In many ways, 2022 was a pivotal year for global trade, and not in a good way. Nowhere was this more evident than the effects of Russia’s invasion of Ukraine in February.
Beyond the human cost and devastation on the ground, the conflict brought surging into public consciousness how easily and quickly trading ties between nations, once the measure and symbol of their comity, can be undone and weaponized.
Its impact gummed up some of the world’s most basic supply chains, from energy to food. As shortages loomed, governments elsewhere raced to ban exports of their own food and food-related products in turn. The conflict came just as inflation was increasing worldwide, growth was slowing, and new tariffs were rising among the world’s biggest economies.
Beyond the war’s immediate impact on commodity markets, trade has become an instrument for nations to probe each other’s strategic weaknesses. President Putin’s move to turn off Europe’s natural gas was the opening gambit in such warfare. Sanctions, both primary and secondary, extended the West’s arsenal. They reflect another dangerous new trend in global trade, with all major powers weighing the expansion of such trade weapons.
In 1995, when globalization was still in its heyday, the Canadian economist Daniel Trefler wrote in a celebrated paper, The Case of the Missing Trade, about how international trade very often does not conform to the economic theorem that countries will export products from resources that they own in relative abundance. Economists found the theorem works only about half the time. Trefler identified a consumer bias toward domestically produced goods as a key reason for this discrepancy, or what he called “the missing trade” – a proxy for the trust between trading partners. Trade and trust are expressions of each other. Increasingly, that bond is under attack.
These events are unfolding as the international will to enforce order in the multilateral trading system is in full retreat. Faith in such institutions is fading. Blocked by a US embargo on its highest court, the World Trade Organization remains unable to adjudicate the world’s biggest trade disputes. Until the world trading order again finds a way back to mutually agreed rules, the golden age of globalization spanning the past 30 years can be regarded as having been an aberration, not the norm, of the global economy.
It is against this backdrop that the Hinrich Foundation launched its fourth iteration of the Sustainable Trade Index, supported in 2022 by the IMD World Competitiveness Center’s (WCC’s) world-class research.
Bleak as the landscape looks, there may be no better time to reboot the index. The STI’s most obvious feature is a ranking of economies – expanded in 2022 to 30 and covering major economies across Asia and the Americas, including current and likely members in the Asia-Pacific Economic Cooperation grouping. They are measured by 70 indicators across economic, social, and environmental factors.
New Zealand topped 2022’s rankings, scoring well in most indicators across all three factors. Aside from maintaining openness to trade in its macroeconomic and monetary policies, the island nation posted top marks for political stability, labor standards, and gender diversity in hiring outcomes. And New Zealand has – comparatively speaking – the least polluted air. It also implements the most international agreements for conserving the environment.
The index reveals the increasingly fragile global macroeconomic environment. Barriers to trade are rising, especially among major economies. The US and UK’s economic rankings were dragged down by their relatively high-tariff and non-tariff barriers to trade. As a cold winter looms, especially in Europe, the rankings also illustrate the importance of environmental policies for making trade more sustainable. The UK, Japan, and Mexico earned high marks in the rankings for their management of energy intensity, which measures the amount of energy consumed for each dollar of gross domestic product.
In addition, our research highlights a worrying trend among developed economies via a new indicator that measures how much an economy’s merchandise imports may be tainted by labor practices akin to modern slavery. While New Zealand has been more successful than others in avoiding the problem, Japan ranked 27th, China 21st, and the US 18th.
Rankings are inherently controversial. For many, placement on a table is all about their own rank and very little about the substance or the methodology.
But details matter. Rankings are meant to be the start of a conversation, not the end. The indicators measured in each ranking reflect a body of policy research that went into the STI’s composition. The evaluations in each indicator help us to understand more about the diversity of trade policies and practices. They reveal how economies can sustain growth and equitable prosperity by managing their trade and trade-related regulations well.
2022’s index identified commonalities among high-performing economies: they tend to provide policies that encourage technological innovation and low trade barriers. Their residents have relatively high life expectancy, go to school for longer periods, and enjoy more opportunities to move up in life – whether measured by income, job opportunities, housing, or other factors of mobility. They value and conserve energy at home and respect climate goals globally.
The 70 indicators represent insights into how economies function. They help us to understand, for instance, how a nation’s capital account peculiarities might put its financial system at risk, or which economies are signatories to key global environmental accords – and which are not. They help us to learn about economies that rely more on forced labor than their peers, where gender discrimination is more of an issue, or where carbon pricing is taking off.
We will constantly refine the indicators with each iteration of the Index, which from 2022 will be published annually. In 2022, we added consumer price inflation and healthcare as additional indicators in the calculation of the sustainability of an economy’s trade.
Until the world trading order again finds a way back to mutually agreed rules, the golden age of globalization spanning the past 30 years can be regarded as having been an aberration, not the norm, of the global economy
The inclusion of each indicator is a collection of deliberate decisions. When we wanted to measure the effectiveness of an economy’s healthcare system as a factor of sustainable global trade, we debated which indicator to use. We eschewed total healthcare spending due to the failure of such spending sometimes to translate into a strong public health system. Neither did public healthcare spending make the cut, as we felt there were too many variations of what that term meant to make for equitable international comparisons. We ultimately picked life expectancy as an overall measure – a literal summation of life-and-death choices – of an economy’s healthcare system.
During the process of refining our assessment of the global social sustainability of traded goods, we sought an indicator that could quantify how much economies were exposed to trade in goods made by modern slavery. We hadn’t expected the findings to be a sobering indication of how the appetite of developed economies is driving forced labor. We hope such findings rally our wider policy, business, and academic communities to discuss solutions. The lesson: know your supply chains.
We publish the STI’s methodology and research free of charge. The indicators ultimately amount to a set of principles about the way we should live, distilled by the United Nations in 2015 as Sustainable Development Goals, a benchmark for global growth, climate change, and the reduction of inequality.
During the pandemic, we saw countries that had allowed overdependence in their supply chains become vulnerable to great economic losses. We saw the social and economic toll of this vary depending on how governments mobilized coherent and intelligent policies.
In 2022, as the pandemic ebbs, we are living with a new danger. Global trade is in crisis. Nations are turning inward, emphasizing self-sufficiency and “friend-shoring” in place of strengthening trust and commercial ties. Political leverage has supplanted comparative advantage. Mediation is increasingly ineffective or absent.
Our research highlights a worrying trend among developed economies via a new indicator that measures how much an economy’s merchandise imports may be tainted by labor practices akin to modern slavery”
These global developments are a reminder of why sustainable trade is more critical than ever before. At the Hinrich Foundation, our mission is to advance trade that balances economic outcomes with the need to strengthen social capital and environmental stewardship. We believe that trade isn’t just a sum of economic efficiencies, but reflects and strengthens our shared values, the transparency of our rules, and equal opportunity.
IMD’s WCC is dedicated to the advancement of knowledge on world competitiveness by offering benchmarking services for countries and companies alike. They see competitiveness, prosperity, and sustainability as almost interchangeable concepts.
The index is a showcase of the ever-evolving interplay of factors that influence global trade. We expect it will identify trends crucial to informing the needs of global trade policy makers, businesses, and researchers. The world benefits from trade and needs to constantly figure out how to do it better. We and our colleagues at IMD believe our Sustainable Trade Index shows a way forward.
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