Globalisation evolves

Globalisation evolves

Globalisation is in trouble. Conflict and rising protectionism are placing new strains on trade and supply chains. Geopolitical risk, as measured by economists at the Federal Reserve, has been trending up for a decade and has reached the highest levels in 25 years in the wake of the conflict in the Gulf. Trade is no longer the engine of global growth that it once was. Rather than outpacing GDP as it did in the golden era of globalisation in the late 1990s and early 2000s, growth in global trade has lagged global growth for most of the last 18 years. In the wake of the closure of the Strait of Hormuz, delays in shipping freight around the world have returned to the record levels seen during the pandemic.  

• Yet, globalisation and trade are in better shape than these headlines suggest.

• We should be wary of comparisons with the era of hyper globalisation. Rapid growth in trade in the late 1990s and early 2000s was made possible by China’s entry into the world trading system, the collapse of Soviet communism and an intense period of EU integration and enlargement. It was an exceptional and fleeting moment in history. Consumers eventually adjusted to a step change in the availability of cheaper imports, and as they did growth in import growth slowed. 

• But then came a series of shocks that created new problems for global trade – the financial crisis, growing international tensions, Brexit, COVID, Russia’s invasion of Ukraine, America’s lurch to protectionism and war in the Middle East. The economic effects have manifested in new frictions, higher costs, and disruption to trade.

• Yet trade has not ground to a halt. Indeed as a ratio of global GDP, trade in goods and services reached an all-time high of 62% in 2022 following the pandemic. Despite falling in the years since, it is not far off record levels.

• Trade in goods has been affected by tariffs and restrictions on trade. Service trade, however, is largely unaffected by tariffs and has consistently outperformed global GDP growth, helped by growing demand, declining technological barriers to trade and the rise of technology-related services.

• The AI boom has provided a powerful new impetus to trade both in goods and services. Last year Asian exports of AI semiconductors rose 68%. In March, the World Trade Organisation (WTO) raised its estimate for growth in global merchandise trade in 2025 from 2.4% to 4.6% due to the surge in AI-related trade.

• Trade and supply chains are adapting to a new, more fractious international environment.

• Most obviously, the economies of the US and China are decoupling, with US imports of Chinese goods declining by 30% last year alone. However, a 2023 study by the Bank for International Settlements found that US buyers are sourcing Chinese products via other Asian countries or are buying them from Chinese-owned factories located outside China, mainly in Asia. At the same time, US and other western companies have focused on building ‘China plus one’ supply chains, maintaining their presence in China and building new capacity elsewhere.

• The logic of the current, contested geopolitical scene seems to point to the reshoring of production and shorter supply chains. Instead, US-China tensions have created more – and more complex, longer supply chains – with US imports from India, Indonesia, the Philippines and other Asian countries surging in tandem with the weakening of direct trade between the US and China. At the same time, China has increased its focus on the European market. Most European countries recorded above-average growth in Chinese imports in 2025. Imports of cars from China have boomed. Chinese vehicles doubled their share of the UK market in March on a year earlier, accounting for 15% of sales.

• Research by Harvard professor Gita Gopinath shows that trade flows are increasingly concentrated along geopolitically aligned blocs. The WTO has come to the same conclusion, reporting that since the invasion of Ukraine, intra-regional trade has grown rather more rapidly than trade between regions – though it adds the significant caveat, “there is…no clear evidence of a widespread shift toward regionalisation or nearshoring of production networks.”

• The benefits that global supply chains bring are simply too great to discard. Businesses are maintaining them and building in greater resilience by developing new sources of supply.

• There are many ways of gauging the health of the global trading system. An OECD report published earlier this month shows that on one of the most important measures the system is in good health. The authors examined the share of overseas products in countries’ exports and how this share has changed over time. Asian exports have some of the highest levels of foreign content, testifying to their openness to, and dependence on, trade. The US has the lowest levels of foreign content in its exports, speaking to its vast internal market and relatively low level of openness to trade. For the OECD as a whole, the overseas content of country exports is only marginally below the all-time peak reached in 2022. In other words, exporters have, over time, become more, not less, dependent on foreign materials and components. 

• We are in an era of heightened international rivalry, one where the old rules of trade are often broken. Yet globalisation is not in retreat. As OECD has observed, we are seeing “a more deliberate form of globalisation, one shaped by resilience as well as by efficiency.”

