you need to calculate the the availability of clean technologies with measuring carbon emissions and
influencing and shaping standards and carbon content of the goods you are to decarbonise the entire logistics adhering to standards could increase
methodologies for carbon accounting. exporting and developing countries infrastructure that underpins trade will costs for SMEs, hindering their ability to
will need to have that infrastructure in be important. Finally, renewable energy trade. Some solutions include greater
What about concerns that countries can place. More finance will be needed to generation will also be vital to reducing access to finance, reducing the costs
use carbon pricing as a veiled form of allow developing nations to accurately international trade’s contribution to carbon of compliance, and enabling global
protectionism, leading to more trade measure carbon and demonstrate they emissions by making production cleaner. alignment on standards to make it
disputes in the future? are complying with carbon standards. simpler to comply. For these reasons,
Climate-related trade policies must be What other environmental regulations international standardisation bodies,
We would hope that countries’ carbon framed with a just transition in mind, with do you foresee coming into effect and policymakers, and the private sector, all
pricing plans are linked concretely to transition times for developing countries impacting trade? have a key role to play.
154 155
SECTION TWO
RISK FACTORS 70%
Share of people
AND CHALLENGES who want their
investments
to be good for
society and the
planet
Despite the Greenwashing106 has presented a reputation risk

for firms for several years, but with environmental
oversight and verification mechanisms to
avoid it (IMF, 2021).
would be directly related to the current
situation in Ukraine. And yet, the short-
momentum behind concerns becoming increasingly mainstream, term consequences alone show the scale
green finance globally, entities that are regarded as attempting to A regulation jigsaw. There is no universally of risk geopolitical instability represents.
mislead consumers by claiming to share their recognised standard of reporting. Several Numerous other potential flash points
there are several values for commercial gain risk damaging their jurisdictions are currently in the process of exist globally. Some are well documented,
risks that could hold relationships. Such practices have also put drafting standards (e.g., the EU), but this while others could spring up as the result
back the market’s full firms in legal trouble for making misleading raises the problem of market fragmentation. of severe short-term factors. Geopolitical
environmental claims. As an increasing number With different criteria in different markets, tensions can dovetail with domestic
potential. We have of companies become subject to sustainability the cost and barriers for entry would rise. A politics, with the result that inflation and
identified several in the reporting requirements, environmental claims will smorgasbord of regulations also potentially thereby the cost-of-living increase as
short-to-medium term: face increased scrutiny in the coming years and increases the appeal of markets with less the world transitions to a low-carbon
may be subject to legal challenge (Sustainable stringent reporting conditions, which, in time, economy. These pressures, combined
Fitch, 2020). A report by the British government could damage green financing’s effectiveness with likely increasing levels of extreme
estimates that 70 per cent of people want their in tackling climate change. weather and other side effects of climate
investments to be good for society and the change, are likely to lead to global political
planet (HM Government, 2019). Meanwhile, to Geopolitical risk. The start of 2022 has seen instability, generating a feedback loop.
drive investment, the IMF notes, investors must significant increases in energy prices. This Any such incidents are likely to further
have confidence about where their money has, in part, reflected supply-chain issues disrupt the global economy and could
is being invested. Greenwashing presents a and the Ukraine crisis. It is too early to redirect financing to short-term needs
major challenge and requires proper regulatory identify any long-term trends in trade that over long-term green structural changes.
106
Greenwashing is a term used to describe claims of environmental credentials that are not matched by corresponding action.
156 157
136
In its recent Global Financial Stability Report, The race to net zero of the governments currently making
the IMF noted that the current size of the and the emergence of these pledges are unlikely to be in power
green finance market is too small to drive the
required global transition to net zero. The
the Green New Deal by the time the pledges need to be
met. And, while a goal of net zero by
IMF estimates that up to US$20 trillion will be Countries the middle of the century gives a clear
that have
required by 2050 to meet net-zero pledges. Countries, cities, and companies have, in indication of the direction of travel, it is
By its own numbers, current investment stands increasing numbers, set net-zero targets on not in itself a detailed policy about how
at US$3.6 trillion. Up to 70 per cent of the
additional funding is expected to come from
their carbon emissions. The concept of net
zero means that in addition to emissions
a net-zero to achieve the goal. Nor does it address
the short-term need to reduce carbon
private sources (IMF, 2021). The scale of investor reduction, any carbon emissions that are target emissions now to avoid the effects of
demand and support from the highest levels produced will be offset elsewhere – via climate change being locked in before
of government, however, means green finance investment in projects to fight climate net zero is attainable. Nor does it provide
growth will continue and that will have profound change, or via the purchase of carbon companies with any sort of guidance
implications for the wider trade of environmental credits. This has the dual benefit of on how to adapt their day-to-day
goods and services around the world. allowing entities to set ambitious targets operations.
for their own carbon emissions while also
giving themselves leeway if technology or By the end of COP26, 151 countries had
behavioural change does not occur at the submitted new climate plans (known as
Challenges ahead: speed required to eliminate all carbon from

their activities.
nationally determined contributions, or
NDCs) to slash their emissions by 2030
scaling up the Green (ibid). An agreement is also in place
New Deal alongside Net-zero pledges have been supported by to revisit these commitments by the
carbon markets a slew of Green New Deals. These should

put in place the funding and policies to
end of 2022 to see if they can be made
more ambitious and to ensure they align
secure the required change to domestic with the stated ambitions of the Paris
In the face of the global threat posed by climate and international infrastructures. Currently, Agreement. The next round of NDCs,
change, government policy and regulation 136 countries have a net-zero target (World scheduled for 2025, will cover the period
aimed at reducing the emission of greenhouse Resources Institute, 2021), covering 85 per up to 2035. This common timeframe will
gases will have profound implications for cent of global emissions and 90 per cent These pledges are in line with the wording give investors and the private sector
domestic economies and global trade. of global GDP (Net Zero Tracker, 2022). If of the Paris Agreement on climate change, clarity about what will need to be done
Companies and consumers will be required these targets are met, most global revenue in which countries agreed “to achieve a over the next decade and will give a
to eschew practices that are increasingly will be carbon-neutral by the last quarter of balance between anthropogenic emissions steer to business about the rate of
banned or taxed, moving instead towards the century. Noticeably, India – the world’s by sources and removals by sinks of change directed from governments.
environmentally friendly alternatives. This shift third-largest emitter – has a target of 2070 greenhouse gases in the second half of
will have a huge impact on global trade flows. by which to reach carbon neutrality. this century” (United Nations, 2015). The A pledge by 109 countries to reduce
pledges provide a clear indication of methane emissions by 30 per cent by
Long-term signalling of intent and short-term Elsewhere, commitments come in many the direction of travel and end-goal for 2030, and the agreement by 141 countries
targets will influence companies’ strategic plans forms, with some countries writing their the global economy. Companies whose to halt and reverse deforestation by
over the coming decade as they aim to adapt pledges into law, others writing it into business models rely heavily on carbon the same date, were also announced at
to a changing regulatory environment and take policy, and yet others having only made emissions will encounter an increasingly Glasgow. These further emphasise that
advantage of what will be introduced in the non-binding pledges or proposals. Despite difficult business environment as the the global economy will increasingly
years ahead. The last year has seen a flurry of this, there is momentum behind the concept century progresses. be moving towards a world where the
high-level conferences and pronouncements of net zero, and it has extended beyond environmental impact of actions will have
on the future trend for fossil-fuel consumption. national governments, with individual cities While net-zero pledges have been to be front and centre of any decision-
This section looks at what has been announced and companies also setting themselves welcomed by environmental campaigners, making – or risk falling foul of impending
and what can be expected. carbon-neutral targets. there are challenges. For example, many government domestic regulation.
158 159
65
The challenge EU costing Carbon trading as an
of carbon-market carbon in essential tool to fight
development imports the climate crisis
Carbon-pricing
initiatives
Setting a price on carbon has often been A raft of global regulations presents several The notion of global carbon markets108 has
cited as a prime tool in the fight against issues for global trade. For example, it been around for decades. Although the
climate change. The mechanism has two
main environmentally beneficial outcomes.
can have the unintended consequence of
making jurisdictions with lower carbon
globally first attempt to establish a global system
for carbon credits and offsets collapsed
The first is that it exacts a cost on using prices or fewer environmental regulations amid accusations of greenwashing and
carbon, which incentivises alternatives. The more competitive in global trade. human-rights abuses, COP26 negotiations
second is that it generates revenue that can Conversely, it punishes domestic entities by reinvigorated the concept. Carbon trading is
then be redirected into needed climate- increasing their overheads, making them once again being spoken of as a major tool
change adjustment and mitigation projects. less competitive than less environmentally in the fight against climate change – with big
friendly competitors. Differing regulations implications for global trade.
There is growing momentum behind the incentivise companies to shop around for
idea of imposing a cost on carbon and the best carbon price rather than focusing There has, however, been some criticism of
removing external price fluctuations in an on reducing their emissions – the opposite of these markets from campaigners who see
area with a huge global impact, although the policy’s intention. them as licences for the wealthy to pollute and
there are concerns that the additional not directly contribute to the overall reduction
costs could create a drag on trade (World In a bid to prevent this, the European Union principle (because the price of imports will vary in carbon emissions that is required if the
Bank, 2021). At the G20 meeting of finance is poised to implement a Carbon Border depending on the nation of origin and the price world is to meet its targets.
ministers in Venice in 2021, the final Adjustment Mechanism (CBAM). The stated of carbon in its domestic market). The policy
communiqué mentioned carbon pricing as aim is to avoid “carbon leakage” by imposing has also been criticised as veiled protectionism In 1997, world leaders established the first
one of a wide set of tools for the first time a cost on imports that have not already paid that will kick off a cycle of retaliatory trade scheme for a global carbon market in Kyoto.
(Reuters, 2021b). an equivalent price for their carbon in their practices, which could damage the global trade The agreement put in place the Clean
countries of origin. Initially, the plans will system (Lim et al., 2021). Development Mechanism (CDM), as well as
There are 65 carbon-pricing initiatives apply to the carbon-intensive imports of “cap and trade”, policies such as the EU’s
globally, covering 21.5 per cent of global electricity, iron and steel, cement, aluminium, Questions have also been raised about Emissions Trading Scheme, set up in 2005.
emissions (World Bank, 2021). Perhaps most and some fertilisers, but it could be extended CBAMs’ compliance with the Paris Agreement.
notably, China launched its emissions-trading to other sectors in the future (UK in a Although the scheme is designed to help The EU scheme established a system
system in July 2021, with an opening price of Changing Europe, 2021). reduce global emissions, some have raised whereby industries were granted permits
48 yuan (US$7.51) per tonne.107 concerns about its compliance with the to release carbon. For every unit of carbon
Several of the EU’s trading partners have principle of Common by Differentiated released, firms had to return a permit to
But there is currently a wide divergence, raised concerns about the additional costs Capacities and Principles in the Paris the regulator. The number of permits was
even among G20 nations, in carbon prices. that CBAMs are likely to impose, particularly Agreement (Berahab, 2022). If implemented, capped and steadily reduced over time.
It ranges from none in Saudi Arabia to low- and middle-income countries, which are CBAMs could signify a major change in Industries in which companies reduced their
€95.95 per tonne in the UK. These prices dependent on the EU for exports of carbon- global policy, triggering copy-cat legislation. carbon emissions were allowed to trade
are expected to rise in the coming years to intensive products. Concerns have also However, it is also possible significant global any unneeded permits, thus creating both
meet obligations under the Paris Agreement. been raised about whether the regulations opposition and technical obstacles will mean a regulatory and commercial incentive to
The IMF has suggested a carbon-price floor comply with WTO rules. The EU is adamant that the policy will not be implemented (UK in reduce emissions. The scheme is credited
of US$75/metric tonnes of carbon-dioxide that the plans are WTO-compliant, but there a Changing Europe, 2021). with reducing the EU’s carbon emissions by
equivalent for high-income countries, US$50 remains suspicion that the rules will act as a
for middle-income countries, and US$25 for barrier to trade and will potentially fall foul
low-income countries (Parry et al., 2021). of the WTO’s most-favoured-nation equality 108
The basic principle behind carbon trading is that for every tonne of carbon emitted somewhere, another tonne is captured or prevented from being emitted
somewhere else. Because climate change is a global problem, and the atmosphere has no national boundaries, any carbon emitted anywhere has the potential to
cause global warming. The inverse is also true, that it does not matter where the carbon is offset or saved if the global calculation results in a zero-sum result. This
opens the possibility to save or offset a tonne of carbon in markets that are less costly than where the emissions took place, making the practice more appealing
107
https://www.scmp.com/week-asia/health-environment/article/3154206/cop26-carbon-pricing-climate-change-silver-bullet and scalable to commercial entities.
160 161
1.2 billion tonnes between 2008 and 2016 Carbon markets

