Why the Rules of Global Trade No Longer Apply: US-China-Russia-India
Chetan Dugar
Financial Market Talks | Quant Finance | Stock Analyzer | Pursuing Btech(CSE)-MBA | National Chess Player
10Minute Read
The evolution of global trade growth shows three distinct eras. The evolution of global trade growth shows three distinct erasIn our interconnected world, where a morning coffee might travel from Ethiopian highlands to European cafés via Chinese shipping containers, an unsettling transformation is taking shape. The very foundations that David Ricardo laid out in his 1817 theory of comparative advantage the elegant mathematical proof that nations prosper when they specialize and trade, are being challenged by a phenomenon economists are calling de-globalization.
Picture this: Global trade, which once grew at a blistering 7.6% annually before 2008, has now crawled to near-zero growth rates. The numbers tell a stark story—trade restrictions by G20 countries have tripled from 1,000 in 2019 to over 3,000 in 2023, while US-China tariffs reached an eye-watering 126.5% before partial reductions. We're witnessing not just a temporary disruption, but what appears to be a fundamental rewiring of the global economic architecture.
The Great Unraveling: From Theory to Reality
Remember Ricardo's famous Portugal and England example? The Portuguese were better at producing both wine and cloth, yet both countries prospered through specialization and trade. This comparative advantage theory promised that even when one nation outperforms another in everything, trade still benefits both parties. For decades, this principle drove the march toward hyper-globalization.
But here's where theory meets harsh reality. As our previous newsletter explored the resilience of supply chains during COVID-19, we're now seeing how the same mechanisms that create trade gains can become weapons of economic coercion. The very economies of scale that make specialization profitable also concentrate power, allowing dominant nations to leverage dependencies.
Consider Russia's dramatic trade realignment following Western sanctions. The data reveals a stunning 500% increase in Russia-India trade from $13 billion in 2021-2022 to over $65 billion in 2023-2024, while Russia-China commerce surged 175% to $245 billion. Meanwhile, EU-Russia trade plummeted by 58%, and UK-Russia trade collapsed by 94%. This isn't just supply chain diversification—it's the emergence of what economists call "economic blocs" based on geopolitical alignment rather than economic efficiency.
The Security-Efficiency Trade-off: A New Economic Reality
What we're witnessing challenges the core assumptions of classical trade theory. The Heckscher-Ohlin model suggests countries should export goods using their abundant factors of production. Yet today, nations are deliberately moving away from this efficiency-maximizing approach, prioritizing economic security over cost optimization.
The numbers are staggering. Companies diversifying away from China have reduced their dependence by 35%, but at a cost—supply chain expenses have increased by an average of 15%. This represents a conscious choice to sacrifice the gains from specialization in favor of resilience. It's the economic equivalent of buying insurance: you pay a premium to protect against catastrophic risk.
This shift reflects what economic theory calls the "fragmentation doom loop". When multiple countries simultaneously attempt to reduce dependence on a hegemon, the result is inefficient global fragmentation that makes everyone worse off. Yet rational actors continue down this path because the alternative—maintaining vulnerable dependencies—feels even riskier.
The Efficiency Trap - When Just-in-Time Met Just-in-Case
Sarah Chen, operations manager at a Fortune 500 consumer goods company, remembers the exact moment she realized the world had changed. It was March 15, 2020, and her perfectly optimized supply chain—a masterpiece of just-in-time efficiency ground to a halt as Chinese factories shut down.
"We had 72 hours of inventory," Sarah recalls. "Seventy-two hours between full shelves and empty stores." Her company's journey from that moment illustrates one of the most dramatic shifts in modern business: the great trade-off between efficiency and resilience.
The data shows companies are making a conscious choice to sacrifice the gains from specialization in favor of security. Firms diversifying away from China have reduced their dependence by 35%, but at a cost supply chain expenses have increased by an average of 15%. It's the economic equivalent of buying insurance: you pay a premium to protect against catastrophic risk.
