TRADE & DEVELOPMENT
The current reconfiguration of global trade is crucial for developing economies. The risks are high, but as successful examples demonstrate: There are also opportunities By Carlo Pietrobelli, Michele Delera and Nicolò Geri 1 Amid rising tensions, “friendshoring” might keep global trade alive
T he world economy is at a crossroads. International trade is slowing, economic uncertainty is rising and trade between the US and China – the world’s two largest economies – risks pulling apart. And it is not just trade: the two countries also invest less in each other than they did just a few years ago. What is driving this reconfiguration of trade? For some large economies, including the US under President Donald Trump, a desire for greater self-reliance is central. Between 2017 and 2023, American imports fell most sharply in the very products where the US had been most reliant on China – including industrial machinery, computers and computer parts, and other electronic equipment such as monitors. This has important implications for global value chains. GVCs are the backbone of international trade – production activities from research and product design to assembly are distributed across various locations, with “value” being added at each stage. This redistribution can take place across several countries, coordinated by multinational firms. The reconfiguration of GVCs is accelerating, and so industrialized economies now have two main options. They can reshore production, bringing manufacturing back to their own countries (a stated priority for the current US administration). Or they can “friendshore”, shifting imports and investments towards economies that are either geographically closer, or with which they have long- standing relationships.
For developing countries, the balance between these two strategies is crucial. If advanced economies reshore a substantial share of production, developing countries could suffer as investment and jobs are lost. And automation and digitization now make it more convenient for advanced countries to produce goods at home, making this a greater risk to these poorer countries than it was a decade ago. For consumers though, this reshoring could mean higher prices for everyday goods, at least in the short term, because of the higher costs of manufacturing in more advanced economies. It should be said, however, that the empirical evidence for this remains limited. Risks and opportunities But friendshoring offers an alternative. Early signals from countries like Mexico and Viet Nam – which have recently seen an increase in investment and factory expansions from multinational firms – suggest that friendshoring can create opportunities. When paired with supportive government policies such as investment incentives or help to upgrade technology, these shifts can ensure that more production takes place domestically. This can lead to greater technology spillovers and learning. To understand the risks and opportunities, we examined the specific products where US-China decoupling is most pronounced (that is, where trade is reducing). From this analysis, two broad clusters emerged, each with different
implications for developing economies. The first group mainly includes relatively complex goods – things like consumer electronics, vehicle components, chemicals and machinery. Here, the US is both diversifying its imports quickly and is already producing these goods competitively. The products and sectors at the heart of the reconfiguration of GVCs These products can easily be reshored, particularly if automation lowers costs. Semiconductors, for instance, are already the focus of major US reshoring efforts. Yet the risk to current producers of US reshoring appears limited for now. While the US has reduced imports from China of these products, other developing regions have not experienced a similar trend. In the second group, the US is diversifying but is not competitive enough to bring production home. This group accounted for just over 6 percent of finished products that the US imported in 2023 – roughly US$181 billion. This is a small share overall, but economically significant. Within this group, two types of opportunity emerge. Technologically complex goods, such as electrical equipment, computers and car parts, offer the greatest potential for middle-income economies with strong manufacturing experience to win contracts and investments. Lower- tech goods like textiles and furniture are better suited to lower-income countries. In both cases, governments need to negotiate carefully to ensure
1 Carlo Pietrobelli is Professor of Economics, UNESCO Chair, United Nations University; Michele Delera is Affiliated Researcher, UNU-MERIT, United Nations University; and Nicolò Geri is PhD Candidate, Economics, Sapienza University of Rome
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