2.0 will be a focal US$ Looking ahead:
The future of carbon
180bn
(Bayer and Aklin, 2020).
Despite this, there remains a clamour for

point markets
effective carbon markets. The Environmental
Defence Fund advocacy group estimates The Glasgow Climate Pact established The Paris Agreement and Glasgow
that carbon markets could reduce the
cost of meeting climate-change targets
several important rules and set out how
things will develop in carbon-compliance
Estimated Climate Pact established the rules for the
governance of the Compliance Carbon
by between 59 per cent and 79 per markets. The Pact states that no tax will value of Market. But there is an additional route
Voluntary
cent, and that if those savings were be levied on bilateral trade of offsets, open to companies and investors looking
reinvested, the world could significantly although 5 per cent of proceeds from the to diversify their portfolios or offset their
step up its emissions-reduction ambitions
(Environmental Defence Fund, 2019).
centralised system will go to funding for
low-income countries to adapt to climate
Carbon Market emissions: the Voluntary Carbon Market.
It was notable that the Glasgow Pact did
Many countries with substantial and diverse

change. This system will be overseen by
the United Nations, with a supervisory
by 2030 not seek to regulate the Voluntary Carbon
Market. This is a system of credits and
natural resources are also interested in board. Once the board has been appointed, offsets brought by entities who wish to
the proposals, as it provides them with a rules of procedure and credit-calculation reduce their carbon footprint but are not
commercial incentive to maintain biodiversity methodologies will have to be established, under any regulatory pressure to do so.
and acts as an important economic which some industry experts predict will This will allow the sector to continue to
counterbalance to the potential monetary take two years (Nicholls, 2022). innovate and experiment as the market
value of exploiting these resources. becomes more mature.
Negotiators in Glasgow managed to reach
As a result, the Paris Agreement included a an agreement on several key sticking points, The value of the Voluntary Carbon
section on the creation of carbon markets. which dogged progress on carbon markets Market surpassed US$1 billion in 2021
Article 6 of the Agreement laid out the since the Paris Agreement. The first was the (Ecosystem Marketplace, 2021) and is
principles of a global market for carbon fate of credits issued under the CDM. Under expected to expand rapidly in the coming
and explicitly stated that countries can the new agreement, all credits issued before years. The Taskforce on Scaling Voluntary
use trading to count towards their own 2013 will no longer be valid, but all those Carbon Markets (TSVCM) estimates
emissions-reduction targets. But it left issued subsequently will continue to operate that under certain scenarios, the market
several key decisions unresolved, such within the system. could be worth US$180 billion by 2030
as the fate of credits under the old CDM (TSVCM, 2021) and demand could reach
scheme and the principle of double counting The second was the issue of double assets that can either be used or sold to other 100 times its current value. What’s more,
emissions reductions. counting. Some countries wanted any carbon countries or companies. the Voluntary Carbon Market is regarded
credits they generated to count towards their as potentially more scalable than the
A key agreement reached at COP26 sought own nationally determined contributions This, it is hoped, will build demand for global Compliance Carbon Market
to address some of these concerns while also under the Paris Agreement, but then be project financiers, developers, and operators (McKinsey, 2021).
seeking to breath fresh life into a market that allowed to sell those to other countries who in middle- and low-income countries, with
could be key to short-term emissions targets, would also count the reductions under their governments seeing these projects as The TSVCM-backed Integrity Council
especially in heavily polluting industries such own nationally determined contributions. opportunities rather than just as obligations. for Voluntary Carbon Markets and the
as aviation, mining, and heavy industry. This Under the Glasgow Pact, this has been There remain some questions about the exact Voluntary Carbon Markets Initiative
agreement is likely to spur renewed interest prohibited. Instead, countries that generate role of these credits in companies’ targets. are both planning to publish principles
in and engagement with carbon markets, and credits will be able to decide if they wish Although these credits will be able to count and guidance on the functioning of
could help establish a new and vital market, to count the credit themselves or sell them. towards a company’s overall carbon footprint the market. This should help provide
which helps both limit climate emissions and Carbon credits generated from saving measurement, they will not be able to count investors and companies with additional
build resilience against climate change – an or regenerating the environment or from against a company’s targets for internal confidence to buy carbon credits and
economic and environmental win-win. installing renewable energy will be state carbon production. report them.
162 163
11m
The City of London has identified six infrastructure. These suffer from many disclosures. Asset managers and asset
requirements to drive the market to of the issues outlined above. But there is owners that manage or administer assets
maturity: potential for these credits to be generated on behalf of others (including occupational
in alternative ways. For example, energy pension schemes) must disclose how they
Governance structures companies could make their services more take sustainability into account. Designers of
efficient, or encourage their customers Plastic investment products will have to report on
Expertise in all aspects of the market to use less energy. Such savings could be
compared with not acting and the credits for production in the products’ sustainability impact and the
relevant financial risks and opportunities (HM
A central hub to bring together
buyers and suppliers
the difference could be sold by the company
on the market. Similar approaches could be
metric tons, Treasury, 2021). This is part of a trend. The
US Securities and Exchange Commission is
used by other companies, thereby generating leaked into moving forward with proposals that require
Access to capital a commercial incentive for them to green
their production (Mendelson et al., 2021). the ocean in companies to disclose data on emissions
from their activities and from the energy
Innovation environmental accounting
methods Both the Compliance and Voluntary Carbon
2016 required to power those activities (Financial
Times, 2022). China has also introduced
Markets look set to flourish in the long term. updated environmental disclosure
Improved trade infrastructure to The potential scale has positive implications requirements, updating its 2015 policy.
improve transparency and efficiency for trade by directing capital, although for
(City of London, n.d.). these projects to meet their environmental Reducing plastics pollution. It was
commitments and therefore prove to be a announced in March 2022 that the UN
Experts identify three main problems with sound investment, standards and governance will begin negotiations on a treaty to deal
the market as it currently exists, from both an structures must be trusted. They will include with plastics pollution. Agreed at the UN
environmental and investment perspective. the following aspects: Environment Assembly in Nairobi, work
on the new treaty will focus on the issue
One is additionality: this is whether the Future regulation. As the world continues of plastics pollution in the oceans but will
project would have taken place regardless of to work towards its climate-change and also address the life cycle of plastic from
the investment. Another is permanence: for global emissions targets, regulations production and use to disposal. Plastics
many nature-based projects, guaranteeing and policy will continually adapt to meet production reached 348 million metric
that they remain a carbon trap is difficult. the new, lower emissions targets. New tons in 2017 (Pew, 2020: p. 16) and 11
For example, carbon-credits forests could regulations are already being announced million metric tons leaked into the ocean
burn down (Clean Energy Wire, 2021). Finally, that will place obligations on companies. in 2016 (ibid.: p. 15). An Intergovernmental
there is leakage: can a project guarantee that Negotiating Committee will come into
the carbon credit it has generated hasn’t Sustainability reporting. Since 6 April force in the second half of 2022, with a
simply resulted in carbon emissions being 2022, the largest firms in the UK have draft agreement slated for the end of 2024.
released at another site instead, leading to been required to disclose climate- Contentious issues are likely to include
increased emissions? related financial information. This is in whether the treaty’s strictures should
line with recommendations from the be legally binding and how it should be
These issues will need to be addressed if the Taskforce on Climate-Related Financial financed. Plans for a treaty have been
market is appeal to investors and result in Disclosures to help investors better endorsed by dozens of financial-sector firms,
improved environmental conditions. understand their exposure to climate retailers, major brands, and producers.109
risk. Before these were introduced, the These all point to an evolving regulatory
The market could also look very different UK announced plans to introduce further market with new rules and policies
in the years ahead. Currently, offsets are disclosure requirements on the broader introduced to tackle specific environmental
generated by individual projects, mostly definition of sustainability. This will include problems. Regulations already in operation
through environmental safeguarding requirements for companies – including in will likewise be adjusted to consider new
or the expansion of renewable energy financial services – to make sustainability emissions targets.
109
Plastic Pollution Treaty: https://www.plasticpollutiontreaty.org/
164 165
SECTION THREE
DIGITAL
INNOVATION
THAT BOOSTS
SUSTAINABILITY
IN TRADE
Technology is fundamental to How the twin forces of technological When demand for these legacy goods
our efforts to create a more change and the drive towards sustainability falls, new trade in the technologies of
interact will have major implications for the future and the services required
sustainable global economy. 21st-century global trade. to support them will shape trade
This is the case whether it is flows. And as demand for technology
the technology required to fuel In the short term, demand for specific
materials and commodities that are
continues, the technology industry itself
will have to consider its own obligations,
the energy transition, for new essential for the low-carbon transition will ranging from the vast amount of energy
and innovative ways to increase help diversify trade flows and help continue required to run huge data centres to
to drive new markets. But eventually, the proliferation of devices in homes
efficiency, or for helping to fewer things will need to be traded as and the environmental impact of
remove carbon directly from the demand for physical fuel continues to manufacturing, charging, and eventually
the atmosphere. decrease (Krane and Idel, 2021). disposing of them.
166 167
Trade in sustainable
technology
(Reuters, 2021). It is also underpinned by
a dominant position in the production of
many of the key elements required for the
transition economy. By some estimates,
The importance of
carbon capture and storage
technology
68%
China’s market
Today, the manufacturing of technology China produces 97 per cent of the rare earth
vital for the green transition is dominated
by China. It currently has 66 per cent of the
elements that are essential to the production
of electronics (Teufel Dreyer, 2020). In
There are several technologies in widespread
use – solar, etc. – which can be used to wean
share of
world’s solar-module manufacturing capacity, December 2021, a merger between China’s the wider power grid off its reliance on fossil solar-module
50 per cent of global manufacturing capacity
for wind turbines, and 88 per cent of global
three-largest rare-earths companies was
approved, giving one state-owned company
fuels. Unfortunately, these technologies
lack the intense energy output needed by manufacturing
manufacturing capacity for lithium-ion
storage batteries (Wood MacKenzie, 2022).
control over 70 per cent of China’s rare
earths output (Financial Times, 2021). Trade
heavy industries such as steel and cement.
An alternative to cutting back emissions in
capacity
with China will be vital for those countries such industries, at least in the short term, is
These sectors are vital for energy generation, looking to meet carbon-reduction targets carbon capture and storage.
storage, and our move away from fossil fuel- and move towards a cleaner economy.
powered transportation. Last year, China Carbon is captured from the industrial
exported 500,000 electric vehicles (EVs), There are, however, some sectors, such process in one of three ways:110
making it the largest global exporter of as hydrogen and carbon capture and
such products (Nikkei Asia, 2021). The EV storage, where China does not have a Post-combustion, where the CO2 is isolated
market is likely to be a key growth sector dominant position. The shock from the from the other gaseous outputs and then
in the coming years, with jurisdictions such COVID-19 pandemic has also caused many removed before leaving the chimney.
as the EU introducing bans on the sales of to reconsider the potential risk of having
new combustion-engine vehicles from 2035 a supply chain so dominated by a single Pre-combustion, where the CO2 is removed
(Reuters, 2021a). country. The sector might, therefore, be ripe in advance by reacting the fuel with oxygen,
for diversification to maximise the potential air, or steam before use.
Despite growing demand, the environmental of the full suite of green technologies, and to
technology sector has had to confront protect against supply-chain disruptions and Using oxyfuel, which involves burning fossil
some recent turmoil. Last year, the cost of geopolitical risk. fuels with almost pure oxygen to generate
solar modules and wind turbines rose, and only steam and CO2 as by-products, making
batteries are expected to follow suit this it easier to capture post-combustion (House
year, the first time in a decade the trend line of Commons Library, 2017).
has been upwards for several key renewable
technologies. Supply-chain issues, the rising Carbon-capture technologies can
cost of raw materials, and higher transport nonetheless trap up to 95 per cent of
costs have piled price rises onto projects emitted CO2 (Carbon Capture and Storage
currently in the planning or construction Association, 2022). This is particularly
phases (Wood MacKenzie, 2022). In contrast important for industries that are difficult to
to this global trend, China has driven run off renewables, and, as such, both the
investment to record levels and the country’s International Energy Agency and the UN’s
production of solar modules is growing faster Intergovernmental Panel on Climate Change
than global demand. have noted carbon capture’s importance
to the short-term transition of energy use.
This manufacturing capacity is, in part, due to There are currently 27 commercial carbon-
increasing domestic demand for electricity, capture, usage, and storage facilities
putting pressure on China’s commitment to operating globally. With plans for another
reach peak carbon emissions before 2030
110
Only the first of these can be retrofitted to existing power generators, however; the others are required to be installed during construction.
168 169
500
100 announced in 2021, carbon capture has Leveraging cell technology R&D (US Department of
momentum behind it to grow in the coming the advantages Energy, 2020). In 2021, the EU launched
a €2 billion industrial partnership in clean
years (International Energy Agency, 2021).
of hydrogen hydrogen (Kurmayer, 2021). The UK has
A perhaps greater driver of trade in this Years-worth its own hydrogen strategy and expects
US estimated
sector is what to do with the captured While some industries will need to its domestic sector to be worth £900
carbon. Once carbon has been removed from capture their carbon emissions, at least million by 2030 and potentially £13 billion
industrial production it is then compressed
into liquid form and can then be transported.
underground in the short term, others are looking at
ways to avoid generating any at all. One
by 2050, when hydrogen-based energy
could account for 20–35 per cent of
But to where? storage of alternative fuel is hydrogen, which is consumption (Department for Business,
The plan during the first generation of its current enjoying “unprecedented political and
business momentum” (International
Energy and Industrial Strategy, 2021).
this technology was to bury the carbon at