The Weaponization of Interdependence
Here's where modern de-globalization differs from historical protectionism. Past trade wars were primarily about protecting domestic industries. Today's economic nationalism leverages the economies of scale that make global trade profitable as tools of coercion. Financial services, with their global reach and limited alternatives, have become particularly potent weapons.
The U.S. exerts its dominance primarily through financial leverage, while China relies more on manufacturing trade networks. This creates what economists call "strategic complementarities"the more a country dominates a sector, the more powerful it becomes at wielding that dominance. It's a self-reinforcing cycle that incentivizes fragmentation.
Recent events illustrate this dynamic perfectly. When President Trump announced that extensive new secondary tariffs would apply to any nation continuing trade with Russia, India became the first country to face repercussions for purchasing Russian oil. The message was clear: economic relationships are no longer just about mutual benefit-they're about choosing sides.
The COVID Catalyst: When Just-in-Time Met Just-in-Case
The pandemic exposed the fragility of hyper-optimized global supply chains. When Chinese lockdowns paralyzed manufacturing hubs, the world suddenly understood the difference between efficiency and resilience. Supply chains that had been designed for cost minimization found themselves unable to deliver basic necessities.
This revelation triggered a fundamental reassessment of the efficiency-security trade-off. Companies that had previously implemented "just-in-time" inventory management began adopting "just-in-case" approaches. The blockchain-enabled supply chain management that some forward-thinking companies implemented showed promising results—20% decreases in inventories coupled with 15% increases in delivery rates—but the overall trend was toward redundancy and resilience over pure efficiency.
Regional Blocs: The New Geography of Trade
The emergence of "friendshoring" represents perhaps the most significant shift in global trade patterns since the end of World War II. Countries are reorganizing their supply chains around political and economic allies rather than pure cost considerations. The U.S.-EU semiconductor alliance, designed to reduce dependence on Asian manufacturing, exemplifies this trend.
This regionalization isn't necessarily economically irrational. The New Trade Theory suggests that when economies of scale are significant, the location of production can be determined by historical accident or first-mover advantages rather than fundamental comparative advantage. If that's true, then politically motivated relocations might not be as costly as classical theory suggests.
Yet the costs are real. Southeast Asian nations like Indonesia have seen palm oil exports to the U.S. decline by 22.5% in volume and 24.9% in value following new tariffs, affecting 17,000 workers. These disruptions ripple through entire economies, demonstrating that trade wars have human costs far beyond the headlines.
The Technology Exception: When Security Trumps Economics
The technology sector reveals de-globalization's most dramatic manifestations. Export controls on semiconductors, rare earth minerals, and artificial intelligence technologies represent a fundamental departure from free trade principles. China's restrictions on critical mineral exports—affecting bismuth, indium, molybdenum, tungsten, and tellurium, demonstrate how resource nationalism is reshaping strategic industries.
This technological decoupling carries profound implications. As our newsletter previously discussed regarding digital transformation trends, the industries driving future economic growth are becoming increasingly subject to geopolitical restrictions. The result is what economists call "industrial policy" on steroids, government intervention in markets based on national security rather than economic efficiency.
Central Banks and the De-globalization Response
Interestingly, central banks have recognized these shifting dynamics. The coordination of global monetary easing in 2025 with India cutting rates by 100 basis points and the European Central Bank reducing all key rates by 25 basis points reflects an understanding that traditional models of global economic integration no longer apply. When trade relationships become weapons, monetary policy must adapt to a more fragmented world.
Naked Market Stock of the Month: Evolution AB (by Eduardo Figueira )
With U.S. equity markets continuing their march higher, valuations have followed suit. The Shiller P/E ratio now sits at its second-highest level in history, surpassed only during the dot-com bubble of the early 2000s.
At the same time, central banks around the world are cutting interest rates or signalling imminent moves in that direction. With inflation trending closer to the 2% target, the prevailing narrative is that tight monetary policy is no longer necessary.
