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Analysis-Global trade rift widening as Ukraine war passes two-year mark
© Reuters.
By Philip Blenkinsop
BRUSSELS (Reuters) – Two years after Russia’s invasion of Ukraine, there are clear signs that the global economy is fragmenting into two separate blocs and that multilateral trade rules that have underpinned commerce for nearly 30 years are under threat.
Rising geopolitical tensions, including in the Middle East, and concerns over economic security are leading to sanctions, trade curbs and signs of a widening split between countries supporting Russia and those backing Ukraine.
The World Trade Organization, which hosts its biennial ministerial conference to debate global trade rules next week, has warned that an outright fragmentation into two rival blocs would shrink the global economy by 5%, with developing countries suffering the most.
In this extreme scenario, the United States and China and their allies would be engaged in a bipolar trade war and the respective blocs would set their own rules, disregarding multilateral agreements.
We are not yet at that point, but WTO economists have shown that since Russia’s invasion in February 2022, the two blocs are pulling apart.
“We find early evidence of a trend towards a stronger alignment between trade flows and geopolitical affinities since the onset of the war in Ukraine,” they said in a report.
“Our findings point to the first signs of fragmentation in global trade.”
They split the world based on different United Nations voting patterns, including but not limited to resolutions on the Ukraine war. They exclude Ukraine, Russia and Russian ally Belarus to remove the impact of sanctions and the war itself.
Their finding is that trade in goods between the blocs has grown 4% slower than trade within blocs.
While the economists showed signs of ‘friend-shoring’, they did not find evidence of extensive near-shoring, with no pick-up of trade within regions, although they did not assess whether countries are bringing parts of value chains back to their own territory. ‘Friend-shoring’ is a term used by U.S. Treasury Secretary Janet Yellen and others to encourage countries to diversify supply chains away from China to market-oriented democracies such as India.
US-CHINA TRADE
Looking at the United States and China alone, the WTO economists find that trade tensions, which jacked up when former U.S. President Donald Trump imposed tariffs on about two-thirds of Chinese goods imports, have been compounded by the Ukraine war.
Paradoxically, trade flows between the two spiked to a record high in 2022 as U.S. demand for Chinese consumer goods rose and Beijing’s demand for U.S. farm products and energy grew. However, relative to each country’s goods trade with other partners, their bilateral trade has slowed, WTO research shows.
It concludes that the initial increase in trade tensions and the subsequent war in Ukraine resulted in bilateral trade that was 31% slower from July 2018.
Geopolitical tensions are partly the cause of downbeat estimates for global goods trade growth, particularly for last year. The WTO has said it will cut its 0.8% estimate, while the World Bank puts the figure at 0.2%, the lowest growth rate of the past 50 years outside global recessions.
World Bank deputy chief economist Ayhan Kose told Reuters this weakness was occurring against a backdrop of dramatic changes to trade policy following a previous embrace of trade integration.
“That era basically disappeared. Now we have a new era characterised by countries not signing agreements… And then if you look at the number of trade restrictions introduced worldwide, that number has sky-rocketed.”
Swiss-based monitoring service Global Trade Alert has found a massive build-up of distortive measures since the start of 2020, from Argentina’s plan to raise an export tax on soy to India’s increased import duty on palm oil and U.S. state aid for on-shoring of a semiconductor supply chain.
And while policies have at times eased earlier import and export curbs, the ramp-up of subsidies – typically making domestic goods look cheaper against imported ones – outweighed these.
The figure below shows the situation for critical raw materials, such as lithium and cobalt, to which countries are desperately seeking access to brace for a green transition and increasingly subsidising local industries to process.
A similar subsidies ramp-up is seen in other sectors Global Trade Alert monitors – food, medicines and global value chains. Not only are there more measures, but more countries are taking them, its data shows.
Trade restrictions and distortions reflect a push towards protectionism, undermining global rules that promote open trade and limit the extent to which countries can support domestic industry with subsidies and other measures.
The Institute of International Finance sees risks for global debt, with higher government spending to mitigate the adverse effects on supply chains of growing trade protection and geopolitical conflicts.
WTO Director-General Ngozi Okonjo-Iweala, who will chair the WTO’s Feb. 26-29 meetings in Abu Dhabi, stresses the costs of fragmentation and advocates “re-globalisation”, a revival of multilateralism that could boost the world economy by some 3%.
Georg Riekeles, associate director of the European Policy Centre think tank, said that for trade-reliant Europe in particular the best one could hope for was a shift to a new equilibrium that maintained open trade, at least with friendly partners.
“A retreat of globalisation due to more caution over China and over disruptions to value chains, such as the Red Sea, could be compensated by greater diversification and open trade elsewhere,” he said.
Stock Markets
Palantir, Anduril join forces with tech groups to bid for Pentagon contracts, FT reports
(Reuters) – Data analytics firm Palantir Technologies (NASDAQ:) and defense tech company Anduril Industries are in talks with about a dozen competitors to form a consortium that will jointly bid for U.S. government work, the Financial Times reported on Sunday.
The consortium, which could announce agreements with other tech groups as early as January, is expected to include SpaceX, OpenAI, autonomous shipbuilder Saronic and artificial intelligence data group Scale AI, the newspaper said, citing several people with knowledge of the matter.
“We are working together to provide a new generation of defence contractors,” a person involved in developing the group told the newspaper.
The consortium will bring together the heft of some of Silicon Valley’s most valuable companies and will leverage their products to provide a more efficient way of supplying the U.S. government with cutting-edge defence and weapons capabilities, the newspaper added.
Palantir, Anduril, OpenAI, Scale AI and Saronic did not immediately respond to a Reuters request for comment. SpaceX could not be immediately reached for a comment.