least 1 km underground in depleted oil and
emissions Energy Agency, 2019). The advantages of
hydrogen are impressive. The element is
The fuel’s versatility makes it an attractive
alternative to fossil fuels in transport and
gas fields or underground aquifers. The the most abundant in the universe, it can heating, and the element’s abundance
United States is estimated to have enough be consumed at source or transported as increases its attractiveness. Recent
underground storage for 500 years-worth either a gas or a liquid and can be used political commitments have set the stage
of its current emissions (Biniek et al., 2020). directly as a fuel or used to generate for increased scaling of the technology in
This, however, represents pure cost, so such electricity. On top of that, at the point of the coming years.
projects have lacked investment. combustion, a hydrogen fuel cell emits
only steam and condensed water.
But there are now growing opportunities for These opportunities present real
using liquified carbon, which could open new commercial value to a by-product Hydrogen can potentially be used in
markets and drive trade: that, up until now, has represented an transport fuels for planes, ships, road
environmental or regulatory cost. A shift vehicles, and trains, and can also be
The most commercially viable use may in emphasis could enable a commercial used to help heat people’s homes
be in enhanced oil recovery. As CO2 is incentive to help drive decarbonisation. through electricity generation. Despite
currently used to boost the productivity its abundance, hydrogen easily reacts
of a well, there are already established For this to take place, however, three issues with other chemicals and so doesn’t
markets. need to be overcome for these projects to exist in a pure form on Earth. It therefore
become scalable: capture costs need to needs to be produced through a process
CO2 could also be locked into concrete fall; there needs to be improved regulatory of electrolysis, where electricity is
by using a new type of cement that is incentives; and tech and innovation need to passed through water, splitting it into
25 per cent CO2. As a major emitter, the create markets for captured CO2. its component parts of hydrogen and
cement industry could, in effect, create a oxygen. Alternative methods using photo-
large portion of its own raw material. Other carbon-capture techniques that electrolysis (using sunlight to split water),
remove carbon from the atmosphere – or algae are in the preliminary research
Through a chemical reaction with for example, by planting rapid-growth phase. Green hydrogen uses electricity
hydrogen, captured CO2 can also be carbon-absorbing biomass before burning produced through renewables to create
used to make synthetic fuels, including them and capturing and storing the hydrogen.
aviation fuel. carbon – have the potential to become
increasingly attractive as the world uses Several countries have recently announced
In the longer term, the used for up its remaining carbon budget and moves large-scale plans to invest in the
captured carbon could also include the beyond the 1.5 degrees of warming cited hydrogen economy. The United States has
manufacturing of carbon fibre and the in the Paris Agreement as the globally announced plans to invest US$100 million
creation of carbon-based plastics (ibid.). accepted goal (ibid.). over five years into hydrogen and fuel-
170 171
Big Data and AI

to drive new forms
of sustainable
trade
4.4%
Estimated
Greening
the technology
sector
17%
Possible
Artificial Intelligence (AI) is one of the
boost to Technology can be a vital tool to help us
reduce our emissions and more towards
reduction
most innovative technologies operating GDP through a zero-carbon economy. Unfortunately, it of global
in the environmental sector. Its scale and
scope present numerous opportunities to application is not a magic bullet. The tech industry
itself has a large carbon footprint, emissions
drive both new trade and green traditional
trade. AI refers to a suite of technologies
of AI which is only expected to grow in the
coming years. Technology has accounted
through proper
that allow machines and computers to take for as much as 2-3 per cent of global application of
in data from their environments, process
this data, take actions, and then learn ways
emissions (Global e-Sustainability
Initiative, 2015). But consumer demand
technology
to make better decisions in the future to for technology is increasing, a trend
augment human decision-making. that will be exacerbated by the demand
for technological solutions to help with
A discussion paper by McKinsey in 2018 environmental problems. Under current
identified 135 uses worldwide of AI that trends, technology’s contribution to
directly supported the UN Sustainable global carbon emissions could rise to 17
Development Goals (McKinsey, 2018). per cent of the world’s carbon footprint
AI can be used to boost performance in by 2030 (Belkhir and Elmeligi, 2018).
energy grids, precision agriculture, supply
chains, environmental monitoring, and By 2030, end-user devices such as Bitcoin activities use more energy than
weather prediction. By augmenting the laptops, phones, and data cards will Norway (Cambridge University Centre
decision-making process in key areas, AI account for 47.2 per cent of information for Alternative Finance Index, 2022).
can help generate large-scale practices and communications technology
and help enable individual ones that emissions. Data centres will take up As result, a raft of technology companies
reduce the resource and energy intensity another 28.8 per cent, and networks 24 has signed up to pledges such as the
of human activities (Nishant et al., 2020). per cent (Global e-Sustainability Initiative, Green Tech Pledge, Race to Net Zero,
A more recent report by PWC estimates 2015: p. 19). Energy consumption is the and the European Green Digital Coalition
that by 2030, application of AI could key driver in this change, but supply to green their business activities. This
generate a 4.4 per cent boost to global chains, particularly regarding rare will likely drive demand and innovation
GDP while also helping save 4 per cent of earth metals, which are essential in the within the sector, with positive knock-
global emissions (PWC, n.d.: p. 8). production of many technologies, will on effects for the rest of the economy.
also play a key role. Technology can undoubtedly help
There are, however, risk factors that might regulation monitoring the use of these us drive down emissions. The proper
hinder the uptake of AI. Although many of powerful technologies will be vital. AI also This presents a great innovation application of technology could help
these technologies can be used to boost relies on a host of supporting technologies challenge: we need technology to help reduce global emissions by 17 per cent
ESG goals, the same technologies can be to be able to input the data and then us fight climate change but expanding (Global e-Sustainability Initiative, 2015: p.
used for other practices, such as public carry out the decisions. The installation of the use of technology will drive up 92). It is therefore vital that we embrace
monitoring. It will therefore be vital to these supporting technologies, although demand for energy, placing added stress its capabilities and encourage its trade,
get public consent for such technologies potentially adding cost, will also be vital to on renewables. For example, because so the advantages can be as widespread
to ensure they are able to provide the ensure that the opportunities presented by of its reliance on data centres and the as possible to help aid sustainability
maximum level of public good. As such, AI are achieved. amount of power required by them, drives across the planet.
172 173
SECTION FOUR
SPOTLIGHT 174%
Growth of
ON SEMI- semiconductor
CONDUCTORS sales between
2000-2021
The global semiconductor With the upcoming growth of sectors such semiconductor more receptive to electrical
as the Internet of Things, and the global impulses; the addition of impurities can
industry looks set to be expansion of new infrastructure to reduce also change its behaviour. This adaptability
one of the most vital energy use and to fight climate change, makes them extremely useful, as they can
industries of the 21st the demand for semiconductors looks set be “programmed” to allow currents to pass
to dramatically expand. These devices are along them but only in a certain direction,
century.111 Semiconductors already vital components of the global or only in certain conditions.
are used in a range of economy and the fight against climate
electronics, from consumer change. Because of their role in the future This adaptability has made semiconductors,
of green technology, we take a close look at and the electronic chips made
tech to industrial energy the state of the industry, its projected risks from them, ubiquitous in a range of
systems to cutting-edge and opportunities, how it is expected to electronics, including smartphones,
flourish in the years ahead – and how it will
defence technology. all impact trade.
household appliances, ATMs, and electric
transportation. Despite the widespread
adoption of semiconductors, creating a chip
The term semiconductor refers to the can take months, must be done in advanced
properties of a particular substance, in clean rooms, and requires precision
particular its ability to conduct electricity. equipment (Reuters, 2021c).
Certain substances, such as gold, easily
conduct an electrical signal; others, such Global trade in semiconductors has more
as rubber, do not. Semiconductors conduct than doubled in the last 20 years. In 2000,
electricity, but not to the same standard semiconductor sales stood at US$204.4
as traditional conductors, such as cables. billion globally. In 2021, sales reached
Crucially, they can change their properties US$555.9 billion, an increase of 26.2 per
based on environmental conditions. The cent on 2020 (Semiconductor Industry
addition of heat or light can make the Association, 2022).
111
The science that underpins semiconductors relies on elements of quantum physics that are not yet widely understood. This raises the possibility that as demand
for semiconductors increases, so will our understanding of the processes involved in them, making them more efficient and more adaptable in the future, and
spurring future innovation and the creation of new, as-yet-unknown markets.
174 175
The global market is dominated by six

big players: the United States, South
Korea, Taiwan, Japan, China, and the
Netherlands. But even as these countries
The semiconductor
industry’s role in
sustainability
the industry and the island’s farming community
(New York Times, 2021).
The industry’s continued demand for energy

