Global Trade Wars: How the World Is Moving from Free Trade to Strategic Competition

 By Nihar Satsangi and Shrinjoy Chakraborty

SIBM, Noida

Introduction

For many years the global economy appeared to obey a simple rule to the effect that the more

freely countries traded, the better off everyone was.

It was possible for firms to produce their products in countries where it was cheaper to do so,

to get their raw materials from another part of the world and then to sell their finished goods

almost everywhere, with consumers enjoying lower prices, businesses being able to tap into

bigger markets and the various countries becoming more closely linked through international

trade.

In recent years governments have begun to pose a new series of questions: what would

happen if an important supply chain suddenly collapsed? What if a country became too

reliant on another nation for technology, medicines or essential raw materials? And what if it

turned out that economic dependence was a threat to national security?

Where is trade liberalization now?

Trade liberalisation just involves cutting down the obstacles which make international trade

difficult, such as tariffs, restrictions and all the other rules that make it harder for goods and

services to move between countries.

For many years the liberalisation of the economy caused companies to seek the cheapest and

most efficient method of producing goods, a move which then resulted in the establishment

of intricate global supply chains. The production of a single product might see its raw

materials supplied in one country, the manufacturing carried out in another and the final

assembly take place in a third.

As long as all the conditions were stable it functioned well; but recent global events have

demonstrated that efficiency does not always imply security.

Why are countries becoming more protective?

Because of a number of important developments, countries have given up the idea of

completely free trade. The COVID-19 pandemic revealed serious flaws in the world's supply

chains and, together with increasing tensions between the major powers, has led governments

to become more careful about their heavy reliance on foreign suppliers.

Domestic inequality, industrial policy, the shift towards green energy and the concerns

regarding advanced technologies have also been of great importance.

The US–China Trade War: More Than Just Tariffs

The contest between the United States and China is probably the clearest instance of this new

approach. It has started off as a dispute concerning trade imbalances and market access, but

has now developed into a wider struggle over technology and industrial strength. Measures

have been introduced by both nations regarding trade and as a result the relationship has

become more and more complicated. Nowadays, the competition extends well beyond

traditional products; semiconductors, artificial intelligence, telecommunications equipment

and electric vehicles are the key fields in the strategic rivalry.

COVID-19 Changed the Supply-Chain Mindset

On the closure of the factories and with the transport systems being disrupted, the countries

discovered just how much they had depended on global supply chains, there occurring

shortfalls in all sorts of items, such as medical supplies and pharmaceutical ingredients as

well as computer chips. Businesses quickly came to the realisation that depending on a single

supplier or a single manufacturing site could be quite risky.

This led to three strategies becoming increasingly important:

 Reshoring means moving the production activity back to the country in question.

 Nearshoring involves shifting production to countries that are nearby.

 Friend-shoring consists of collaborating with countries that are seen as reliable

political and economic partners.

Even if these strategies involve higher costs, they can help businesses get better preparation

for unexpected disruptions.

From "Cheapest" to "Safest"

The most significant development in global trade is the increasing focus on economic

security. Governments are concentrating on the industries which are so important that it

would be too risky for them to depend completely on foreign suppliers; this applies to

semiconductors, the infrastructure for artificial intelligence, telecommunications, defence

equipment, pharmaceuticals, energy systems, electric vehicles and critical minerals.

The Semiconductor Race

The semiconductor marks this new phase in trade competition because computer chips are

present in almost all the things we meet with these days, such as smartphones and cars,

medical equipment, power systems, the infrastructure for artificial intelligence, and defence

technology.

The United States is trying to boost the number of chips produced in the country and has

therefore started to take steps to regulate access to some advanced technologies. Meanwhile,

China is making major investments in the development of its own semiconductor capabilities,

and countries such as Japan, South Korea, the members of the European Union and India are

also attempting to strengthen their positions.

Critical Minerals: The Next Big Battleground

The importance doesn't end with technology since the raw materials required for building

future technologies are becoming just as crucial; lithium, cobalt, nickel, graphite and the rare

earth elements are all necessary for use in electric vehicles, renewable energy systems,

electronics and defence equipment, even though the supply and processing of many of these

resources are carried out in only a few countries.

India: A Big Opportunity, But Not an Easy One

India has the chance to benefit from the changing global situation since it has a number of

advantages when businesses are seeking alternatives to highly concentrated manufacturing

centres, such as a large workforce, a rapidly expanding domestic market, a growing

technology sector and improved infrastructure. There is already evidence of potential in the

field of electronics manufacturing; thanks to government policies and incentive schemes,

India has increased its capacity for manufacturing and assembling smartphones and other

electronic products.

Is Globalisation Really Ending?

Not really.

It might appear that countries are turning their backs on globalisation, but since international

trade is so important that it cannot just vanish and as no country can produce all the things it

needs by itself, the likely outcome will be a new form of globalisation – trade in ordinary

goods and services will go on, but governments will exercise great care over those industries

which are related to national security and technological power.

What are the effects on companies and individuals?

Because the new trading conditions are in place, companies can no longer depend entirely on

maximum efficiency in relation to their supply chains. They may need to have alternative

suppliers, maintain extra stock, have more than one place for production, and improve their

oversight of geopolitical risks. All of these measures could lead to higher costs. On the other

hand, there is the possibility of creating a more diverse supply chain, a situation which could

help both businesses and consumers to avoid unexpected shortages.

Conclusion: Globalisation Is Changing, Not Disappearing

The global economy is entering a new stage. For many years the aim has been to achieve as

high a degree of openness and efficiency in trade as possible; nowadays, however, greater

attention is being given to the situation where economic efficiency comes into conflict with

national security. The heavy reliance on other countries in the rivalry between the United

States and China—due to the disruptions to supply chains caused by the pandemic, the

competition over semiconductors, and the increasing importance of critical minerals—has

shown that serious vulnerabilities can occur.