Building stability in a fractured trading world

Current developments surrounding Iran, marked by sharp disruptions in trade flows and growing threats to the security of established maritime routes, are increasing uncertainty in global markets, national economies, and international supply chains. The question is, which countries are likely to be the worst affected and which are positioned to cushion the impact.

History offers a useful perspective. Local disruptions in major trade corridors have often produced consequences far beyond their immediate epicenters.

The Yom Kippur War of 1973, followed by the oil embargo, caused oil prices to surge, accelerated global inflation and pushed major economies into recession. The closure of the Suez Canal in 1956 and again in 1967 forced the restructuring of trade routes and raised transportation costs.

The current situation is considerably more complex, since supply chains have become longer, production systems are more sophisticated, and the density of the global trade network has increased.

To understand how the crisis unfolding in the Strait of Hormuz will affect different countries, it is important to examine the structure of the global trading system. There are three dimensions of global trade.

The first is a country's position within the trade network, which determines its connectivity with other economies. The key nodes here include the United States, China, Germany, France, the United Kingdom and Japan.

Their centrality means that disturbances reaching them can quickly affect large parts of the global economy.

The second is the scale of trade, or a country's share in global exports and imports. The leaders here are China, the United States and Germany. Their trade volumes are so substantial that fluctuations in their external demand or supply capacity are transmitted widely across markets.

The third is the breadth of trade ties, or the number of countries for which a given economy is among the principal trading partners.

By this measure, China is the clear leader. Its economic links extend across regions and development levels, making it one of the most deeply embedded participants in world trade.

Across all three characteristics, the leading economies are China, the US and Germany.

Within this space, China is the center of production and exports, the US is the financial center and a major consumption hub, while Germany is the core of European production chains.

How do shocks spread through such networks? Typically, disruptions begin at a bottleneck, such as an important trade artery. Then the impulse spreads through the global network and reaches the central nodes, namely China, the US and Germany.

These countries act as shock absorbers and redistribute pressure across the network. The scale of their trade network makes it possible to redirect flows and compensate for supply disruptions. On the other hand, the peripheral nodes — countries that depend on a narrow range of suppliers, have limited trade structures and few alternative routes, and are not deeply integrated into the global network — suffer more from the disruption.

This fragility is reflected in global assessments. In April, the International Monetary Fund released its flagship report titled Global Economy in the Shadow of War in which it lowered its forecast for global GDP growth from 3.3 percent to 3.1 percent.

The report identified the escalation of the Iranian conflict, further fragmentation of the global trading system, and rising energy prices as among the main risks to future global development.

Other leading institutions such as the Organisation for Economic Co-operation and Development have also warned of global recession risks. The question is whether this applies to all countries and the mechanisms that each country has to escape stagnation and maintain steady development.

Interestingly, the answer comes from the IMF. In March, it published a paper titled Institutions for Industrial Policy: The Foundation of Economic Development.

An institution that for many years promoted minimal state intervention in the economy has finally acknowledged that market reforms alone are not enough. Citing the example of East Asian countries, the study notes that technological breakthroughs can be achieved through active industrial policies.

According to the researchers, long-term growth requires a dedicated agency for managing industrial policy. Its role would be to coordinate the state and business, support strategic sectors, align policy tools, and finance science and education. This would not be a traditional ministry functioning along rigid lines, but a flexible and learning-oriented development system.

Many elements of this model resemble Asian development institutions, especially those in China. They also have roots in the strategic planning traditions of the 20th century, including Japan's Ministry of International Trade and Industry and other successful historical experiences of state-led coordination.

The difference is that today such mechanisms can operate on a new technological foundation. Digital monitoring, modern balance systems and data analytics now make coordination more precise, timely and responsive.

In other words, the IMF has recognized the return of coordination tools once used by successful industrial states, particularly China.

The current global crisis may end not only in recession, but also in a reconsideration of the economic model itself.

But this alone may not be enough for sustainable development. Enhanced economic and technological collaboration between major economies, such as that between China and Russia, can bring greater stability. Their technological convergence, together with the combination of their resource capacities, could give rise to a resilient economic cooperation zone capable of maintaining stability amid global uncertainties and advancing as a new technological and industrial self-sustaining center in the evolving global governance landscape.

The author is the director of the Central Economics and Mathematics Institute in the Russian Academy of Sciences and a professor at the Lomonosov Moscow State University.

The views don't necessarily reflect those of China Daily.

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