Global trade proved resilient throughout the pandemic. Demand for «stay-at-home» goods prevented a steeper contraction in global trade flows than initially feared, and by late 2020 a shortage in semiconductors engineered an explosion in global trade flows (as well as supply-chain disruptions) in 2021. Now, however, warning lights are blinking. By the fourth quarter of 2022, as we had previously warned, global sea freight rates entered freefall. Softening trade performance across Asia has already signalled the end of that region’s export boom. As major economies face looming recessions, what will the trade landscape look like in 2023?
China’s domestic demand rebound will be uneven
China will continue playing an outsized role in global trade. This role was boosted in 2009-10, when China’s massive stimulus programme in response to the global financial crisis drove demand for commodities and raw materials. The expansion of its consumer class over the past decade has also since positioned China as an important market for exporters of consumer and industrial goods, ranging from cosmetics and clothing to automobiles and semiconductors.
In 2023, however, China’s global trade role will be slightly smaller. We expect China’s economy to rebound, after bruising lockdowns undermined activity in 2022, but the drivers of this growth will be unbalanced, with imports concentrated in commodities-related sectors as China’s leadership revives growth through state-led investment. Even under these conditions, the correction in China’s housing sector—along with squeezed local government budgets as a result of covid-induced fiscal shocks—will probably keep imported commodities demand from rebounding to pre-2021 levels. Nevertheless, we expect some opportunities in China for overseas exporters of copper and lithium products, given the government’s growing focus on energy infrastructure construction.
By contrast, we retain a pessimistic outlook for China’s retail landscape for the early part of 2023. Much of this derives from our assumptions about China’s zero-covid policy. Although authorities have signalled more willingness to move away from this framework, this relaxation will be slow, particularly in China’s smaller cities. More importantly, worsening unemployment stress, rising burdens on China’s healthcare system and hesitation among the wider population to «live with the virus», particularly in smaller cities, will weigh negatively on consumer confidence. Consequently, even as overall private consumption recovers in 2023, we expect Chinese consumer demand for retail goods to struggle over the first half of the year. Even as a wider rebound in Chinese domestic demand gathers pace from mid-year, this will largely be felt in sectors such as catering and dining activities, domestic travel and purchases of cheaper discretionary goods. By contrast, poor consumer sentiment is likely to keep the domestic consumption of automotives, luxury goods and finished consumer electronics subdued. Chinese demand for certain types of semiconductors may be one bright spot, given our expectations that the global electric vehicle (EV) industry (a large consumer of chips) will enjoy strong growth in 2023. These dynamics will also reflect China’s changing relationship with the world: the country is emerging as a major exporter of EVs. However, although this may preserve some growth opportunities for semiconductor and machinery exporters in markets like Taiwan and Malaysia, China’s growing role in the new energy vehicle market will pose competitive risks to traditional car exporters like South Korea, Japan and Germany. This may exacerbate existing global tensions around industrial policy and unfair subsidies, particularly given China’s strong state support of its EV market over the past decade.
Trans-Atlantic trade tensions are rising
Building concerns about next-generation industries are not limited to China. EU-US trade relations have also soured over the US’s Inflation Reduction Act, where subsidies and tax cuts to promote EVs and other green products made in North America have raised concerns about the EU’s industrial competitiveness. An outright EU-US trade war looks unlikely, but a decision by the EU to escalate these disagreements to the World Trade Organisation (WTO) would serve as a strong symbol of trans-Atlantic misalignment, at a time when the US is working to build an international coalition to curb Chinese global influence. Conversely, if the US and the EU were to resolve this dispute by better aligning their EV incentives, this could dampen China’s competitiveness as an EV exporter, but at the cost of potentially sparking future WTO challenges by China, Japan and South Korea as a result.
We continue to assume that US-EU ties will strengthen in 2023 as geopolitical concerns (including with regard to energy security and Russia’s invasion of Ukraine) overshadow bilateral trade disagreements. Our expectations that the European Commission will grant its adequacy decision to facilitate US-EU cross-border data flows in the first half of 2023 will also help to expand trans-Atlantic digital trade links. Nevertheless, Europe’s push for «strategic autonomy» will prevent complete uniformity in a trans-Atlantic approach towards China. Much of this will play out in trade policy, with key items to watch including the US’s efforts to force European governments into stronger alignment with US restrictions on semiconductor exports to the Chinese market. The Dutch government has already voiced opposition to the US «dictating» the Netherlands’ trade policy to China, in an attempt to avoid being dragged further into US-China frictions.
Nevertheless, the Netherlands has quietly complied with US pressure since 2018 to prohibit ASML, a Dutch manufacturer of equipment critical for chip manufacturing, from shipping its most advanced equipment to China. As EU-China ties unravel further in 2023, we assume a further tightening in European trade and investment controls, driven partially by Europe’s own reassessment of its relationship with the Chinese government. This will inevitably bring Europe into closer alignment with the US and enhance regulatory compliance burdens facing multinational companies operating in the Chinese market.
Climate topics are already driving trade policy, and that is here to stay On a global level, competition in climate technologies is already emerging as an international trade irritant. This will not play out in international fora, where nominal commitment to environmental goals will yield only limited progress on topics like climate finance and industrial transformation. Instead, it will feature in economic policy as governments intertwine climate ambitions with industrial development goals in ways that will exacerbate concerns about protectionism and unfair trade practices.
The main market to watch will be the EU. Reporting requirements for the bloc’s carbon border adjustment mechanism (CBAM) will begin on January 1st 2023 (although full adoption will occur gradually until 2027). Palm oil exports are important to countries like Indonesia and Malaysia, particularly with regard to local employment, and the likelihood of these products falling foul of the EU’s CBAM suggests that their existing trade tensions with the EU will intensify in 2023 (especially if Indonesia and Malaysia rally South American exporters to join their cause). Although Indonesia and Malaysia have already raised this issue at the WTO, the collapse of that institution’s appellate body means that any solution will have to be struck outside that framework.
Europe remains at the forefront of climate trade developments in other ways. The continent’s attempts to diversify its energy links from Russia pose an opportunity for Australian energy exporters, particularly in the short term for coal, as well as in the long run for shipments of liquefied natural gas. In addition, we expect Europe to rely more on energy-intensive imports as domestic energy costs remain high, which should also benefit Chinese and other Asian producers (particularly for exporters active in the chemicals and base metals sectors). However, this trend will moderate as the terms of the CBAM are implemented with increasing stringency over the next five years. Once that mechanism is fully adopted, European producers’ competitiveness will be boosted by the region’s greener industrial processes, but we do not expect this to happen to any meaningful degree until 2026-27. In the interim, however, we expect grumbling from China and the US over EU-protectionism, in ways that will challenge (but not derail) Europe’s green energy transition.