Commodities, globalisation, & geopolitics

There has been much talk (including in these notes) about the disruptive productive potential of new technologies, such as generative AI.  But the world still runs on commodities, from energy to agricultural products and industrial metals.  

Commodity trade has been at the centre of globalisation over the past several decades, from the rise of the energy superpowers to China’s voracious demand for commodities.  And looking forward, commodity markets will be at the centre of the energy transition.  This centrality makes commodities deeply political as well as economically significant.  Commodities are a useful lens to illuminate changing global economic and political dynamics. 

Commodities and deglobalisation?

The world trade/GDP series has moved sideways since peaking just prior to the global financial crisis after a few decades of intense globalisation.  This trend-break is commonly cited in support of deglobalisation. But this argument is exaggerated: globalisation is changing but not unwinding.  Indeed, trade flows such as digitally-delivered commercial services are growing quickly; a dynamic likely to continue in a world of AI and related technologies. 

It also turns out that variation in commodity prices can explain some of the variation in the intensity of world trade over the past 25 years.  As commodity prices surged on stronger demand from China and other markets from the late 1990s, the share of commodity trade in overall merchandise trade increased from ~20% in 1998 to ~30% in 2008.  This supported higher world trade/GDP.   From 2010, though, commodity prices approximately halved – leading to a reversal in the commodity share of world trade, and dampening world trade/GDP.  Manufacturing trade was much more stable over this period.

And part of the post-Covid strength in world trade values has been an increasing contribution from commodities.  Structurally stronger commodity prices are likely over the next several years, including because reduced investment will constrain supply.  This will support a ‘re-globalisation’ phase, with increasing world trade/GDP – reinforced by strong increases in other trade flows, such as digitally-delivered services. Although the CPB reported another contraction in world merchandise trade volumes this week, indicating that there are some near-term headwinds to global flows.

Politics of commodities

A regular theme of these notes is the development of a fragmented global economy, that is shaped by geopolitical rivalry.  These dynamics can be seen clearly in commodity flows.

The full note is available at: https://davidskilling.substack.com/p/commodities-globalisation-and-geopolitics