Europe Braces for Trade Hit as Global Commerce Slows

Trade is now growing at a slower pace than the world economy, marking a fundamental shift away from the trade-centric globalism prevalent since the end of the Cold War, Boston Consulting Group said in a report published this month. The slowdown is due to rising protectionism, including in China, and increased disruptions from conflict, BCG said.

“A characteristic of the new world trade order will be the growing prominence of [regional] trade blocs," BCG said. “The cooler trade climate is part of a reordering of the world trade map."

While trade between China and its major rival, the U.S., will be $197 billion lower in absolute terms by 2032 than in 2022, the main winners of this shift will be Southeast Asian nations, whose trade with China is set to skyrocket.

European nations, whose rivalry with China is less bitter than the country’s relationship with the U.S., won’t see the same falloff in trade with the East Asian giant, but growth in commerce between the two will slow nonetheless, BCG said.

In the near term, the export-oriented eurozone looks especially vulnerable to a creaking global trade structure, according to Pantheon Macroeconomics, a consulting group. This year, exports from the bloc are set to take a hit from weakening growth in its major trading partners, notably China, Pantheon said in a recent note. In the past 12 months, export growth has plunged, too, it said.

With imports on track to rebound more strongly than exports, the resultant drag on trade will weigh on already listless economic growth in the bloc, Pantheon said. The continent’s reliance on energy imports has proved a headache in the last couple of years.

“The eurozone is an open economy, very export-orientated," Claus Vistesen, Pantheon’s chief eurozone economist, told The Wall Street Journal. That is especially true of the bloc’s powerhouse economy, Germany, but also applies to France and to a lesser extent Italy, he said.

A trend toward on-shoring—that is, efforts to bring production closer to home markets and shorten supply chains—is another problem for European exports, said Jens Magnusson, chief economist at Swedish bank SEB. China is ever keener to produce its own goods, including in key sectors like automobiles, Magnusson said.

Trade spats are an increasingly common feature of relationships between the West and China. Shares in French cognac makers plummeted this month after the Chinese government opened an antidumping probe into imports of the brandy from the European Union. The move was widely seen as a politically motivated one-two after the EU opened its own investigation into China’s subsidies for electric-vehicle makers, reportedly at the behest of the French government, a major shareholder in automaker Renault.

For now, trade with China is going strong, with the exception of key sectors like semiconductors. “The ports are still open, the container ships are still coming from Shanghai," Pantheon’s Vistesen said.

But geopolitical risk is unpredictable and remains a growing threat, he added. Rather than a continuous trend, geopolitical shifts tend to manifest as abrupt and unexpected flashpoints with serious consequences, Vistesen said, pointing as an example to the Russia-Ukraine conflict that ramped up in 2022. “If you look at bilateral trade, especially between Germany and Russia, that’s gone. It’s basically zero," he said.

Israel’s military operations in Gaza have added to instability in global trade at the beginning of 2024. Attacks on international shipping in the Red Sea by Houthi militants in response to the war in Gaza have disrupted trade, forcing ships to take longer routes, and fears remain of a further escalation in the restive region. “We’re seeing a big, big unexpected flashpoint in the Middle East," SEB’s Magnusson said.

Companies and governments can alleviate the risks to trade, including by stocking up on buffer inventories and by vetting alternative suppliers closer to home, BCG said in its report. But an unhappy cocktail of a more guarded industrial policy in the world’s major economies, combined with a global volatility that makes risks increasingly difficult to forecast, means Europe can no longer bank on trade to power its economy.

“Of course, we will continue to trade," Magnusson said. “But it’s a downhill slope from here."

Write to Joshua Kirby at joshua.kirby@wsj.com