Is the WTO right about friends-first trade?

FIGURES released in July this year revealed that world trade volumes have fallen at their fastest annual pace since the pandemic three years ago. The latest annual report from the World Trade Organization posits that geopolitical tensions are changing trade flows as countries switch supply chains to allies rather than the most cost-efficient exporter.

It believes the post-1945 international economic order – that was built on the idea that interdependence among nations through increased trade and economic ties would foster peace and shared prosperity – is under threat today, as is the future of an open global economy.

Indeed, sharp inflection points and shocks in geopolitics continue to arise. First and foremost, the current multiple conflicts around the world are devastating at a human level. But they also put globalisation under renewed scrutiny and, at a company level, move resilience to the very top of the leadership team’s strategic agenda.

Unsurprisingly, among the vast number of organisations that EY works with around the world, CEOs tell us that geopolitical concerns continue to loom large, with 62 per cent in Asia-Pacific expecting that geopolitical conflicts and trade tensions will have a significant impact on business performance over the next 12 months.

Recognising these geopolitical shifts, major changes are underway with 41 per cent of surveyed Asia-Pacific CEOs reconfiguring supply chains, 37 per cent relocating operational assets and 37 per cent postponing planned investments.

To focus in on what we’re seeing here in Asia-Pacific, what is also abundantly clear is that CEOs are balancing the risk and opportunity that comes with several macro shifts, and business remains focused on finding value in cross-border trade, supply chains and transactions.

Put another way, while geopolitical pressures are leading many companies to undertake major changes to address their existing business risk in the region, this is countered by continued steps towards growth and expansion to capitalise on the broader regional opportunity.

When we think about global supply-chain dynamics, of course there is vast change, but it is not just geopolitics that is driving that change – demographic shifts and urbanisation are key pieces of this puzzle.

Location is more critical than ever. Global businesses are on a mission to build greater resilience by derisking and decreasing their reliance on just one or two supply-chain hubs, chief among these China. But China will clearly remain a vital cog in global supply chain operations. Manufacturing locations will increasingly be driven closer to the consumer, near-shoring to the largest consumer hubs is becoming the norm.

Asia-Pacific CEOs are taking the necessary actions to protect their competitive position and support their growth agenda. Geopolitics is a driver, but just as important on the strategic agenda are digitalisation and decarbonisation. A neat illustration of this: Asia-Pacific CEOs, in contrast to other regions, place sustainability initiatives on the same level or above other business priorities when it comes to capital allocation.

Despite the macro uncertainty that we all agree exists, Asia-Pacific CEOs’ appetite for deals has substantially increased since January 2023. Again, digitalisation and decarbonisation are key deal drivers as companies look to accelerate their transformation, increase their competitiveness, and mitigate risks.

What’s more, cross-border deal flow patterns reflect continued interest from global companies to invest in the region. Inbound deals targeted towards the region are on the rise. Elevated inbound deal value into Asia-Pacific suggests that the region remains an attractive destination for inorganic investment by global companies.

This is great news for businesses in the region. Inbound deals, and global trade more generally, facilitate a transfer of knowledge and intellectual property, and strengthen broader trade relations.

The dynamics and diversity of Asia-Pacific make it the most attractive region to invest in the world – there are value-creation opportunities in the various countries that are seldom found on such scale elsewhere. Top companies globally are aware of this fact, and there will be competition between international and domestic players to capture deals that generate the best value for their respective stakeholders.

Yes, global trade flows are shifting. But as Asia-Pacific neatly demonstrates, the private sector does not need to be convinced of the benefits of a strengthened global trading system.

The writer is Asia-Pacific managing partner at EY