The Unforeseen Benefits of Global Trade Network Fracturing
In the past, we have discussed three essential domestic characteristics supporting U.S. economic growth: strong household balance sheets, robust corporate balance sheets, and positive demographic trends. This article introduces a fourth pillar: the fracturing of global trade networks.
Background: The Development and Decline of Global Trade Networks
Global trade networks initially emerged post-WWII, driven by U.S. geopolitical considerations and centered around the Bretton Woods Agreement. These networks aimed to create stronger economic ties to reduce the risk of military confrontations. As a result, international trade as a percentage of global economic activity rose from just 25% in the early 1970s to a peak of 61% in 2008. However, after the Global Financial Crisis (GFC), global trade as a percentage of GDP began to decline, revealing the economic risks associated with cross-ocean reliance.
The Concern: Fracturing Global Trade Networks
There is growing concern about the fracturing of global trade networks, which could upend national economies dependent on trade. For instance, headlines about a China-oriented trading bloc, including Russia and other emerging market countries, could push global trading networks to a breaking point. The fracturing of global trade networks could be a significant step backward for global economic development, potentially posing a challenge to the U.S. economy as well.
The Silver Lining: U.S. Economy and Fractured Global Trade Networks
Despite these concerns, the U.S. economy’s diversity and well-protected primary trading networks could soften the impact of fractured global trade networks. The U.S. ranks lowest in trade as a percentage of GDP among OECD countries, and its largest trading partners, Canada and Mexico, are geographically close and politically aligned.
Looking Ahead: U.S. Onshoring, Nearshoring, and Strengthened Trade Ties
As global trade fractures, we expect the U.S. to focus on onshoring and nearshoring, bringing manufacturing back home and strengthening trade ties with neighbors and other friendly nations. These efforts will fortify supply chains against geopolitical risks, create growth opportunities, and capitalize on the significant consumer base within the United States-Mexico-Canada Agreement (USMCA) trading bloc.
Conclusion: The U.S. Economy’s Resilience Amid Global Trade Fracturing
The U.S. economy is less at risk of economic turmoil resulting from potential global trade fracturing due to its focus on the North American trading bloc. With its resilience to economic impacts of geopolitical risks, the U.S. is poised for impressive economic growth in the coming decade.