Global trade is changing. It is at the mercy of international and domestic pressures, from security tensions to climate loads to technological change. Security competition is intensifying trade between “blocs” and rebalancing long-standing trade dynamics. Conflicts in Europe and the Middle East are disrupting supply chains already disrupted by the COVID-19 pandemic. Countries are using environmental measures to restructure production and trade. And technological change is accelerating trade facilitation while creating new challenges for countries that have not effectively regulated the digital economy.
These challenges create obligations, burdens and expectations for a country like Canada that is highly dependent on global trade for its economic growth and prosperity. Canada must prepare for an increasingly contested, complex and divisive global trade environment in which it will be increasingly difficult to engage, negotiate and exert influence.
Four megatrends are dominating global trade.
First, the US-China security competition continues to cast a shadow over the trade regime, affecting and reshaping regional economic partnerships. This seemingly persistent competition is exacerbated by aggressive industrial policies by both countries and other major powers (such as the European Union), further distorting trade patterns. Despite constraints, both “friend-shoring” and “near-shoring” may accelerate, disproportionately benefiting countries such as Mexico, South Korea, Thailand, and Vietnam.
But the fallout could be far-reaching as the race spans semiconductors, artificial intelligence and electric vehicles. The fight for chip dominance will have ripple effects across industries, with implications for innovation and climate change. The potential reorganization of the global economy into blocs could reduce global GDP in the coming years.
Second, U.S.-China rivalry and other geopolitical fault lines in Ukraine, the Middle East, and the South China Sea will put further pressure on global trade. Interregional trade is slowing while intraregional trade is expanding. Southeast Asia in particular continues to benefit from this trend, at least for now. U.S. tariffs and export restrictions are forcing multinational companies to relocate their manufacturing bases from China to Southeast Asia, stimulating foreign direct investment and creating jobs.
Companies are pivoting by restructuring cross-border supply chains, reducing costs, re-examining business financing, localizing innovation in certain markets, reorganizing functions such as hiring, re-evaluating exposure to geopolitical hotspots, and developing new revenue streams. Managing corporate risk will require understanding how Indo-Pacific countries, which have not historically been at the center of global trade, operate and operate. Governments and businesses will also need to internalize the notion that economic security is critical and develop strategies to remain resilient and protect in light of unpredictable geopolitical events.
Third, as countries develop policies to mitigate climate change, trade patterns, tensions and preferences will intersect, drive and sometimes clash with the progress of the energy transition. Climate change is already affecting trade. Companies will need to adopt low-carbon business models to gain and maintain international competitiveness. Sustainability will increasingly be commercially priced and included in the cost of doing business. Climate change mitigation will come with new investment opportunities. Some developed countries are strategically using trade-related environmental policies peppered with requirements to measure and verify the environmental footprint of imported goods.
These burdens fall on unprepared and frustrated trading partners. So as policies like the EU's Carbon Border Adjustment Mechanism (CBAM) move into the mainstream, it's important for governments, businesses, and interest groups to share critical information about compliance. The CBAM acts like a tax on energy-intensive European imports, ensuring that domestic manufacturers of similar products aren't at a competitive disadvantage because of higher domestic standards.
That said, measures like the CBAM could also benefit developing countries by seizing low-carbon energy opportunities such as green hydrogen, fertilizer production, and solar panels, accelerating their decarbonization. Finally, especially given their geographic concentrations, trade will be important in enabling critical mineral flows and facilitating the deployment of clean energy technologies that address issues such as pollution, carbon emissions, and electrification.
Fourth, technology both facilitates and constrains global trade. Digital technology is a key driver of trade, but most countries have yet to effectively regulate its domestic and international impacts. Digital trade measures need to be coordinated across borders. This issue will become increasingly important as countries enact legislation on issues that may affect digital trade, including data, AI, cybersecurity, and digital competition.
For developing countries to benefit from digital services, digital markets need to be created and supported, and the right policy support on privacy, consumer protection, and cybersecurity needs to be provided as companies digitize. At the same time, developing countries need to support broader digitalization to connect citizens who lack broadband access. AI is already speeding up trade processes, but it can further simplify supply chain management by enhancing inventory planning, production, and distribution. AI could also transform logistics planning and services by accounting for and moving production to the best locations.
G7 representatives attending the G7 Trade Ministers Meeting in Osaka | © European Union, 2024, P062136-895370, CC BY 4.0
What do these trends mean for global trade?
