According to the DP World report, fragmented trade is likely to have a short-term impact on the global economy

Global tensions that begin to fragment trade as rivalries emerge will have only a limited negative impact on global economic growth, according to a report commissioned by DP World.

The production loss is estimated at just under 1 percent, according to the annual Trade in Transition report, commissioned by the Dubai-based port operator and led by research organization Economist Impact.

This forecast comes at a time of simmering trade tensions between the US and China, attacks by Houthi rebels on ships in the Red Sea, the Israel-Gaza war and the Russian invasion of Ukraine.

“Geopolitical shocks continue to disrupt global trade and bring supply chain restructuring into focus,” the report said.

“[Trade] A bloc restructuring with increasing trade barriers could reduce global GDP [gross domestic product] significant.”

The report, released Tuesday at the World Economic Forum's annual meeting in the Swiss Alpine resort of Davos, surveyed 3,500 company executives for their views on trade trends, technology adoption, supply chains and geopolitical risks.

Its GDP impact findings are based on a hypothetical scenario of further “geoeconomic fragmentation” focused on significantly increased trade barriers for high-tech goods.

In this scenario, disruptions in trade between a U.S.-led Western bloc and a Chinese-led Eastern bloc could lead to a 0.9 percent decline in GDP, the report said.

That impact will weigh heavily on China's economy, which is expected to contract by 1.9 percent, while the U.S. economy is expected to shrink by 0.9 percent and those of other Western bloc countries by 0.8 percent, the results said.

If tariffs were increased by 15 percentage points on all traded industrial goods, global GDP could be expected to decline by 0.7 percent, the report said.

This would “disproportionately affect” politically aligned blocs due to trade diversion. As a result, China's economy would decline by 4.5 percent and that of the remaining Eastern bloc by 1.3 percent.

The United States and neutral countries would see a marginal benefit of 0.2 percent and 0.7 percent economic growth, respectively.

On Monday, the WEF said in a report that the global economic outlook remains subdued and uncertain, with more than half of chief economists expecting the economy to weaken this year.

Seven in 10 chief economists expect the pace of geoeconomic fragmentation to increase this year, the WEF said in a survey.

According to the WEF survey, there is strong consensus that recent geopolitical developments are increasing localization (86 percent) and strengthening geoeconomic blocs (80 percent).

Trade fragmentation means companies must balance economic factors such as cost and quality against non-economic elements such as security and resilience in supply chains, the DP World report said.

The results showed that about 36 percent of business leaders surveyed responded to geopolitical shocks by prioritizing “friendshoring,” meaning vital economic production should occur within the borders of allied countries.

Another 32 percent of respondents said they would create dual supply chains to address geopolitical tensions.

“These strategies aim to increase resilience but could increase costs for companies juggling multiple supply chains,” the report said.

“Achieving this balance is critical to managing the changing global trade landscape.”

In other findings, the report said higher transportation costs will be the biggest challenge in 2024 for companies looking to increase exports, according to nearly a quarter of survey respondents.

This was followed by higher tariffs in key markets, supply shortages of key manufacturing materials, adverse exchange rate fluctuations and political instability in key markets, the survey showed.

Despite the “tremendous challenges” posed by the current geopolitical and economic climate, there are several growth drivers and sources of optimism underlying global trade, the report said.

Around 26 percent of companies surveyed worldwide are expanding into new markets and 24 percent are focusing on existing markets to meet increased demand.

In the Middle East, 33 percent of companies are seeking to diversify into new markets.

Updated: January 16, 2024, 12:21 p.m