The World Is Getting Smaller

Much is said about the rise of protectionism, but global trade remains in good health. The latest statistics from the World Trade Organization (WTO) show that the value of world merchandise trade covered by new trade-facilitating measures is still far exceeding that affected by new trade restrictions.

In its ‘Global Trade Outlook’ (2024), the WTO expects trade to grow essentially in line with GDP in the foreseeable future, in line with history. Naturally, trade volume swings around GDP must be anticipated since it is pro-cyclical due to the high share of manufactured goods compared to GDP, which is predominantly based on services.

Beyond this rosy picture, the WTO acknowledges the existence of worrying trends related to nationalistic trade policies. Traditional protectionism has, until now, relied on a simple concept: imports are bad, but exports are good. Things have been getting more complicated since 2020: Export restriction policies have been increasing, a concerning trend that the IMF has picked up on.

It is all in the name of national security. The reaction to the pandemic brought export restrictions for vaccines and medical equipment. Russia’s invasion of Ukraine led to a new wave of export restrictions related to food and fertilizers. Separately, the tension between the US and China has brought its fair share of export controls in the US (semiconductors, computing, and outbound investment control) and China (e.g., minerals). Earlier this year, Europe came up with its own EU-wide set of regulations related to export and outbound investments.

Since it was set up with traditional, import-related trade policies in mind, the WTO is unequipped to effectively deal with export-related restrictions. Politicians are thus enjoying an open field to fuse geopolitics with geoeconomics, with export restrictions targeting high technologies (dual-use products for civilian and military applications) and commodities (energy transition). In addition, food export restrictions (climate change) are directing the spotlight to agriculture and farmers, with important political ramifications. Someday, one will see clear water caught in these dynamics.

Export restrictions may be politically enticing under a ‘[insert country name] First’ banner but are problematic in many ways. At the macroeconomic level, they contribute to global inflation by making scarce resources scarcer. From a geopolitical perspective, they may be presented as a fair response to national threats, but they also make the world more prone to conflicts.

When it comes to microeconomics, a New York Fed research report (2024) confirms that domestic exporters subject to controls lose global market share, as one would expect. Meanwhile, those whose access to needed goods or technology is restricted develop ways to work around them with replacement technologies. Thus, export controls end up being counterproductive.

Given this backdrop, M&A and IPO due diligence processes are likely to incorporate a growing set of topics related to trade restrictions, including export controls from a strategic, operational, and compliance perspective. The impact on revenues (export restrictions), costs (import restrictions due to export restrictions), and working capital (higher inventory levels to derisk supply chain risk) can materially affect asset valuation across many sectors.

Because the world is not getting bigger. It is getting smaller.