These four trends are likely to further fragment the world economy as connections and ties between certain “blocs” weaken and become less internal. This situation could foster “reglobalization,” splitting the world economy into competitive regions with concentrated trade and investment and harmonized trade rules. Security tensions and macroeconomic difficulties will force countries to look to regions to become new trade hubs and corridors, restructuring supply chains in the process.
Trade diversification for security reasons is encouraging new regional networks among “trusted” partners who share security and economic concerns. This reality could pose a problem for Canada, which seeks to balance its relationships with countries and not be tied to any particular camp. Friend-shoring and near-shoring are changing trade structures as countries rethink economic partnerships to mitigate various risks.
Companies also appear to be pivoting after shocks from the pandemic, the wars in Ukraine and Gaza, tensions in the South China Sea, and the U.S.-China tariff dispute. Countries with robust and sophisticated trade infrastructure, like the United Arab Emirates and Singapore, will benefit.
Regionalization may flourish again, albeit with potential costs and trade-offs for non-regional partners like Canada that appear strategically and institutionally distant. It is good to see Canada reprioritizing trade within the Americas, but that strategy should not come at the expense of deepening trade ties in the Indo-Pacific.
Geopolitical instability has been further fueled by recent industrial policies from China, the EU and the US. Other large economies such as India are still scarred by the pandemic, the ongoing climate crisis and persistent supply chain difficulties. World Trade Organization rules generally limit how countries can use policies and subsidies to support specific domestic industries and boost exports.
However, China's economic rise and experience have changed the context around these efforts, with these trade rules now being applied selectively. National security considerations are driving these policies, given that certain goods and services could be weaponized by trading partners. According to Global Trade Alert, in 2023, countries implemented more than 2,500 trade-distorting and discriminatory policy interventions.
Canadian Considerations
What is unique about this wave of targeted interventions is that they are driven not purely by economic factors, but by a desire to strengthen resilience, protect national security, and promote climate change mitigation. Resilience, rebuilding, and sustainability are now key trade objectives. These large-scale intervention efforts to revive and rebuild specific industries will be difficult for countries like Canada, with their limited fiscal capacity, to counter. Canada and other smaller economies will find such policies untenable and unaffordable, and will have to turn to other means to compete.
What happens to a trade-dependent country like Canada in this scenario? Besides injecting capital to support various strategic industries, Canada will need to take the lead in drafting, negotiating and mainstreaming new forms of trade agreements with “like-minded” trading partners such as Australia, Japan, New Zealand, Singapore, South Korea and the UK, as well as developing countries such as Brazil, Indonesia, Malaysia, Mexico and the Philippines that see value in reviving and integrating trade patterns.
With the US, China and the EU unwilling to seek multilateral solutions to the trade challenges outlined above, there is an opportunity for these countries to push for trade initiatives. The US has been hesitant to engage in trade due to political difficulties, while the EU's unilateralism on trade and technology has caused widespread resentment among its partners as they reluctantly play by European rules. Despite Beijing's interest, China has not been trusted to lead or drive multilateral trade solutions.
This situation creates room for other countries to explore new agreements on trade issues such as digital trade, green economy, and AI to advance mutual goals. Bilateral trade solutions such as the Australia-Singapore Green Economy Agreement (GEA) could serve as a workable template and example. Canada could benefit from such bilateral, open-ended, flexible agreements that promote green trade and investment across sectors to reduce emissions.
Extraterritorial application of policies such as the EU's CBAM, General Data Protection Regulation and EU Deforestation Regulation has increased regulatory demands on businesses, creating an urgent need to align trade rules and standards. Climate change and national security considerations have led to a proliferation of such measures. The competitiveness of businesses and economies will be linked to the conclusion of aligned trade rules and standards that help businesses export their goods and services.
Canada must navigate this complex situation skillfully. Trade is no longer just about trade. It is about establishing and fixing the conditions under which countries can exchange goods and services, setting appropriate domestic rules to regulate the issues, and using those measures and market power to compel other countries to comply.
Trade plays a central role in Ottawa's Indo-Pacific strategy, which relies on efforts such as trade missions, gateways and agreements with India, Indonesia and other Asian countries. These measures are necessary but insufficient for a region where trade is fundamentally strategic and driven by issues such as security, climate and technological change. Canada's trade policy must reflect and advance our ambitions for the climate transition, our security concerns and interests, and technological advances. Anything less will not be fit for purpose.