Reuters reported earlier this month that President-elect Donald Trump’s planned U.S. government efficiency drive involving Elon Musk could lead to more joint projects between big defense contractors and smaller tech firms in areas such as artificial intelligence, drones and uncrewed submarines.
Musk, who was named as a co-leader of a government efficiency initiative in the incoming government, has indicated that Pentagon spending and priorities will be a target of the efficiency push, spreading anxiety at defense heavyweights such as Boeing (NYSE:) , Northrop Grumman (NYSE:) , Lockheed Martin (NYSE:) and General Dynamics (NYSE:) .
Musk and many small defense tech firms have been aligned in criticizing legacy defense programs like Lockheed Martin’s F-35 fighter jet while calling for mass production of cheaper AI-powered drones, missiles and submarines.
Such views have given major defense contractors more incentive to partner with emerging defense technology players in these areas.
By Simon Lewis (JO:)
(Reuters) -The Biden administration is concerned that a weakened Iran could build a nuclear weapon, White House National Security Adviser Jake Sullivan said on Sunday, adding that he was briefing President-elect Donald Trump’s team on the risk.
Iran has suffered setbacks to its regional influence after Israel’s assaults on its allies, Palestinian Hamas and Lebanon’s Hezbollah, followed by the fall of Iran-aligned Syrian President Bashar al-Assad.
Israeli strikes on Iranian facilities, including missile factories and air defenses, have reduced Tehran’s conventional military capabilities, Sullivan told CNN.
“It’s no wonder there are voices (in Iran) saying, ‘Hey, maybe we need to go for a nuclear weapon right now … Maybe we have to revisit our nuclear doctrine’,” Sullivan said.
Iran says its nuclear program is peaceful, but it has expanded uranium enrichment since Trump, in his 2017-2021 presidential term, pulled out of a deal between Tehran and world powers that put restrictions on Iran’s nuclear activity in exchange for sanctions relief.
Sullivan said that there was a risk that Iran might abandon its promise not to build nuclear weapons.
“It’s a risk we are trying to be vigilant about now. It’s a risk that I’m personally briefing the incoming team on,” Sullivan said, adding that he had also consulted with U.S. ally Israel.
Trump, who takes office on Jan. 20, could return to his hardline Iran policy by stepping up sanctions on Iran’s oil industry.
Sullivan said Trump would have an opportunity to pursue diplomacy with Tehran, given Iran’s “weakened state.”
“Maybe he can come around this time, with the situation Iran finds itself in, and actually deliver a nuclear deal that curbs Iran’s nuclear ambitions for the long term,” he said.
Stock Markets
Ukraine says Russian general deliberately targeted Reuters staff in August missile strike
(Reuters) -Ukraine’s security service has named a Russian general it suspects of ordering a missile strike on a hotel in eastern Ukraine in August and said he acted “with the motive of deliberately killing employees of” Reuters.
The Security Service of Ukraine (SBU) said in a statement on Friday that Colonel General Alexei Kim, a deputy chief of Russia’s General Staff, approved the strike that killed Reuters safety adviser Ryan Evans and wounded two of the agency’s journalists on Aug. 24.
In a statement posted on Telegram messenger the SBU said it was notifying Kim in absentia that he was an official suspect in its investigation into the strike on the Sapphire Hotel in Kramatorsk, a step in Ukrainian criminal proceedings that can later lead to charges.
In a separate, 15-page notice of suspicion, in which the SBU set out findings from its investigation, the agency said that the decision to fire the missile was made “with the motive of deliberately killing employees of the international news agency Reuters who were engaged in journalistic activities in Ukraine”.
The document, which was published on the website of the General Prosecutor’s Office on Friday, said that Kim had received intelligence that Reuters staff were staying in Kramatorsk. It added that Kim would have been “fully aware that the individuals were civilians and not participating in the armed conflict”.
The Russian defence ministry did not respond to a request for comment on the SBU’s findings and has not replied to previous questions about the attack. The Kremlin also did not respond to a request for comment. Kim did not reply to messages sent by Reuters to his mobile telephone seeking comment about the SBU’s statement and whether the strike deliberately targeted Reuters staff.
The SBU did not provide evidence to support its claims, nor say why Russia targeted Reuters. In response to questions from the news agency, the security agency declined to provide further details, saying its criminal investigation was still under way and it was therefore not able to disclose such information.
Reuters has not independently confirmed any of the SBU’s claims.
Reuters said on Friday: “We note the news today from the Ukrainian security services regarding the missile attack on August 24, 2024, on the Sapphire Hotel in Kramatorsk, a civilian target more than 20 km from Russian-occupied territory.”
“The strike had devastating consequences, killing our safety adviser, Ryan Evans, and injuring members of our editorial team. We continue to seek more information about the attack. It is critically important for journalists to be able to report freely and safely,” the statement said.
Reuters declined to comment further on the allegation that its staff were deliberately targeted.
The SBU statement said Kim had been named a suspect under two articles of the Ukrainian criminal code: waging an aggressive war and violating the laws and customs of war.
“It was Kim who signed the directive and gave the combat order to fire on the hotel, where only civilians were staying,” it said.
Evans, a 38-year-old former British soldier who had worked as a safety adviser for Reuters since 2022, was killed instantly in the strike.
The SBU statement gave some details about how the strike had occurred, according to its investigation.
“To carry out the attack, the Russian colonel general involved one of his subordinate missile forces units,” the Ukrainian agency said, adding that the strike was carried out with an Iskander-M ballistic missile.
The SBU did not identify the specific unit.
Ivan Lyubysh-Kirdey, a videographer for the news agency who was in a room across the corridor, was seriously wounded. Kyiv-based text correspondent Dan Peleschuk was also injured.
The remaining three members of the Reuters team escaped with minor cuts and scratches.
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