Building a resilient trade system in a volatile world

In November, the United Nations Climate Change Conference (COP29) will convene in Baku, Azerbaijan, with a clear and urgent focus on "Investing in a livable planet for all." Having been termed the "Finance COP," this year’s summit will emphasize the important role of financial systems in promoting sustainability. Global trade, too, remains at the heart of this dialogue, given that it sits at the intersection of climate finance and sustainable development.

The global trade landscape is increasingly characterized by volatility driven not only by climate crises, but also by geopolitical instability and supply chain disruptions. This growing uncertainty calls for more sustainable trade practices that can withstand the pressures of volatility. But for trade to be sustainable, it must also be resilient. This is a hard-learned lesson from recent experiences with the pandemic, geopolitical tensions, and the subsequent fragmentation of the global economy.

Broadly speaking, sustainable trade resilience must include economic adaptability, social inclusiveness, and environmental sustainability. It is no coincidence that the Hinrich-IMD Sustainable Trade Index (STI) is structured according to economic, societal, and environmental pillars. In the pre-pandemic era, many economies focused on efficiency, adapting just-in-time manufacturing strategies to optimize resources in stable conditions. However, the pandemic and increasingly tense geopolitical relations since then have exposed the vulnerability of such systems. Global supply chains collapsed, revealing blind spots in risk management.

To build a resilient global trade framework, flexibility must be a core attribute. Interestingly, this flexibility may require redundancy in certain areas such as diversifying trade partners or expanding the portfolio of export products. Recent shortages in semiconductors, which caused delays across various industries, emphasize the necessity of building resilience into trade networks. However, the key question remains: is the global economy ready to absorb the cost of resilience? Specifically, the cost of increasing flexibility and redundancy to remain resilient in the presence of negative shocks. These additional expenditures can be thought of as insurance against potential future disruptions.

For sustainability, however, environmental resilience is perhaps the ultimate prerequisite. But it should not be viewed merely as a checklist that firms and countries need to comply with. Instead, it must be embedded as a strategic imperative for trade. The transition to cleaner energy, for example, requires leadership and long-term foresight to decide on a clear trade-off: while it requires substantial upfront investment and disrupts traditional industries, the long-term risks of inaction, climate shocks, stranded assets and escalating regulatory pressures are far greater.

Decisions concerning environmental resilience are not easy. The shift to a low-carbon economy will likely entail carbon taxes and other protectionist measures, which may fragment global trade further. This raises the critical question: how can we balance the need for green trade with the imperative of global cooperation?

An integrated approach to resilience

As the world prepares for COP29 and beyond, the core challenge lies in how economies can balance economic growth, societal advancement, and environmental stewardship. The 2024 STI will offer valuable insights into which nations are leading the way in adapting to this new reality. By examining these pillars, it will highlight those economies that are successful in this complex landscape and in setting the standard for a sustainable and resilient future.

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