Global trade continued to increase in 2022, including for products greatly affected by the war, highlighting the resilience of the multilateral trading system. Early estimates suggest that trade growth was above the WTO trade forecast from April 2022 (around 3 per cent) and substantially higher than the more pessimistic predictions for 2022. This stability is also reflected in trade in supply chains, which grew by 4 per cent year-on-year in the second quarter of 2022, when measured in terms of trade in intermediate goods. Trade in products and by countries greatly affected by the war was remarkably resilient. Even in the short run and for unexpected disruptions, alternative suppliers filled in the gaps – at least for the majority of products affected by the conflict.

For the longer term, new simulations highlight the importance of strengthening the multilateral trading system. The latest simulations run by WTO economists modelling different scenarios for the global economy show that the gains from further multilateral liberalization are large. In line with this, the opportunity costs of decoupling into two rival blocs relative to more liberalization are estimated at 8.7 per cent of real income at the global level, varying between 6.4 per cent for developed countries, 10.1 per cent for developing countries and more than 11.3 per cent for least developed countries.

The benefits of reglobalization are not only about income gains but also about resilience and security for the supply of goods. The positive trade performance of countries dependent on imports from the conflict region was facilitated by their ability to switch their import supply to unaffected economies. For example, Ethiopia used to rely on Ukraine and Russia for 45 per cent of its wheat imports. The country reacted to the loss of most supplies from these two countries by increasing purchases from other producers, including the United States (shipments increased by 20 per cent in volume terms) and Argentina, which supplied 21 per cent of Ethiopia’s imported wheat, up from zero in the previous year.

Ukraine’s exports collapsed by 30 per cent in 2022 in value terms. The drop was relatively consistent across trade partners, although some neighbouring countries, such as Hungary and Poland, increased their imports from Ukraine. This was driven mostly by increased imports of agricultural products such as oilseeds, fats and oils, meat and dairy. Exports of cereals, which are central to the food security of many African economies, declined by 14.9 per cent, forcing these economies to adjust their trade patterns.

Increases in prices led Russia’s exports to expand by 15.6 per cent in value terms, but estimates suggest that Russia’s export volume might have slightly declined. The increase in Russia’s exports in value terms is driven mostly by goods in the primary sector such as fuels, fertilizers and cereals. The relatively limited increase in trade values in combination with the sharp increase in prices for these goods suggests a slight decline in export volume. In contrast, trade flows have fallen sharply for industrial goods, such as motor vehicles, pharmaceuticals and aircraft, where sanctions are likely to be particularly restrictive.

Prices rose for goods most affected by the war but by less than expected at the beginning of the war. Among these products, prices increased between 4.4 per cent for palladium – a key input in the production of catalytic converters in the automotive sector – and 24.2 per cent for maize. While these price increases are substantial, they are significantly lower than the gloomiest predictions. Simulations run by WTO economists in a scenario of cascading export restrictions on food forecast wheat prices increasing by up to 85 per cent in some low-income regions. However, the actual increase was 17 per cent.

The relative restraint by WTO members in imposing export restrictions likely played a key role in keeping price increases in check. The WTO’s latest trade monitoring report, covering mid-October 2021 to mid-October 2022, shows that regular (non-COVID-related) import-facilitating measures introduced by WTO members covered US$ 1,038.4 billion of trade, far exceeding the trade coverage of import-restrictive measures (US$ 163.5 billion). This, in combination with the limited price increases in grains, suggests that the success of the WTO’s 12th Ministerial Conference, which resulted in the Ministerial Declaration on the Emergency Response to Food Insecurity, has had a meaningful impact on reducing food insecurity.

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Consequences for security of European states?

For the past year, Ukraine has been resisting Moscow’s unprecedented excesses of violence. It is supported by NATO member countries, the European Union, and some 20 other states, such as Japan and South Korea. With regard to military aid deliveries to Ukraine, Kiev’s supporter states are repeatedly faced with the same trade-off: How many and what weapons systems does Ukraine need to repel Russian aggression as well as defend its state sovereignty – and what are the risks of further drastic Russian escalation? What are the consequences of Russia’s war against Ukraine for the security of European states – and beyond? These are the main topics that will be discussed at the Security Conference. As always in Munich, on an open stage and in front of the whole world.

Featured Speakers:

Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, European Commission

Katherine Tai, Trade Representative, United States of America

Oliver Zipse, Chairman of the Board of Management, BMW AG

Moderator: Zanny Minton Beddoes, Editor-in-Chief, The Economist

To watch the full conference videos, please click here.

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The international condemnation was followed quickly by the imposition of wide-ranging economic sanctions on Russia, and the provision of military support to Ukraine, by most OECD and European Union countries. Trade-related sanctions have included prohibitions of exports to Russia of strategic goods, including high-tech goods and components for use in electronics, telecommunications, aerospace and oil refining, among other sectors. Sanctions imposed by the United States apply not only to goods exported by US companies, but also to goods produced elsewhere using US technologies. The extraterritorial nature of US sanctions has likely impacted exports to Russia even from countries that have not applied sanctions.The EU, United Kingdom and US have also announced plans to phase out imports of Russian energy.

The war hit the global economy by creating new geopolitical and economic uncertainties, soaring energy prices, and disruptions to global value chains in which Russian and Ukrainian companies were involved. Economic sanctions exerted adverse effects not only on Russia, but also on countries that imposed them and, more generally, on other economies because of higher energy and commodity prices.

Isolating the impact on the global economy and trade of Russia’s war is difficult because global inflation pressures were building up already before the war, along with the recovery from the COVID-19 pandemic. The pandemic resulted in shortages of various materials and machinery, and in increased transportation costs and times. The fiscal stimulus implemented by most countries around the world in 2020-2021 supported household incomes, but the uncertainty and lockdown restrictions boosted household savings in several countries, creating pent-up demand. Sandbu (2022) argued that one of the reasons for the global surge in inflation, which came earlier than the energy price shock, was the strong rebound in US consumer goods demand, leading to a global scarcity of goods, with spill-over effects on the rest of the world. As pandemic-related restrictions were eased and largely eliminated from 2021 or early 2022, demand for contact-intensive services has also resumed 2. These developments would have exerted upward pressure on various prices even without the war.

Zsolt Darvas (zsolt.darvas@bruegel.org) is a Senior Fellow at Bruegel and Senior Research Fellow at Corvinus University of Budapest. Catarina Martins (catarina.martins@bruegel.org) is a Research Analyst at Bruegel.

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