How Will Global Trade Change in the New Multipolar World?

An article by: Andrea Beltratti

Climate change and transport costs, geopolitical crises, quality of life, and information. What will be the economic scenario of the future, and what will change for the Italian economy

It seemed that mercantilism was defeated by liberalism, but perhaps this was not the case

Trade has always been one of the great forces that moves the world, providing incentives for continuous improvement through innovation. Globalization, which is blamed for lowering living standards in rich countries due to unfair competition from companies in poor countries, is the force that has ensured low inflation and the availability of cheap goods. International trade is characterized by costs and benefits. People buy goods from a distant country because it can provide goods that are different from those produced locally and/or because they can pay less for the same goods. But what happened in recent decades may not happen in the near future: how will the structure of global trade change in a new multipolar world? I discuss this referring to some important underlying trends, including transport costs incurred through climate change, international economic demand, the new geopolitical balance, quality of life, and information, and then draw some conclusions for Italy.

Climate change: until now, the cost of transporting goods has been artificially kept low due to the lack of costs associated with greenhouse gas emissions. Even today, the atmosphere is considered a global container capable of absorbing all CO2 emissions, which is an example of a “tragedy of the commons,” which results in overexploitation of the common good, private benefits, and social costs. The relationship between greenhouse gas emissions and average temperature levels creates pressure for economic policies and regulations that incorporate the value of using a common resource into the cost of transportation through taxes and/or the purchase of emissions permits. This factor is expected to reduce international trade.

Global economy demands: a hundred years ago, all the economies of the world were looking for raw materials to create other goods, especially if they were infrastructure-related. Today, much of the infrastructure has been built and is still usable, and wealthier economies have moved to consume services that have less need for international trade. But most of the world’s population lives in areas that still need infrastructure and raw materials, and so it is not certain that global trade in the aggregate will decline significantly. And in any case, everyone needs energy and imports of raw materials for its creation and operation.

New geopolitical balance: the Russian invasion of Ukraine created an unprecedented scenario, in which the world voted for or against Russia. However, it is unclear whether the end result was unfavorable for the perpetrator. The situation has prompted the creation of new zones of global trade, where the supply and demand of goods not only depend on price and quality, but also account for geographical origin, which can promote or hinder the purchasing incentive of ideological consumers and businesses. It seemed that mercantilism had been defeated by liberalism, but perhaps this was not the case, and most importantly, it will not be so in the future, if the choices of billions of consumers are the product of ideologies rather than free demand, in the modern version of the Stalinist maxim that “it doesn’t matter who votes, it matters who counts the votes.”

Italian economy needs incentives to play even with economies using public resources

Quality and information: quality is a luxury item. In developed countries, we are willing to pay more to consume high-quality products. In Italy, we particularly tend to think that the best quality products are Italian, and we prefer a short rather than a long production chain. In addition, consumers are increasingly willing to support the production efforts of local communities with their demand rather than those of distant producers. This position has an economic basis: the fortunes of an Indian or Chinese manufacturer do not benefit the Italian region, while the growth of an Italian company brings benefits locally and nationally.

Consequences for Italy: in our country, the production structure is very unbalanced in relation to small companies, which often tend to work very flexibly in local cross-supply conditions. According to some commentators, this short value chain contributed to the resilience of the Italian economy during a period of high energy prices and fragmentation of the global value chain. However, we cannot remain stagnant, also because we have much to lose from the decline in international trade with our exports of 660 billion euros and our traditional shortage of raw materials. In many countries, some “relocation” efforts have been underway for some time, involving bringing production back within national borders, also taking into account the trends listed above. According to International Finance, this could benefit economies such as Mexico, Singapore, Malaysia, and Vietnam. Short supply chains ensure higher quality, lower costs, less exposure to international geopolitical crises, greater support from the local community, and therefore greater recognition of the value produced. Therefore, in order to maintain our position, we must compete with other countries of the world, using our advantages. Italy remains one of the most beautiful countries in the world, making it easy to attract international business and talent. However, we must have incentive packages that allow us to play even with economies that do not skimp on using public resources to persuade companies to settle in different countries. Incentive packages should include localization assistance, preferential channels for finding human capital, interaction with large public and private players already existing in Italy. As was the case 600 years ago, competition is driven primarily by systems and collaboration between the public and private sectors, rather than by the ability of individual companies to operate independently.

Economist, Academic Director of the Executive Master in Finance

Andrea Beltratti