60%
Asia Pacific’s
dominate the global revenue charts, could help drive demand in the renewable energy
there are discrepancies among them, and
particularly in what generation of chips can
Semiconductors are integral to many of the
technologies that will be vital as the world
sector. TSMC has announced plans to reach net
zero by 2050, and, as part of that, has signed
market share
be manufactured. Some of the emergent moves towards a net-zero carbon future. a deal with Danish firm Ørsted to buy energy of the global
trends include: They are embedded in devices that help
optimise energy usage in transportation,
directly from its wind farm in the Taiwan Strait
(Guardian, 2021). Such innovative solutions will be semiconductor
The United States accounts for
47 per cent of semiconductor
manufacturing, and consumer goods, which
are key to both global emissions and trade’s
vital to ensure the industry can reach its potential,
while also safeguarding the environmental
industry
revenue by country, with second- contribution to global emissions. benefits that its technology enables.
placed South Korea generating
19 per cent of global revenue They will also enable the goods and services
(Deloitte, 2020). of the future, including driverless cars, and
Asia-Pacific is the hub of the

smart grids and cities. Semiconductors
are also of vital importance for the
Geopolitical The EU unveiled the European Chip Act
earlier this year. It seeks to boost the EU’s
global semiconductor industry, communication systems that will allow all dynamics will continue market share of semiconductor chips to 20
notwithstanding the United States’ these systems to flourish. to underpin trade in per cent by 2030, coughing up €11 billion
dominance. As well as four of on R&D to help achieve its goal (European
the top six revenue-generating Energy efficiency will be vital as demand
semiconductors Commission, 2022). The Commission argues
countries, the region accounts for for electronic devices – and the associated that semiconductor chips are so vital to a
60 per cent of global sales, with energy they consume – increases with the The semiconductor industry has been range of important future industries – cloud
China alone accounting for 30 per mainstreaming of the Internet of Things, described by the current US administration computing, telecoms, space and defence
cent (Deloitte, 2020: p. 2). where household devices are connected, as the “DNA of technology” and vital to technology, etc. – that securing access to
allowing for improved monitoring and 21st-century geopolitical competition high-quality semiconductors will dictate the
Demand from consumer performance of these appliances (European (White House, 2021: p. 23). Meanwhile, the bloc’s ability to act militarily, economically,
technology companies is set to Semiconductor Industry Association, 2021). EU regards semiconductors as strategic and industrially (ibid.).
continue, but over the coming Superconductors will play a large role in assets with geopolitical implications
years, demand will diversify as an building energy efficiency. and China has aims of “technology The United States is seeking to pass
increasingly large number of uses independence”. the CHIPS for America Act, with US$52
for semiconductors begin to go But the semiconductor industry is not billion in funding to spark innovation and
mainstream. immune from the energy demands and The supply-chain disruptions caused by investment (White House, 2022) in the
greenhouse gas regulations effecting the COVID-19 pandemic meant that many tech industry it leads in design, but not
For example, semiconductors are vital all companies. Taiwan Semiconductor companies had to cease production. manufacturing. The bill also has incentives
for the functioning of electric vehicles, Manufacturing Company (TSMC), the This disruption, along with the strategic to support the manufacture, research, and
from the energy systems that power world’s largest chipmaker, is responsible importance of some of the new technology supply-chain security of semiconductor
them to the onboard computers that for 5 per cent of Taiwan’s electrical that advanced semiconductor chips chips (US Congress, 2020). The United
control their systems. As regulations consumption, according to figures from will make possible, is causing multiple States also has restrictions in place aimed
begin to slow the demand for Greenpeace (Taipei Times, 2020). It also jurisdictions to try to safeguard their at limiting China’s ability to produce chips
traditional combustion engines, the used 63 million tonnes of water in 2019. economically and geopolitically important measuring 10 nanometres or smaller,
demand for electric vehicles will TSMC is not the only chip manufacturer supply chains. This is driving policies that particularly those regarded as “dual use”,
increase, driving the need for more on the island and this level of water will shape the technology industry for with applications in military technology
semiconductors. consumption has led to tensions between decades to come. Recent policies include: (Reuters, 2021c).
176 177
US$1.4tn
China’s move towards “technology Looking ahead: the semiconductor industry keeps up with
independence” has been informed by the semiconductor global demand (Varas et al., 2021). The three
some of these restrictions. Currently,
industry areas expected to drive revenue are wireless
China spends US$300 billion on
semiconductors annually (Thomas,
communications, the Internet of Things,
and the automotive sector, according to an China’s
2021). In 2020, it spent more money
importing semiconductors than it spent
The semiconductor industry is now truly
an “essential industry”, whose importance
industry survey (KPMG, 2022). The following
drivers will also be important:
announced
importing oil (Technode, 2021). The has only been highlighted by the recent investment
Chinese government is encouraging its
domestic companies to take the reins,
shortages (Deloitte, 2022). The COVID-19
pandemic increased demand and limited
As countries ramp up their 5G
infrastructure, the demand for in advanced
but there has not been any significant
shift in market share (Thomas, 2021).
supply, causing a global shortage and
missed global revenue of more than US$500
communication tech will also increase,
all of which requires semiconductors.
technologies
China announced plans to invest US$1.4 billion (ibid.). The growing importance of between 2020-
trillion between 2020 and 2025 on
advanced technologies, echoing its
semiconductors was further highlighted by
the range of industries that were affected.
Similarly with the Internet of Things,
the improvement of the connectivity
2025
‘”Made in China 2025” programme.112 of currently unconnected devices
In 2019, it formally created a state- Market research suggests demand is will require a further expansion of
backed fund (worth approximately expected to continue to exceed supply communication technology.
US$29 billion)113 to support Beijing’s until at least 2023, yet despite this, 95
efforts to build its own semiconductor per cent of the industry expects to see The demand for electric cars, as a result
supply chain from chip design to increased revenue this year (KPMG, 2022) of government regulation, will result in
manufacturing. and industry revenue is expected to be 50 increased production, which will require
per cent higher than it was in 2019 (Deloitte, more semiconductors.
Taiwan holds a key position in the global 2022). The industry is looking to scale
semiconductor industry. The island up its activities. Mergers and acquisitions Despite being an essential technology by the expansion of the industry into
holds a dominant position in making the reached US$118 billion in 2020 (Burkacky for vital markets of the future, Chip places like Israel, Singapore, and Europe,
most advanced semiconductor chips. et al., 2021a) and companies are looking to nationalism, supply chains, and talent but competition for high-level talent at
TSMC alone accounts for a 90 per cent increase their output. top the concerns of industry insiders the cutting edge of the industry will likely
market share in advanced chips, which (KPMG, 2022). continue (KPMG, 2022) (Deloitte, 2022).
are vital for cutting-edge technology in TSMC are building a new production plant, The most advanced technology,
both the civilian and military markets which will be the world’s first facility to The imposition of regulations, tariffs, and with the greatest opportunities
(Reuters, 2021c). In Q1 2021, half of all produce 3-nanometre chips. It is also building potential national security policies all to revolutionise the sustainability
Taiwanese exports to mainland China were a new research and data centre, and it was have the potential to place restrictions sector, lies with the smallest chips. In
semiconductors (ibid.). The semiconductor reported the company was looking to boost on the growth of the industry. 2020, only TSMC and Samsung were
industry accounts for 15 per cent of its monthly wafer production (the basis for manufacturing 5-nanometre chips; and
Taiwan’s GDP. TSMC capital investment chips) by 70 per cent year on year by the Continued supply-chain disruption due no European country was producing
was estimated to be US$28 billion in 2021, end of 2021 (FT, 2021a). Meanwhile, Toshiba to COVID lockdowns and the associated chips smaller than 22 nanometres
compared with Taiwan’s defence budget of will spend US$89 million in 2022 to increase backlogs are expected to be a short- (European Parliament, 2021). All the
US$16 billion (Financial Times, 2021a). This production of power semiconductors – a 45 term drag on the sector. world’s advanced semiconductor
gives the island a huge stake in the global per cent increase over last year’s investment manufacturing capacity – defined as
economy from which to base its domestic (Nikkei Asia, 2022a). As the industry expands rapidly, there are below 10 nanometres – is concentrated
economy. And yet, should there be any fears that the availability of talent in an in Taiwan and South Korea, although the
disruption to production in Taiwan, it will Around US$3 trillion in investment will be extremely complex manufacturing process latter only accounts for 8 per cent of
have global ramifications. needed over the next decade to ensure may not be able to keep up. In mature capacity (Varas et al., 2021). This gives
markets, such as South Korea, this is the respective economies and the region
already happening. This might be alleviated significant scope to boost bilateral trade.
112
https://www.scmp.com/tech/policy/article/3085362/china-has-new-us14-trillion-plan-seize-worlds-tech-crown-us
113
https://about.bnef.com/blog/china-invests-29-billion-to-beat-u-s-semiconductors/
178 179
Key takeaways Recommendations for businesses:
1 Green finance, both public and 5 China will continue to dominate 1 Firms should prioritise green 3 Firms should devote further
private, will continue to expand, the green tech sector. Of the three investments that aid in resources and funding to
representing an opportunity for leading green energy technologies macroeconomic resilience and promoting sector and firm-
investors to scale green investments. in the world — wind turbines, solar economic transformation, generate relevant innovations to contribute
photovoltaics and electric vehicles returns, and help meet net zero to net zero commitments. Where
2 Sustainable debt issuance could — the last two technologies are climate commitments. relevant, exporters’ usage of
break another record in 2022, overwhelmingly produced in China. digital technology will be key to
though current global debt 2 First and foremost, this should sustainable initiatives.
dynamics may be a restraining 6 The semiconductor sector will involve applying a low-carbon
factor. continue to be at the forefront of approach to operations and to the
the green and digital transitions. design of products and services,
3 Much of the global economy is An improvement in global providing a competitive advantage
covered by governmental net-zero semiconductor capacity is expected over late adopters.
commitments. This is likely to mean in 2022, and beyond, as capital and
increasing levels of regulation in investment spending are increased
the coming years. In the short term, to meet global demand.
this could restrain export growth;
and yet, in the long run, the digital 7 In the short term, the war in Ukraine, Recommendations for governments:
innovation that is likely to occur and sanctions imposed on Russia,
from complying with environmental are likely to further disrupt global
regulations will boost exports. semiconductor supply chains. One of 1 Governments should agree to 3 Collaboration with and advance
the knock-on effects of US sanctions reporting standards for green notice of planned ESG regulations
4 Global carbon trading markets on Russia could be to increase finance to boost investor should be given to firms in order to
will be reinvigorated by COP26 Russian demand for semiconductor confidence. They should ensure allow companies enough time to
agreements that put in place chips from China. that the application of regulations develop sector specific strategies
some of the guidelines for how the and standards is implemented in a and company business models.
markets will operate. coordinated manner. A further scaling up of infrastructure
investment is required to allow
2 Governments should meet their green technology to flourish at
commitments on catalysing green scale, to safeguard long-term
finance to drive investments, sustainable trade and to help de-risk
innovation, and blended finance further infrastructural investment.
initiatives aimed at adapting to
climate change and meeting
climate commitments.
180 181
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184 185
CHAPTER V
STRUCTURE
GAPS IN TRADE
AND INFRA-
STRUCTURAL
FINANCE
CHAPTER V: Structural gaps in trade and infrastructural finance CHAPTER V: Structural gaps in trade and infrastructural finance
FIGURE 20
MDB climate finance by income levels of borrowing (2019-2020)

