Trade Defies Simplification Predictions Amid Energy Constraints
The Great Simplification predicts that as the world's energy supply dwindles, economies will shift towards local production and trade will decline. However, a closer look at the data reveals a more nuanced picture.
According to the World Bank, global trade as a share of GDP did peak in 2008, but it has been steadily increasing since then, reaching 62.1% in 2022, only to fall slightly to 56.7% in 2024. This contradicts the idea that trade is receding.
Cody Kallen of the Federal Reserve Board examined US foreign direct investment and found that while some multinationals are moving production closer to home, particularly in Mexico and India, others are not returning their activity back to the US.
The International Monetary Fund also concluded that post-pandemic foreign direct investment declined by nearly 20%, but the decline was uneven, producing relative winners and losers rather than a general retreat homeward. Its modeling put the long-term cost of investment fragmentation at around 2% of global output.