Lower rates reduce the cost of borrowing, which encourages households and businesses to invest, spend—and, inevitably, speculate. The signs of speculative mania are hard to ignore:
· Crypto assets surging
· Loss-making companies jumping 30% in days
· IPOs returning with enthusiasm
Against this backdrop of froth and euphoria, certain high-quality businesses remain overlooked, trading at historically attractive valuations. One such company is Novo Nordisk (NVO), currently not in our portfolio. From a peak of $148 per share, ADR shares now trade around $52—a decline of over 60%
What Does Novo Nordisk Do? (Business Model & Competitive Positioning)
Novo Nordisk is a Novo Nordisk is a Denmark-based healthcare company and the global leader in diabetes and obesity care. The business operates in two main segments:
· Diabetes & Obesity Care (~92% of revenue): GLP-1 therapies (Ozempic, Wegovy, Rybelsus), along with insulin products, dominate this category.
· Rare Disease (~6% of revenue): A smaller but optional segment, with potential applications of GLP-1 therapies in areas such as cardiovascular disease, sleep apnea, and Alzheimer’s.
🔹 Why Is Novo Attractive? (Valuation, Growth Potential, Strategic Advantages)
o 10-Year EPS CAGR: 54%
o 10-Year Free Cash Flow Per Share CAGR: 59%
o ROIC > 60%
o 10-Year EPS CAGR: 54%
o 10-Year Free Cash Flow Per Share CAGR: 59%
o ROIC > 60%
o P/E: ~13× (vs. 10-year average ~27×)
o P/FCF: ~23× (vs. 10-year average ~26×)
While we don’t currently own Novo Nordisk, we see its risk/reward profile as very compelling.
What Economic Theory Teaches Us About the Path Forward
Classical trade theory offers limited guidance for navigating deliberate economic fragmentation. Ricardo's comparative advantage assumes that countries trade finished goods with fully integrated domestic production. But modern supply chains involve complex networks of intermediate goods and services that don't fit neatly into classical models.
The gravity model of trade, which predicts trade flows based on economic size and distance, is being overwhelmed by political variables. When geopolitical alignment becomes more important than transportation costs or market size, traditional trade models lose their predictive power.
Perhaps most importantly, the Stolper-Samuelson theorem suggests that trade protection benefits scarce factors of production while harming abundant ones. In developed countries with abundant capital and scarce labor, de-globalization might benefit workers while harming capital owners. This redistribution of gains and losses helps explain the political appeal of protectionist policies, even when they reduce overall economic efficiency.
The Future of Global Economic Integration
As we look ahead, three scenarios seem possible. The first is a return to some form of managed globalization, where nations balance efficiency gains with security concerns through international cooperation and stronger multilateral institutions. The World Trade Organization's efforts to modernize trade rules represent one path forward.
The second scenario involves the hardening of economic blocs, with the world dividing into competing spheres of influence centered around the U.S.-EU and China-Russia axes. Recent research suggests this fragmentation could reduce global GDP by 0.2% in a mild scenario, but losses could be much larger in extreme fragmentation scenarios.
The third possibility is a more chaotic fragmentation, where bilateral relationships replace multilateral cooperation, and economic policies become increasingly unpredictable. The rapid shifts in tariff policies we've seen in 2025 suggest this scenario remains disturbingly plausible.
Lessons for the New Era
For investors, de-globalization represents both challenge and opportunity. Traditional diversification strategies that assumed global economic integration may need fundamental revision. Companies with resilient, diversified supply chains are likely to outperform those dependent on single-source suppliers, even if this comes at higher initial costs.
In our interconnected yet fragmenting world, that separation is no longer possible. The great experiment of hyper-globalization may be ending, but what emerges next will determine the prosperity and security of nations for decades to come.
"We used to optimize for efficiency. Now we optimize for survival. The question is: what comes after survival?"
That’s where we leave you in this edition of Naked Market. The answers are still unfolding and we’ll be here to track them with you.
Founder at Likeatortoise | Helping People Build Wealth Through Long-Term Investing
2moGreat work Chetan Dugar!
Algorithmic Trading & Investment Solutions
2moDefinitely worth reading