US$, BILLION
Structural 2020 2019
gaps will
influence
Low-income
Multi-regional
trade in Upper-middle income
the years Lower-middle income
ahead High-income
0 5 10 15 20 25 30
Persistent structural gaps within and between A declining availability of private trade-credit finance gap, which, in 2020, was measured approximately 4.5 per cent of GDP116 to
the world’s economies will decisively influence lines has had a knock-on effect on low- to at US$1.7 trillion (ADB, 2021). Multilateral achieve infrastructure-related Sustainable
trade in the years ahead. At the centre is the middle-income countries, which has, in turn, development banks have nonetheless Development Goals (SDGs) and stay on
need to close the gaps through structural coincided with a growing infrastructure gap. continued to finance and/or provide track to limit climate change.
change. But such change – and the reform There has been a shortfall in export credit and, guarantees in the poorest parts of the world.
processes that drive it – is challenging at in some cases, adequate fiscal resources to In 2018, these programmes supported around Most governments do not have adequate
the best of times: COVID-19 and the current make trade finance available to businesses, US$30 billion in trade transactions. The WTO, resources on their own to fully finance
situation in Ukraine – with the associated according to WTO Director-General Ngozi development finance institutions, and MDBs their infrastructure needs – particularly
economic shocks and financial volatility – Okonjo-Iweala.114 This has meant that the continue to be crucial in filling the gap or, at after the succession of shocks – which
have exacerbated the difficulties. dearth of trade finance has been an obstacle least, stopping it from widening across the makes private-sector participation
to trade growth, as well as keeping poorer country income spectrum (Figure 20). essential. Approximately US$35 trillion
In this section, we look at three structural nations poor. in assets were held by pension funds at
gaps that are particularly relevant for trade Similarly, for infrastructure, there is a need end-2020117 (and approximately US$10.5
– in financing trade, in infrastructure, and After having hit a record high of US$35.2 for more resources, with the largest shortfall trillion were held by sovereign wealth
between private and public financing. All billion115 in 2017, multilateral development bank seen in emerging and developing economies funds in 2021).118 Yet, their contribution to
need and can benefit from reform, particularly (MDB) finance has continued to cover only that actively engage in cross-border global investment in developing-country
given recent crises. a comparatively small amount of the trade trade. Developing countries need to invest infrastructure remains negligible.119
116
https://www.worldbank.org/en/topic/publicprivatepartnerships/publication/beyond-the-gap---how-countries-can-afford-the-infrastructure-they-need-while-
protecting-the-planet
114
https://www.wto.org/english/news_e/news21_e/trfin_17may21_e.htm 117
https://www.oecd.org/daf/fin/private-pensions/Pension-Funds-in-Figures-2021.pd
115
https://www.worldbank.org/en/news/press-release/2018/06/13/mdb-climate-finance-hit-record-high-of-us352-billion-in-2017 118
https://www.statista.com/statistics/1267499/assets-under-management-of-swfs-worldwide/
188 189
SECTION ONE
THE 80%
Share of global
IMPORTANCE trade covered by
OF CLOSING credit or short-
term payment
TRADE guarantees
FINANCING
GAPS But such financing is often taken for granted however, when requests for trade finance
in developed countries, because importers are due to the lack of ability to assess
and exporters are backed by mature creditworthiness (owing to a lack of
financial industries. Financing gaps between collateral), which entails risk assessment
countries can also be problematic for mechanisms that might not be available.
sustainable trade. It is therefore important Recognition of creditworthiness is more
for the future of overall trade to identify difficult for companies that cannot
financing gaps and address them (ibid.). provide collateral or detailed financial
documentation – indicating the need for
Safeguarding trade finance is particularly new financing instruments and mechanisms
important during times of crises – or to assess risk for SMEs (OECD, 2015).
unexpected shocks – given its short-term Given this backdrop, therefore, trade
orientation. An estimated 80 per cent finance may be an even greater concern
Trade is an important driver of global trade is covered by credit or for SMEs in developing countries, and
of economic development; short-term payment guarantees.120 But particularly in emerging market economies,
approximately half of the trade financing as they account for an ever-increasing share
it needs finance to grow. gap is in developing countries (Castell and of global trade.121
Credit and credit insurance Gonzalez Behar, 2021; Auboin and Gonzalez
help facilitate trade by Behar, 2020; Auboin, 2015). This is likely to This section outlines the ways in which
increase further as supply chains rotate to trade finance gives rise to sustainable trade
bridging the gap between poorer developing countries. and the ways in which obstacles to trade
exporters’ and importers’ finance can be tackled in the years ahead
differing expectations about In industrialised countries, the depth and – including through mechanisms such as
breadth of the financial and insurance fintech and upgrading the knowledge and
when payment should be sectors help cover trade finance gaps during digital skills-base in both developed and
made (WTO, 2016). difficult conditions. The gap emerges, developing open economies.
120
https://iccwbo.org/publication/icc-trade-register-report/
121
https://www.worldbank.org/en/topic/smefinance
190 191
FIGURE 21 Rejections of funding for small and yet produce less than half that per centage
medium-sized enterprises. SMEs tend to in global economic input.124 Fintech (largely
Arrangement official export credits
US$, BILLIONS be the most credit constrained.123 Estimates software, applications, and other tech
project that half of SME trade finance created to automate traditional finance)
requests are rejected, compared with only meets demands from small businesses and
60
7 per cent for multinational corporations. exporters, filling the gaps left by traditional
Some 68 per cent of companies in a survey financial institutions. Additionally, for regions
50 also said they did not seek alternatives after that are experiencing political uncertainty and
being rejected. This disparity has continued, unrest (and, in some cases, fragile or unstable
leading to a perception that credit governments) the alternative provision of
40
constraints may constitute a “new normal” finance can contribute to economic resilience.
for SMEs (OECD, 2015). Firms in the survey
30 cited price constraints as the key systemic Fintech helps cover unbanked individuals
bottleneck to obtaining trade finance. and SMEs. Estimates suggest that providing
services to individuals without bank accounts
20
Lack of information about SMEs. This results could generate US$200 billion in global bank
in more credit rationing of SMEs, higher costs revenues.125 Fintech carries lower overhead
10 of “screening”, and higher interest rates from costs and enables companies to reach a
banks than charged for larger enterprises larger portion of the population. According
(Beck and Demirgüç-Kunt, 2006). Incomplete to recent statistics, an increasing proportion
0
information on firms’ performance metrics of people surveyed prefer to manage
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
(such as productivity) is linked with credit investments with an app rather than through
constraints for both domestic and exporting a traditional bank, making this method of
firms. But exporting firms – which bear an managing finances a preferred way for
To facilitate and develop sustainable trade harms the prospects for the supply of additional risk in the form of larger gaps many across the globe, according to the UK
in the years ahead, trade finance has to trade finance in the very locations where between production and sales – have tended Financial Conduct Authority.
overcome the following hurdles: there are significant gaps. to experience even tighter credit constraints
(Feenstra et al., 2011). Fintech enhances data usage and
Lack of access to the knowledge and The shortage of trade finance during transparency. Funding isn’t the only
skills required for trade. Adequate periods of crisis. During the Asian and The macroeconomic and financial backdrop disadvantage with which micro, small, and
provision of trade finance, and Latin American financial crises, credit is such that the trade finance gap will widen medium-sized enterprises are faced. Their
liberalisation, are essential as developing crunches at the country level affected in the near term. Notwithstanding this, there small size and lack of connections within
economies seek to benefit from the both exports and imports to the point is significant potential for digital technology the larger global economy mean wider
trade opportunities offered by shifting of stoppage (WTO, 2020). Elements of to help close the gap – either via streamlining information gaps. Fintech companies,
patterns of production (Fan and Liu, market failure include herd reactions by onboarding processes for SMEs, or by opening however, can be catalytic in changing actual
2021). Financial-sector capacity to banks, confusion between counterparty the sector up to new sources of liquidity. market structures by tackling information
support the trade sector has stagnated, and country risks on the part of inequalities (Feyen et al., 2021). This is done
according to certain metrics (Figure 21). investors, and gaps between perceived Digital and fintech will help as follows: through the provision of electronic data
The development of a deeper and more and actual credit risk (Auboin, 2015). The across entire trade regions and financial
varied financial ecosystem would aid in COVID-19 crisis and its economic impact Fintech adoption and uptake will be cycles: fintech connects smaller companies
the channelling of finance and the transfer is a single unforeseeable shock and supported by demographics in emerging to investors, lines of credit, business data,
of knowledge. Post-financial crisis, global governments cannot rely on mechanisms markets. Emerging markets comprise more and tools to control their financial data. It can
banks are less inclined to invest in many used in past crises to cover gaps in trade than 85 per cent of the world’s population transform local economies worldwide.
developing counties (BIS, 2018). This finance.122
123
Women-owned SMEs face even more difficulty: about 70 per cent of applications were totally or partially rejected (Wragg, 2021).
124
https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp020416
122
https://www.oecd.org/coronavirus/policy-responses/trade-finance-in-the-covid-era-current-and-future-challenges-79daca94/ 125
https://www.ey.com/en_cz/news/2018/01/improved-financial-inclusion-could-boost-global-bank-revenues-by-us-200b
192 193
SECTION TWO FIGURE 22
INFRA-
Private particiaption in infrastructure
INVESTMENT COMMITMENTS IN INFRASTRUCTURE PROJECTS WITH PRIVATE PARTICIPATION IN EMERGING MARKET
AND DEVELOPING ECONOMIES
STRUCTURE GAPS, H1 2020 PPI as a share of GDP
OPPORTUNITIES, Uzbekistan
AND CHANGE Brazil
Vietnam
India
China
0 0,5 1 1,5 2 2,5 3 3,5 4
There is a significant link The link will continue to be an important Of primary importance, given countries’
driver for global economic growth because climate commitments, is the added
between infrastructure the availability of infrastructure enhances dimension of promoting infrastructure for
development and sustainable connectivity and, in turn, trade promotion. green growth.
trade performance. In Asia, The gap between countries with good The following elements will impact
there is a significant long- infrastructure and those without is significant, infrastructure financing throughout 2022
term impact of the state of estimated to reach US$15 trillion by 2040.126 and beyond:
Ongoing concern over inflation, economic
infrastructure (transport, scarring from the COVID-19 crisis, and Investor risk aversion. This is
telecommunications, energy, growing fiscal and monetary constraints is likely to remain elevated, given the
and the financial sector) on currently dampening investor appetite for geopolitical tensions in several regions
infrastructure development; this has coincided and anticipated (and unanticipated)
exports and trade deficits with pressure on governments seeking to monetary tightening to stem growing
(Rehman et al., 2020). finance it (UN, 2021). There are expectations inflation. There are likely to be “safe
that the increasingly uneven nature of the haven” capital outflows from countries
economic recovery will result in an even larger deemed to be vulnerable (with
infrastructure funding gap. Moreover, private significant economic scarring that has
participation in infrastructural investment not been adequately matched with
has been comparatively low in the larger fiscal or monetary stimulus) and from
emerging markets (Figure 22).127 countries where there are elements of
126
https://outlook.gihub.org/?utm_source=GIHub+Homepage&utm_medium=Project+tile&utm_campaign=Outlook+GIHub+Tile
127
https://www.aiib.org/en/news-events/news/2022/2022-AIIB-Expects-Bigger-Infra-Funding-Gap-Cyclical-Tensions.html
194 195
financial vulnerability (such as a high and

