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Why US-China Trade Tension Hasn’t Held Back Globalization

The recent doom and gloom across the supply chain has called into question whether globalization was as beneficial for international trade as initially thought.

But one report from DHL and New York University’s Stern School of Business indicates that globalization has proven to be resilient in the face of today’s supply chain headwinds.

International flows of goods, services, capital, information and people have battled back in the face of recent supply chain shocks such as the Covid-19 pandemic and the war in Ukraine. By the middle of last year, international trade of goods was 10 percent above pre-pandemic levels, according to the DHL Global Connectedness Index.

The DHL Global Connectedness Index offers a comprehensive examination of the current state of globalization, analyzing 13 types of international trade, people, capital and information flows between countries. After a brief decline in 2020 to an index level of 125, the index rose back to above pre-pandemic levels in 2021 to 127. Current data reflecting the first nine months of 2022 points to a larger increase throughout last year.

Courtesy of DHL

“The latest DHL Global Connectedness Index data clearly debunks the perception of globalization going into reverse gear,” John Pearson, CEO of DHL Express, said in a statement. “Globalization is not just a buzzword, it’s a powerful force that has transformed our world for the better. By breaking down barriers, opening up markets and creating opportunities, it has enabled individuals, businesses and entire nations to flourish and thrive like never before. As we continue to embrace globalization, we can build a brighter future that benefits us all, creating a world that is more interconnected, more prosperous and more peaceful than ever before.”

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China and U.S. see declining trade flow, but no global fracturing

While globalization appears to be on solid footing, the index illustrated that the two top global economies are undergoing a decoupling of sorts.

The share of U.S. trade flows with China declined to 12 percent of overall trade in 2022, down from 14 percent in 2016.

Considering a sample of 11 categories across trade, capital, information and people, the share of U.S. flows taking place to or from China fell from 9.3 percent in 2016 to 7.3 percent in 2022 (or the most recent year with data available). Meanwhile, the share of China’s flows to or from the U.S. fell from 17.8 percent to 14.3 percent. Areas where declines were seen include merchandise imports and exports, M&A transactions and scientific collaboration.

While the flows indicate noteworthy declines relative to 2016 levels, overall the changes are minor relative to the U.S. and China’s total flows with the rest of the world. And even after these declines, the U.S. and China are still connected by far larger flows than any other pair of countries that do not share a border.

With that in mind, it appears the decoupling between the U.S. and China has not led to a wider fracturing of the world economy into rival blocs—indicating that globalization is likely not in danger of collapse.

The index cites “very limited” evidence of close allies of the U.S. and China reducing their focus on flows with the rival bloc. The share of U.S. allies’ flows involving China and its close allies fell only from 8.8 percent in 2016 to 8.2 percent in 2022. And the share of China’s allies’ flows involving the U.S. and its close allies only fell from 40 percent to 38 percent.

Longer trade distances suggest regionalization isn’t in the picture

Wider geopolitical tensions, along with concerns about supply chain resilience, have prompted many observers to predict a shift from globalization to regionalization, especially as businesses seek nearshoring alternatives. But the DHL Global Connectedness Index analysis shows that projections of such a shift have not yet come to fruition.

For one, trade flows stretched out over longer distances during the Covid-19 pandemic, with the average distance traveled approaching 5,100 kilometers in 2021—an all-time high. Average distance per trade route had surpassed 5,000 kilometers in 2019.

And the percentage of global merchandise trade happening within regions, rather than between them, has hovered at approximately 53 percent since 2016 after rising for four straight years.

Beyond just trade, the average distance traversed across capital, information and people flows has increased over the past two decades. The only category that displays a clear recent shift toward regionalization is people flows. This is due to the dramatic change in travel patterns during the Covid-19 pandemic.

“It remains an open question whether trade patterns will become significantly more regionalized in the future,” said Steven Altman, senior research scholar and director of the DHL Initiative on Globalization at NYU Stern’s Center for the Future of Management. “Many companies and governments are focused on nearshoring to regionalize supply chains, and there are substantial business benefits that can come from regionalization. On the other hand, more than half of all trade already happens within regions, and the benefits of long-distance trade are still important, especially as inflation remains high, economic growth has slowed, and container shipping rates have come back down.”

While global trade is expected to grow at a slower pace in 2023, that is mainly attributed due to weakened global macroeconomic conditions. As a result, the global trade-to-GDP ratio increased in 2021 and 2022, but is forecast to decline modestly this year.

The 2022 DHL Global Connectedness Index is based on over 4 million data points from 171 countries, accounting for 99.7 percent of the world’s gross domestic product and 96 percent of its population.