Trade protectionism: A quest for economic resilience among small economies

Smaller countries often find themselves caught in the geopolitical tussle between the US and China, often at the expense of their own interests and autonomy. As US-China trade relations continue to deteriorate, ongoing trade disputes have further disrupted global supply chains and prompted a reconfiguration of trading relationships. While the US aims to cripple China’s high-tech manufacturing sector by banning China’s access to advanced chips and technologies, the Chinese government has retaliated with export bans on critical minerals. Large, resource-rich nations have many tools at their disposal to weaponize trade in service of foreign policy, but their measures often have the most pronounced effects on other export-reliant smaller economies that are vulnerable to abrupt trade policy changes.

The imposition of trade restrictions and industrial policies by major economies has further impeded international trade growth. Global goods exports contracted by 4.3% in 2023, according to the World Trade Organization (WTO). In contrast, smaller economies like Mexico and Thailand built resilience in their overall goods exports, having benefited from increased exports to the US, a major end-market as well as attracting foreign direct investment (FDI) for component supply from China. Thailand, Indonesia, and India have similarly attracted significant investment from companies in Singapore, Japan, Korea, and Europe seeking to reduce their dependence on China. Due to heightened geopolitical risks in Western markets, Chinese companies made substantial investments in Asia, accounting for approximately 80% of its outward FDI in 2023. 

Enhancing economic resilience for smaller economies involves increasing their attractiveness to foreign investors and ensuring export competitiveness. By strategically investing in trade infrastructure and innovation, and diversifying their trade networks, these economies can attract foreign investments and maintain resilience despite facing disruptions caused by geopolitical tensions.  

Invest in trade infrastructure and technological innovation

Trade infrastructure encompasses a broad range of facilities and systems, including ports, transportation networks, logistics hubs, and tech infrastructure. Efficient trade infrastructure is vital for smaller economies to facilitate the seamless movement of goods and services, reduce trade costs, and enhance their competitiveness. Several smaller economies have demonstrated how strategic investments in trade infrastructure and technological innovation can foster resilience and growth.  

Diversify trade networks

To hedge against growing geopolitical or supply chain risks, it is crucial that smaller economies diversify their trade and investment partners by participating in new trade initiatives or agreements. Smaller economies can also join multilateral and plurilateral initiatives to increase their collective bargaining power and collaborate on mutual interest.

Smaller economies could, however, face some challenges in pursuing these strategies. Multilateral trade negotiations can be slow and complex, especially when they involve many diverse participants with different interests. Additionally, some economies may lack the capacity to engage in multiple trade initiatives and negotiations simultaneously. 

Yet, adopting a wait-and-see approach could leave smaller economies vulnerable to the actions of larger nations that are actively safeguarding their own interests. By investing in robust trade infrastructure, fostering technological innovation, and forging resilient multilateral and plurilateral trade networks, these nations can bolster their competitive edge. Strategic diversification of trade partnerships mitigate risks associated with geopolitical tensions and protectionist policies. Through a balanced approach, leveraging cooperation with like-minded partners and enhancing internal competencies, smaller economies can better navigate the intricacies of global trade and ensure their own sustainable economic growth in a rapidly changing world. 

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