unsustainable level of debt). This could, in
turn, impact the ability to finance necessary
and long-term infrastructure investments.
Lack of new infrastructure
exacerbates cost and
inflation pressures
Aligning infrastructure
with renewable energy
and climate commitments
10gt
CO2 emissions
COP26 announcements and climate
commitments. Climate-change policies,
COVID-19 lockdowns, labour shortages, and
strains on logistics networks led to shipping-cost
Real economy and infrastructure investments
are increasingly aligning with several
from the
particularly those of the major emitting increases and significantly lengthened delivery initiatives relating to energy transition. For building
economies, stand to significantly alter both
the planning and funding of infrastructure
times (Kamali and Wang, 2021) – although some
of those pressures are now easing. This includes
example, in the building sector, carbon
dioxide (CO2) emissions (including both sector in 2019
investments. Regions with outsized on trans-Pacific eastbound routes (constituting direct and indirect emissions from upstream
infrastructural finance gaps will need both the main sea link from China to the United States). energy production) reached 10 gigatons in
to channel increasing amounts of capital 2019, an all-time high that represented 28
and redistribute it to the renewable sector But in the absence of renewed investment, per cent of all energy-related CO2 emissions
and to energy-efficient transmission and infrastructure capacity constraints are likely to globally (IEA, 2020).
distribution projects. Infrastructure that can result in renewed cost pressures. Underlying
adapt and be resilient to weather shocks, supply constraints (such as with backlogs and The International Energy Agency sees
will – out of necessity – need to be scaled port delays, labour shortages, supply-chain untapped energy-efficiency potential in the
up. Both management of stranded assets disruptions moving inland, shipping industry sector, because “global building energy code
(those subjected to unexpected write- challenges, and few carriers) suggest that there evolution is not keeping pace with rapid Investment relating to expanding energy
downs, for example) and an expanded are structural factors that are indicative of cost floor area expansion in emerging economies, production has fallen short over the past few
ecosystem for blended finance will be key to pressures. while renovation rates in developed countries years. In the absence of a scaling up, there
getting the right infrastructure for expanded remain low”. In the light of this, CO2 will be a prolonged period of shortages
cross-border trade. Higher shipping costs and goods shortages emissions are effectively being locked in and elevated energy prices (IEA, 2020a;
will contribute to inflation. The United Nations over the lifetime of buildings; this is largely OECD, 2020). The results of climate-change
Digital innovation (Nambisan et. al., Conference on Trade and Development occurring in new constructions in emerging mitigation policies across OECD and G20
2017). Collaborative delivery models128 (UNCTAD) projects that if container freight rates economies and because of low rates of countries show that renewables investment
and procurement based on outcomes remain elevated throughout 2023, they could energy-efficient retrofitting in developed from 2000 until 2014 was primarily driven
rather than methodology will help foster increase global import and consumer prices by countries (Jachnik and Dobrinevski, 2021). by investment incentives (feed-in tariffs,
innovation, break silos,129 and drive the 10.6 per cent and 1.5 per cent, respectively.130 This renewable certificates, and public tenders)
best use of technology. Crucially, digital cost would be disproportionately borne by small, Notwithstanding the challenges, 2022 could (OECD, 2017).
innovation will play an essential role in developing islands, which heavily rely on imports be a defining year for renewable energy
infrastructure projects that improve physical that arrive by sea. investment. Indeed, renewable energy Feedback loops, spillover effects, and
connectivity; it will aid strengthening infrastructure will be the best-performing interactions between different climate-change
supply chains and logistics operations. Higher freight rates will transmit inflation to asset class of 2022, according to a survey of mitigation policies show that such policies can
The incorporation of digitalisation in low-value-added products. And here too, smaller investment company managers.131 An increase enhance each other when combined (Baranzini
the built environment (houses, streets, developing exporting economies would be likely in infrastructure spending in the renewable et al., 2016). Investment flows in renewable
transportation, etc.) and associated projects to become less competitive and see a significant energy sector will have two main drivers: power also depend on a broader investment
will involve significant structural shifts – loss in export revenues – constituting a sizeable environment (Ang et al., 2017). This can be
including incentivising supply chains for economic shock. Moreover, the final prices of Governments, through spending and seen, for example, in emerging economies
digital delivery (Lobo and Whyte, 2017) and products that are highly integrated into global innovation policy. where explicit carbon pricing is combined with
fostering strategic shifts at the managerial value chains, such as electronics and computers, public research, development, and deployment
level (Papadonikolaki et al., 2022). will also be more affected by higher freight rates. Corporates, through investments in spending (Vieira, 2017). It is particularly
decentralised energy as a hedge against relevant for investment in solar and wind
spiralling gas prices. energy (in advanced economies as well).
128
Collaborative delivery models encompass a variety of collaborative methods in projects, including public-private partnerships (PPP).
129
https://www.aiib.org/en/news-events/news/2022/2022-AIIB-Expects-Bigger-Infra-Funding-Gap-Cyclical-Tensions.html
130
https://unctad.org/news/high-freight-rates-cast-shadow-over-economic-recovery 131
https://sebgroup.com/press/press-releases/2022/sebs-the-green-bond-energy-investments-to-surge-in-2022 html
196 197
SECTION THREE
BRIDGING THE 80-90%
GAPS THROUGH Share of global
exports supported
BLENDED FINANCE by financing or
credit insurance
Trade finance shapes persist, and the difficulties are particularly There is an opportunity for lower-cost Closing the trade gap:
acute for countries that are in sovereign economies to capture market share
export opportunities default or distress (IMF, 2021). Recovery in certain sectors, depending on the
the intersection between
from financial crises lags in weaker associated access to trade finance. gender and climate finance
The networks that define cross-border economies (Freund, 2009), and this has Countries in developing Asia and Africa
commerce all entail some form of finance. significant impacts on the availability are poised to take advantage of the Addressing gender equality, including through
Ultimately, it enables firms (some of which of trade finance, credit rationing, and relocation of apparel and garments access to trade finance, is one of the most
might otherwise have been designated as risky) trade flows (Ahn et al., 2011). All this manufacturing from China (Zhang effective, yet overlooked, means to mitigate
to link into expanding global value chains. underscores how financial deepening et al., 2015), for example. But such the impacts of climate change. Increasingly,
in developing countries needs to be new players require trade finance; blended climate finance will need to address the
But trade finance is not equal. The Asian accompanied by advances in financial 80 to 90 per cent of global exports growing gap in gender equality when it comes
Development Bank puts the global trade inclusion – a link that has been lacking are supported by financing or credit to financial access. Trade policies and access
finance gap at US$1.7 trillion dollars. What (Dabla-Norris et al., 2015). insurance.132 to finance impact women and men differently,
is more, it is not evenly distributed across because of differences in their economic and
financial institutions that evaluate applications Providing blended finance – government Rationing of finance does not always social conditions. Women overwhelmingly
for trade finance reporting; in some instances, and/or philanthropic funding leading to reverse after an economic or financial contend with the consequences of climate
there have been rejection rates as high as corporate investment – is important: shock has ended.134 In this sense, trade change.135 Additionally, over-representation in
nearly 60 per cent for small and medium-sized finance gaps reflect a structural market the informal sector limits income stability and
enterprises in the past.132 This poses a policy Financial-sector development and failure (Auboin and Di Caprio, 2017). leaves women more exposed to the economic
conundrum, given that trade finance is one of access to finance are crucial for long- There are disconnects between the impact of extreme weather (Zelenczuk, 2022).136
the safest forms of finance, with less than 1 per run growth prospects. Various paths more liquid end of the trade finance
cent of transactions defaulting (Auboin and Di to reach financial-sector development market (where borrowing costs are Trade lowers prices for consumers; this,
Caprio, 2017). have different long- run growth cheaper) and the other end of the in turn, increases and typically supports
impacts at the country level (Bordo market (in which liquidity is scarce and the purchasing power of more vulnerable
Structural difficulties in lower-income, and Meissner, 2015). In addition to this, borrowing costs are high). groups (where women are disproportionately
emerging, and developing economies trade finance impacts trade flows and
attempting to access affordable trade finance underlying economic development.
133
https://www.wto.org/english/thewto_e/coher_e/tr_finance_e.htm
134
See, for example, Guttentag and Herring (1984).
135
https://www.un.org/en/chronicle/article/womenin-shadow-climate-change
132
https://iccwbo.org/global-issues-trends/banking-finance/access-trade-finance/ 136
https://www.convergence.finance/news-and-events/news/0qkaeG2OlenTfKkYEZokz/view
198 199
represented). Conversely, higher trade costs investment can foster financial deepening FIGURE 23
impede access to international markets for in a way that promotes sustainable trade.
China’s total investment
smaller businesses more than they do for large An example of this is climate insurance for PER CENT OF GDP
firms (which also disproportionately impacts women to improve their ability to adapt.
women, who tend to own and lead smaller
50
businesses) (Korinek et al., 2021). The opportunity to bridge the climate-
gender financing gap is rapidly closing. On 28
45
Blended finance constitutes both a promising February 2022, the Intergovernmental Panel
investment approach and a tool to tackle the on Climate Change, in its latest report, found
gender funding gap: that approximately half of the measures 40
previously believed to be critical to limiting

