A view from London

Globalisation is in trouble. Conflict and rising protectionism are placing new strains on trade and supply chains. Geopolitical risk, as measured by economists at the Federal Reserve, has been trending up for a decade and has reached the highest levels in 25 years in the wake of the conflict in the Gulf. Trade is no longer the engine of global growth that it once was. Rather than outpacing GDP as it did in the golden era of globalisation in the late 1990s and early 2000s, growth in global trade has lagged global growth for most of the last 18 years. In the wake of the closure of the Strait of Hormuz, delays in shipping freight around the world have returned to the record levels seen during the pandemic.

Yet, globalisation and trade are in better shape than these headlines suggest.

We should be wary of comparisons with the era of hyper globalisation. Rapid growth in trade in the late 1990s and early 2000s was made possible by China’s entry into the world trading system, the collapse of Soviet communism and an intense period of EU integration and enlargement. It was an exceptional and fleeting moment in history. Consumers eventually adjusted to a step change in the availability of cheaper imports, and as they did growth in import growth slowed.

But then came a series of shocks that created new problems for global trade – the financial crisis, growing international tensions, Brexit, COVID, Russia’s invasion of Ukraine, America’s lurch to protectionism and war in the Middle East. The economic effects have manifested in new frictions, higher costs, and disruption to trade.

Yet trade has not ground to a halt. Indeed as a ratio of global GDP, trade in goods and services reached an all-time high of 62% in 2022 following the pandemic. Despite falling in the years since, it is not far off record levels.

Trade in goods has been affected by tariffs and restrictions on trade. Service trade, however, is largely unaffected by tariffs and has consistently outperformed global GDP growth, helped by growing demand, declining technological barriers to trade and the rise of technology-related services.

The AI boom has provided a powerful new impetus to trade both in goods and services. Last year Asian exports of AI semiconductors rose 68%. In March, the World Trade Organisation (WTO) raised its estimate for growth in global merchandise trade in 2025 from 2.4% to 4.6% due to the surge in AI-related trade.

Trade and supply chains are adapting to a new, more fractious international environment.

Most obviously, the economies of the US and China are decoupling, with US imports of Chinese goods declining by 30% last year alone. However, a 2023 study by the Bank for International Settlements found that US buyers are sourcing Chinese products via other Asian countries or are buying them from Chinese-owned factories located outside China, mainly in Asia. At the same time, US and other western companies have focused on building ‘China plus one’ supply chains, maintaining their presence in China and building new capacity elsewhere.

The logic of the current, contested geopolitical scene seems to point to the reshoring of production and shorter supply chains. Instead, US-China tensions have created more – and more complex, longer supply chains – with US imports from India, Indonesia, the Philippines and other Asian countries surging in tandem with the weakening of direct trade between the US and China. At the same time, China has increased its focus on the European market. Most European countries recorded above-average growth in Chinese imports in 2025. Imports of cars from China have boomed. Chinese vehicles doubled their share of the UK market in March on a year earlier, accounting for 15% of sales.

Research by Harvard professor Gita Gopinath shows that trade flows are increasingly concentrated along geopolitically aligned blocs. The WTO has come to the same conclusion, reporting that since the invasion of Ukraine, intra-regional trade has grown rather more rapidly than trade between regions – though it adds the significant caveat, “there is…no clear evidence of a widespread shift toward regionalisation or nearshoring of production networks.”

The benefits that global supply chains bring are simply too great to discard. Businesses are maintaining them and building in greater resilience by developing new sources of supply.

There are many ways of gauging the health of the global trading system. An OECD report published earlier this month shows that on one of the most important measures the system is in good health. The authors examined the share of overseas products in countries’ exports and how this share has changed over time. Asian exports have some of the highest levels of foreign content, testifying to their openness to, and dependence on, trade. The US has the lowest levels of foreign content in its exports, speaking to its vast internal market and relatively low level of openness to trade. For the OECD as a whole, the overseas content of country exports is only marginally below the all-time peak reached in 2022. In other words, exporters have, over time, become more, not less, dependent on foreign materials and components.

We are in an era of heightened international rivalry, one where the old rules of trade are often broken. Yet globalisation is not in retreat. As OECD has observed, we are seeing “a more deliberate form of globalisation, one shaped by resilience as well as by efficiency.”