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.4% at 10,195. 

Middle East conflict

• During a two-day summit between the US and China, US president Donald Trump said he and Chinese president Xi Jinping “feel very similar” about not wanting Iran to have a nuclear weapon and how the conflict should end
• Earlier in the week, Mr Trump rejected Iran’s counterproposal for a deal to end the conflict and commented that the ceasefire with Iran is on “massive life support”
• The US Department of Defence said that the US’s conflict with Iran has cost $29bn so far, up from $25bn estimated two weeks ago
• The International Energy Agency warned that global oil inventories are being depleted at a record rate, raising the possibility of further oil price spikes. Oil prices ended the week at $109 per barrel
• Saudi Arabia discussed a non-aggression pact between Middle East states and Iran once the conflict between the US, Israel and Iran ends, the FT reports
• Shipping rates on the Shanghai to Gulf and Red Sea route hit an all-time peak

Economics

• US consumer price inflation increased by 3.8% in the year to April, the highest rate since May 2023, driven by higher energy prices
• The US government sold long-term bonds with a yield over 5% for the first time since 2007 amid concerns of higher US inflation caused by the conflict in the Middle East
• The UK ten-year bond yield rose above 5.17% at one point on Friday, the highest since 2008. Concerns about a challenge to the leadership of Keir Starmer and the impact of higher energy costs on UK inflation are widely seen as major factors in the rise in UK gilt yields
• UK GDP increased by 0.6% in the first quarter this year, up from 0.2% in the previous quarter, in part reflecting a front-loading of activity in anticipation of rising energy prices
• King Charles announced the UK government’s legislative agenda for the next parliamentary session, which included plans to fully nationalise British Steel and fast-track EU legislation into UK law
• UK long-term government borrowing costs hit their highest level since 1998 amid growing speculation over Keir Starmer’s position as prime minister *Euro area GDP softened to 0.1% in the first quarter, from 0.2% in the final quarter of 2025 

Business

• Abu Dhabi backed the construction of a $13bn natural gas plant in the US, reflecting rising interest in global energy supplies not directly impacted by the conflict in the Middle East
• Chinese state-owned car manufacturer Dongfeng agreed a deal with rival Stellantis to produce Jeep and Peugeot vehicles in China as part of the European carmaker’s attempts to increase its presence in the Chinese car market
• Ebay rejected video game retailer GameStop’s $56bn takeover offer, calling the bid “neither credible nor attractive”
• Ukrainian defence company Fire Point said that it launched two satellites this year and plans to launch dozens more in the near future in a bid to reduce reliance on the US and improve security independence
• Energy company British Gas agreed to pay more than £90m in fines and penalties for breaching licensing conditions regarding pre-payment meters
• The UK Civil Aviation Authority announced proposals that would allow other companies to bid to build Heathrow Airport’s planned third runway and new terminal, in an attempt to minimise construction costs
• New research by Queen Mary University of London found that a large majority of social media posts containing financial guidance were of low quality, despite nearly 40% of those surveyed using social media for financial guidance

Global and political developments

• Mr Trump said he had not decided on whether to approve a $14bn arms sale to Taiwan following the two-day summit with Chinese president Xi Jinping. Earlier in the summit, Mr Xi said, “The Taiwan question is the most important issue in China-US relations”, according to Chinese media
• Russia fired over 1,400 missiles and drones at Ukraine last week as a three-day ceasefire collapsed. Ukrainian officials said the attack was one of the largest since the war started
• The Latvian government fell, and prime minister Evika Siliņa resigned after the government’s coalition partner withdrew support over disagreements on how to respond to Ukrainian drones crashing in Latvia
• MP Josh Simons resigned as MP for Makerfield, with Manchester mayor Andy Burnham saying he will seek election for the seat. Mr Burnham is viewed as a potential leadership rival to Mr Starmer
• Wes Streeting resigned as health minister and said that he would enter any potential leadership race to succeed Mr Starmer. No formal leadership challenge has yet been triggered

 

And finally… French police issued a warning to rural drivers to look out for ‘drunk’ deer. During the summer, some animals may consume fermented fruits which are thought to cause unpredictable behaviour – stag-gering around