Increased trade is associated with lower climate risks are “no longer an option” and 35
levels of gender discrimination (ibid.). The that climate-change risks are highest and will
increased competition resulting from trade be experienced more immediately in low- 30
liberalisation in goods and services leads income and least-developed countries, where
to cost reductions. This, in turn, erodes the women form the majority of the population
25
ability of firms to exploit cost disparities living in multidimensional poverty.137 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
that can lead to discriminating between
men and women (Black & Brainerd, 2004).
Export subsidies have been found to Crucially, China’s administration has become announced commitments to increase the total
coincide with firms discriminating against Shifts in China’s increasingly active in the functioning of financing volume, and particularly the World
women workers, because they provide catalytic role in multinational development banks. Chinese Bank’s “billions to trillions” challenge to itself
additional financial resources that firms
can use to hire relatively more expensive
global infrastructural contractors have also accounted for an
increasing proportion of World Bank contracts,
(Eyraud et al., 2021; Hoque, 2017).
men (ILO, 2016; Lopez 2016). finance backed both by recipient governments and Looking ahead, there could be structural shifts
the Bank. An estimated 31 per cent of all in the provision of infrastructure finance. The
Gender-framed climate finance will China is the main financer of much of the construction projects in Africa valued at United States recently announced the Build
drive new (higher-return) investment. infrastructure transformation in several US$50 million or more in 2020 were Chinese Back Better World Initiative (B3W) to help
Adopting a gender lens when designing regions and economies, including, notably, funded (Kenny, 2022). A core reason for this meet this challenge and address infrastructure
and financing climate solutions addresses Africa.138 China’s development banks (China is the cheap labour costs in the country’s needs in the developing world. B3W will be
the unique way in which climate change Exim Bank and China Development Bank) construction sector (ibid.). Owing to the led by the G7 in partnership with multilateral
impacts women. Since 2015, only 18 accounted for more than twice the amount state-owned status of China Exim Bank, institutions and private-sector companies –
per cent of blended climate-finance lent by the United States, Germany, Japan, the low interest rate is unbeatable by other with China also announcing its intention to
transactions have been aligned with the and France combined over 13 years: multinational organisations, such as the IMF contribute to the initiative.140 B3W will focus on
UN’s Sustainable Development Goals US$23 billion versus US$9.1 billion. This (Morris et al., 2020). mobilising “hundreds of billions” in investments
relating to gender equality. They account was to 535 public-private infrastructure in climate, health, digital technology, and
for just 7 per cent of all blended capital deals funded in sub-Saharan Africa.139 Despite this impressive funding, a gap between gender equality. It will focus on two tracks of
directed towards climate outcomes This is consistent with China’s growth public-private investment and infrastructure investment – one on private-sector finance, the
(Convergence, 2021; UN Women, 2016). in outbound investment. Its domestic finance needs in sub-Saharan Africa persists. other on grants and concessional loans through
Approximately a quarter of blended investment as a share of its own economy From 2007 to 2020, the total domestic US development agencies.141 B3W could also
climate-finance deals had incorporated has remained resilient compared to several and external finance for financially closed provide a unified platform for America and its
some gender component into the overall developed economies but has trended infrastructure projects (including private allies to offer an alternative model to China’s
transaction structure (ibid.). Gender-smart lower of late (Figure 23). participation) remained stagnant, despite Belt and Road Initiative.
140
https://www.reuters.com/world/china/china-willing-work-with-us-build-back-better-world-initiative-2022-02-28/
137
https://www.ipcc.ch/report/ar6/wg2/resources/press/press-release/ 141
Deputy National Security Advisor for International Economics Daleep Singh recently emphasised that the initiative’s success will rely heavily on US development
138
https://eastafricamonitor.com/chinese-infrastructural-funding-in-africa-continues-to-build-momentum/ personnel serving abroad, who “understand the binding constraints to the development impact we’re looking for” and can help create a “repeatable process for
139
https://www.cgdev.org/article/new-study-china-lends-25x-us-uk-japan-germany-combined-infrastructure-sub-saharan-africa developing a pipeline of bankable projects”.
200 201
SECTION FOUR FIGURE 24
KEY
DEVELOP- Gross domestic product, constant prices Trade volume of goods and services
MENTS IN THE
15
DE-RISKING OF
10
INVESTMENT 0
-5
-10
-15
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Trade has rebounded strongly Blended finance has been used to support 2018). Similarly, responding to COVID-19, up
trade finance to ensure that market access to US$400 million of concessional resources
following the COVID-19 channels remain open. The economic impacts have been made available through the
crisis, coinciding in large of the pandemic, and the resultant global International Development Association’s
part with a bounce-back in supply-chain disruptions, pose intermittent

risks to trade in the form of falling export
Private Sector Window to low-income
countries and fragile states, to ensure
global growth (Figure 24). revenues, limited access to foreign exchange continued availability of trade finance.143
However, the positive upturn liquidity, and a risk of decreased supply of
bank-intermediated trade finance (Nyantakyi Key to de-risking of investment is wider
masks wide divergences and Drammeh, 2020). use of blended finance. The blending of
between countries, sectors, investment funds on commercial (private
and products.142 The gaps Organisations linked to the World Bank sector-led) and concessional (public sector-
are stepping up. The International Finance led) terms can catalyse investments that
in trade finance and the Corporation’s global trade finance would have otherwise not been made.
risks in accessing finance programme (GTFP) offers local banks partial This will, in turn, lead to the creation and
have accounted for these or full guarantees covering payment risk development of deeper, varied, competitive,
for trade-related transactions. Through and sustainable markets (Lankes, 2021). This
differences. the GTFP bank network, local financial stems from pioneering new investments,
institutions work with international banks building market platforms, adopting new
that can broaden access to finance and technologies and business models – often
reduce cash collateral requirements (IFC, amid pronounced uncertainty.
142
https://www.oecd.org/coronavirus/policy-responses/international-trade-during-the-covid-19-pandemic-big-shifts-and-uncertainty-d1131663/ 143
https://www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_site/financial+institutions/priorities/global+trade/gtfp
202 203
Blended finance should only be used in Looking ahead, key placing capital in blended-finance vehicles.150
specific contexts.144 Financing on commercial catalysts for blended Greater transparency is needed to improve
terms is typically best as the first option,
though it’s often not a realistic one.145 Blended
finance will include the understanding of what works and
where the effectiveness of blended-finance
finance is also not the solution to long-term mechanisms can be improved.
structural issues where permanent subsidies Thinking more strategically. Meeting the
are called for, or the solution for problems
where reforms would be preferable. Blended
Blended significant sustainable investment needs in
the least-developed countries post-COVID-19
Strengthening capacity and ecosystems
in local capital markets. Transaction,
finance should be used in the presence of finance can will require thinking about how to scale advisory, and business-development services
market failures, affordability constraints,
or information deficiencies that prevent
drive recovery blended finance. The small size of individual
investment projects in such countries is one
constitute the supportive ecosystem to
help generate specific blended-finance
private-sector investment (Mutambatsere
and Schellekens, 2020). Even when blended
and risk acute barrier that prevents the mobilisation
of private finance. Early-stage risk capital
transactions. Local capital markets need
the capacity to assess and price the credit
finance is needed, its use should be limited, mitigation will continue to be a critical support.149 Such (repayment) risk of infrastructure projects.
and concessionary rates minimised as much capital, combined with technical assistance, Donor-funded guarantees can attract
as possible to help develop and encourage helps demonstrate commercial viability local investors and foster local-currency
future sustainable commercial markets (ibid.). and address constraints, such as a lack of guarantors to support local capital markets.
collateral or credit history.
Investment-ready sustainability projects
Supporting transactions at the portfolio in key sectors for crisis-recovery financing.
Blended finance will level. Pooled funds or facilities, for example, Even before the COVID-19 crisis, there
support sustainable and are a principal strategy for managing credit was wide recognition of the shortage of
resilient trade risk (Boffo and Patalano, 2020). A portfolio

approach helps create larger deals to
investment-ready projects in the least-
developed countries. The crisis then
increase diversification to reduce risks; it also triggered a precipitous drop in global foreign
Blended finance can particularly contribute The channelling of blended finance into makes assessment and approval processes direct investment, which has not recovered
to the following two areas for continued digital infrastructure. The digitalisation of more cost-effective. This can include a in a substantive way. This macroeconomic
medium-term recovery and risk mitigation: global trade finance will continue to take greater use of structured funds, which backdrop for cross-border investment will
centre stage. When it comes to attracting pool capital with different risk and return be a barometer for investments that are
The reduction of basic-goods and medical- blended finance investment, particularly expectations. These have already mobilised perceived to be riskier. The United Nations
goods prices. Governments are rethinking from the private sector, the expected more commercial finance than flat funds and SDG Investor Platform could fill market
their industrial policies to improve resilience productivity and efficiency gains from are more likely to reach a size of US$100 intelligence gaps and connect investors to
and achieve self-sufficiency for essential digitalisation are likely to result in strong million or more (Convergence, 2021). investment opportunities.151
domestic goods.146 Given this, they are likely profit and revenue projections. This, in turn,
to pursue Public-Private Partnerships to will make digital-infrastructure investments Standardisation in the blended-finance
alleviate fiscal pressure. Blended finance financially attractive. The principles for field. This will lead to less complexity, lower
can help lower the prices of critical goods, digital development148 – highlighting the transaction costs, and greater transparency.
such as medicine or medical diagnostic guidelines for best practices in technology- However, a tailored country-specific approach
equipment,147 to improve the accessibility of enabled development programmes and is needed: it is absent in least-developed
essential commodities, especially for low- regulatory frameworks – will be important countries (Attridge and Engen, 2019),
income countries. facilitators of investment. preventing many mainstream investors from
144
Private Sector Development Roundtable (2013), “DFI Guidance for Using Investment Concessional Finance in Private Sector Operations”, which defined five core principles for
engagement: (i) ensuring additionality; (ii) crowding-in private investments; (iii) promoting commercial sustainability; (iv) reinforcing markets; and (v) reinforcing high standards.
145
https://openknowledge.worldbank.org/bitstream/handle/10986/30377/125904-BRI-EMCompass-Note-51-BlendedFinance-April-13-PUBLIC.pdf?sequence=1&isAllowed=y 149
UNCDF’s LDC Investment Platform aims to address the “missing middle” challenge; UNCDF manages a portfolio of risk-tolerant catalytic loans and guarantees, which aim to de-risk
146
https://www.oecd.org/coronavirus/policy-responses/building-back-better-a-sustainable-resilient-recovery-after-covid-19-52b869f5/ early-stage projects in least-developed countries (Berlin and Lediju, 2021).
147
https://www.cdcgroup.com/en/news-insight/news/cdc-group-invests-in-medical-credit-fund-to-support-health-entrepreneurs-in-sub-saharan-africa/ 150
https://www.convergence.finance/news-and-events/news/7Cwi1FknKtfqd2vVmgcKIW/view
148
https://digitalprinciples.org/ 151
https://www.undp.org/press-releases/undp-and-gisd-alliance-launch-sdg-investor-platform-unlock-trillions-sdg-aligned
204 205
The central role build more resilient markets, including Development Bank, the largest priority to target climate financing
of development through the promotion and facilitation of dollar-denominated social bond in emerging economies (Jessop,
institutions digitalisation (Runde et al., 2019). DFIs have

been at the centre of the discussions in
launched in the international capital
markets to date.158 Additionally,
2021). Illustrative of this was the
announcement to mobilise US$2 billion
the multi-stakeholder THK Roadmap154 for there has been funding from the with the Rockefeller Foundation for
DFIs: Crucial to small and medium-sized Blended Finance platform. International Finance Corporation investment in distributed renewable
business financing following COVID-19 for low-income and least-developed energy (generated near its users,
Taking on, and underwriting, more risk will countries. rather than for a main grid) in
Development finance institutions’ (DFI) mean a greater focus from DFIs on more emerging economies. The investment
guarantees are critical for SMEs. These fragile countries and sectors that have been The Asia Development Bank has has the underlying aim of unlocking
guaranteed portfolios yield low, single- severely hit by the COVID-19 crisis and worked with the Inter-American further private capital to fund the IFC’s
digit, market-based returns, with typically geopolitical uncertainty (Collier et al., 2021). Development Bank and the Africa renewable energy projects.161
zero losses and very low delinquencies over This has been demonstrated by the global Development Bank (AfDB) to include
extended periods of time. Their fixed income- development finance coalition – comprising member banks in each other’s trade As financial markets grow and access
like risk-return profile (similar to longer- 20 international development financial finance programmes. The goal is to to diverse forms of finance improves,
dated commercial paper) has proved to be institutions – committing more than US$5.55 encourage direct cross-continental a strategy needs to be implemented
attractive. Insurance companies have been billion for micro-to-medium-sized business relationships between banks and to to account for a phasing out of the
willing to share in some of the guaranteed financing in Africa.155 alleviate part of the financing gap in concessional finance component of any
exposure with DFIs (Kingombe et al., 2011). trade between developing countries. blended-finance arrangement. As markets
MDBs: A source of resilience for trade AfDB risk-mitigation instruments run mature, business models are ideally scaled
DFIs also hold a central role in blended
153
promotion and inclusion on a private-sector demand basis, up and extended, new standards and
finance. No single financing instrument can with a focus on clients in the poorest market norms are established, and new
provide a sustainable long-term solution in The blended-finance programmes of developing countries. All institutions financing is mobilised (IFC, 2018). In such a
isolation. During the current recovery from multilateral development banks (MDB) operating such programmes facilitate scenario, bespoke de-risking structures can
the COVID-19 crisis, DFIs are focused on strengthen trade inclusion in low-income trade in countries where private be implemented (ibid.).
countering short-term liquidity shortages, countries. In effect, they provide risk markets do not operate. Notably,
restructuring loans, or simplifying procedures mitigation through guarantees to both the AfDB continues to launch new
to implement fast-track processes to get issuing and confirming banks, allowing transaction guarantees to support
money disbursed. While many DFIs appear for rapid endorsement of letters of credit, SMEs’ trading activity in Africa.159
to have announced financial commitments the main instrument used to finance trade
urgently, it has not been clear whether they transactions between developing countries, The World Bank’s International
are coming up with new or reallocating and between developed and developing Finance Corporation (IFC) has
existing financing. countries.157 deployed more than US$321
billion in emerging and developing
DFIs are important actors in offering risk New initiatives include the three- economies.160 IFC actively works
mitigation and should use their role to attract year, US$3 billion Fight COVID-19 with the private sector to drive co-
further investment in the medium term to Social Bond issued by the African financing and has announced its
153
According to the OECD, bilateral, multilateral, national, and international development finance institutions (DFIs) are “specialised development banks or
subsidiaries set up to support private sector development in developing countries. They are usually majority-owned by national governments and source their
capital from national or international development funds or benefit from government guarantees. This ensures their creditworthiness, which enables them to raise
large amounts of money on international capital markets and provide financing on very competitive terms.” See: https://www.oecd.org/development/development-
finance-institutions-private-sector-development.htm
154
https://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/tri-hita-karana-roadmap-for-blended-finance.htm
155
https://www.edfi.eu/news/global-development-finance-coalition-commits-over-usd-5-5-billion-for-msme-financing-in-africa/ 158
https://www.afdb.org/en/news-and-events/press-releases/african-development-bank-launches-record-breaking-3-billion-fight-covid-19-social-bond-34982
156
Multinational development banks are supranational institutions formed by multiple sovereign states for the purpose of financing economic and social 159
https://www.afdb.org/en/news-and-events/press-releases/african-development-bank-launches-new-transaction-guarantee-support-smes-and-trade-africa-44851
development. Multilateral DFIs are typically the private-sector arms of regional and multilateral development banks (Ravenscroft, 2020). 160
https://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/home
157
https://www.oecd.org/dac/financing-sustainable-development/blended-finance-principles/documents/Principle_4_Guidance_Note_and_Background.pdf 161
https://renewablesnow.com/news/ifc-rockefeller-foundation-aim-to-unleash-usd-2bn-of-private-capital-for-distributed-renewables-744636/
206 207
35% 88%
Innovative blended Increased blended-finance funds to
finance as a form of fill the energy gap. Larger, utility-
risk management scale, transformative investments

are needed to drive low-carbon
Innovative blended finance that creates Estimated development and jobs. One example
is Climate Investor One,163 which is Share
new markets (ibid.) could be part of the
solution to providing the financing support
share of focused on financing projects in low-
and lower middle-income countries
of SMEs
needed by SMEs. This is especially true SMEs that in the wind, solar, and hydro sectors. It operating at
for small and growing businesses, the
so-called missing middle. MDBs and DFIs, have laid off focuses on 11 countries, of which five
are least-developed (Burundi, Djibouti, 75% capacity
as well as local banks, tend not to serve
this segment because of the perception
staff due to Madagascar, Malawi, and Uganda).164
Following a notable investment by the
or less due to
of high (or unquantifiable) risks and the pandemic Green Climate Fund, along with the the pandemic
technical obstacles inherent in a particular Netherlands, the European Union, the
investment or project. Nordic Development Fund, and USAID,
the Climate Investor One facility closed
Managing risk will be essential, given the at US$850 million in June 2019, with
likelihood of pronounced and multiple some US$620 million in commercial
further shocks in the years ahead. Against equity mobilised from investors in Africa
such a backdrop, blended finance is an and Europe (Choi and Seiger, 2020).
effective approach for risk mitigation.
There are sectors that would be effective

for blended finance:
Innovative blended finance More specifically, the survey found

to offset SME scarring from that the textile, personal-care,
COVID-19. SMEs based in least- hospitality, and energy sectors are
developed countries have been more impacted than businesses in
severely affected by the pandemic. the financial and digital services Investments in digital infrastructure and economic consequences of the pandemic
Preliminary findings from a sectors. Women-led businesses solutions are imperative for the future of and the uneven economic recovery in
survey on the state of SMEs in report higher rates of lay-offs (37 trade and are needed to build more resilient several countries.
such countries – conducted by per cent) and risks of closure (40 economies in the face of shocks. The
a consortium of organisations, per cent). As noted above, MDBs financing of shortfalls in infrastructure and Blended finance can play an important
including the UN Capital and DFIs, as well as local banks, trade finance will continue to be of primary role in reaching segments of the
Development Fund – indicate that tend not to serve this segment importance in the future. Tackling both in a population and portions of the private
because of COVID-19, nearly 88 per because of high risks (real and way that is sustainable and consistent with sector that lack affordable access to trade
cent of SMEs operate at less than perceived) and high transaction the energy transition will be crucial. finance, or access to finance altogether.
75 per cent capacity, 35 per cent costs. Providing support – through Collaborations, such as those between
have laid off staff, and more than loans or guarantees, for example As part of this, closing the digital divide government, schools, and the health sector,
a third indicate that they are at – to local financial institutions that will help mediate and mitigate the socio- boost broadband connectivity.165
risk of shutting down within three lend on to local SMEs can help
months.162 ensure access to finance.
163
CI1 comprises three funds tailored to finance each stage in a project’s life cycle: the development fund for the development stage (including pipeline
development), a construction equity fund for construction, and the refinancing fund for operations. See: https://www.researchgate.net/figure/CI1-Financing-
Structure-Source-Author-compilation-based-on-Climate-Fund-Managers_fig1_342183454
162
https://www.uncdf.org/sme-survey 164
https://www.greenclimate.fund/publications?f[]=field_date_content:2018#
208 209
Blended finance will play an essential At the core of these endeavours will
role in the future of trade. It can improve be increased partnerships between Recommendations for businesses:
both financial and economic resilience the public and private sectors. As with
for future crises, including those related most crises, the COVID-19 pandemic
to climate. The mobilisation of finance underscored the importance of public- 1 Increase co-investment initiatives greater use of blended-finance
remains central, particularly for least- sector involvement in responding to with development finance funds and facilities in order to build
developed countries and segments of multiple shocks. institutions and multinational sustainable investment initiatives.
emerging economies that lack access to development banks in order to build
finance. With private-sector capacity retrenched a larger market for blended finance 3 To close financing gaps, portfolio
(as demonstrated by trade finance that would channel more financing investments managed by financial
Crucially, trade finance can contribute to rejection rates), coordination between into sustainable initiatives. institutions and non-bank financial
accelerating economic recovery through the public and private sectors is institutions could be utilised
improving market access. Industrial policy key. In particular, the co-financing of 2 Financial institutions and firms to create larger deals (through
measures and affordable access to finance investments will decisively support a should start to pivot away from structured funds), to increase
will help build greener digital economies. sustainable outlook for trade. traditional models of bilateral diversification and scale up private
investment transactions towards finance.
Key takeaways
Recommendations for governments:
1 Infrastructure – and renewed this is the use of blockchain for
investment in infrastructure – will payment systems, or machine 1 Policymakers need to strengthen 3 Greater standardisation in blended
lower costs in transportation. But learning for underwriting. the investment ecosystem and align finance would simplify and lower
the spike in oil and commodity These mechanism help connect it with climate-change mitigation transaction costs, as well as
prices will exacerbate the trade micro enterprises and SMEs to policies to mobilise greater green promote transparency. Closer
financing gap for resource- investors. investment, particularly in the coordination between pension funds
constrained SMEs and constitutes renewable energy sector. and sovereign wealth funds would
a negative growth shock (of 3 The mobilisation and further mobilise more blended finance.
anywhere between 0.25 and 1 per scaling of blended finance 2 Prioritise automation of trade
cent depending on the economy). remains an important pathway to facilitation, which has proven crucial
help close both the substantial for the cost efficiency of SMEs. For
2 Fintech continues to help close trade finance gap and women-led businesses, automation
the global trade finance gap, infrastructure financing gaps that also helps eliminate formalities that
now likely to be over the US$1.7 have been, in part, exacerbated subject women entrepreneurs to
trillion estimate; An illustration of globally by the COVID-19 crisis. discrimination.
210 211
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2022

GLOBAL TRADE IN A NEW

THE FUTURE OF TRADE:

CHAPTER I CHAPTER III

References for Chapter I 60 References for Chapter III 132

References for Chapter II 96 References for Chapter IV 180

Section One: The importance of closing trade financing gaps 188

Section Two: Infrastructure gaps, opportunities, and change 192

Section Three: Bridging the gaps through blended finance 196

Section Four: Key developments in the de-risking of investment 200

Conclusions, key takeaways, and recommendations 208

References for Chapter V 210

EXECUTIVE We expect the

Multiple underlying factors are likely to support cross-border trade

Below, we set out a series of detailed recommendations for business

Global GDP growth is expected to be driven by resilient cross-border

In this context cross-border investment and trade could become

Governments should adapt their economic development strategies to

Greater breadth and application of ICT should be integrated at all levels

Governments (and businesses) need to incentivise ICT use among smaller

New types of trade agreements should be designed to enable growth of

Greater standardisation in blended finance would simplify and lower

SECTION ONE FIGURE 1

FIGURE 2 A resilient, equitable, Trade aids economic diversification: This

There is a need for greater financing

Let us start with the smaller SMEs. The

to help with its efficiently pairs credit and risk appetites

Technology and competitiveness: From a

high trade costs (which can be seen An expected FIGURE 4

Transport costs are, therefore, a key have multidimensional macroeconomic

DMCC Commodity commodity endowment factors pillar, 2. Proximity to markets (based on

United States 54 56 63 58 United States 47 5 53 1

United Arab Emirates 74 2 72 50 United Arab Emirates 56 1 53 2

United Kingdom 19 45 70 45 United Kingdom 49 4 46 5

Hong Kong SAR, China 11 39 83 44 Hong Kong SAR, China 39 7 45 6

South Africa 10 24 30 21 South Africa 20 9 23 9

Source: See appendix Source: See appendix

Appendix to the DMCC Commodity Trade Index

Commodity Trade Index methodology Commodity Trade Index data sources

Headquarters locations Locations of global and regional Various 2022

Locational and trading partner factors

Commodity endowment factors

Methodology changes Attractiveness of the tax

rate of corporation tax)

pent-up demand in key sectors COVID-19 developments, including high

Net foreign direct investment Exports of goods and services

Capital flows The recovery in economic growth in the first

have decreased start of 2022, growth in international trade

since the Great there is little systematic evidence indicating

Recession. an era of de-globalisation (BIS, 2018),

SECTION ONE FIGURE 7

There is strong evidence Global and regional economic stability.

landscape is likely to be Pivot 1: loss of wealth and employment could

Annual retail sales growth in China

Japan’s fuel import share in context

SECTION TWO FIGURE 10

MULTI- European Union China United States

AND THE NEW