Geopolitics and Global Trade: A System Under Pressure

The structure of today’s global trade system is deeply rooted in the political realignments that followed the Second World War. The end of the war in 1945 did not merely redraw political boundaries; it reshaped the global economic order. The world gradually split into two ideological and economic camps—one led by the United States, advocating liberal democracy, open markets, and capitalism, and the other led by the Soviet Union, promoting state-controlled economies and collective ownership. Trade, investment, and economic cooperation soon became tools of geopolitical influence rather than neutral economic activities.

As ideological rivalry intensified, especially after the onset of the Cold War in 1947, economic policy emerged as a strategic weapon. Western countries expanded trade and financial cooperation within their bloc to strengthen political alliances, while the socialist camp pursued economic coordination among allied states. In this polarized environment, international trade was no longer guided solely by efficiency or comparative advantage; it became an extension of foreign policy and global power competition.

Recognizing the need for economic recovery and stability after the devastation of war, Western nations promoted multilateral institutions to rebuild the global economy. Initiatives such as the Marshall Plan and the Bretton Woods system led to the establishment of institutions like the International Monetary Fund and the World Bank. These bodies were designed to stabilize currencies, support reconstruction, and promote economic cooperation. In 1947, the General Agreement on Tariffs and Trade (GATT) was introduced to reduce trade barriers and encourage freer global commerce.

Over time, GATT played a central role in lowering tariffs and expanding international trade. However, these institutions were never entirely insulated from geopolitical influence. Powerful countries often shaped rules and negotiations to protect their own strategic interests. Nevertheless, the gradual adoption of market-oriented reforms by formerly socialist economies during the late twentieth century led to greater economic integration. By the 1990s, the once-divided global economy had become increasingly interconnected.

This process culminated in the establishment of the World Trade Organization in 1995. The WTO was created to provide a formal mechanism for dispute resolution, rule enforcement, and trade liberalization. For nearly two decades, multilateral economic governance helped maintain relative stability in global trade. Countries like Nepal benefited through access to development financing, trade facilitation, and policy support from multilateral institutions.

Despite these gains, dissatisfaction with multilateral trade rules persisted. Some countries argued that taxation and tariff-setting are sovereign rights that should not be constrained by global agreements. These concerns gained political momentum in the mid-2010s, particularly after the election of Donald Trump as President of the United States in 2016. His leadership marked a sharp departure from the long-standing US support for multilateral trade.

Under the “America First” policy, the US shifted decisively toward protectionism. Beginning in 2018, tariffs were imposed on solar panels, steel, aluminum, and a wide range of Chinese goods. This move triggered retaliatory measures from China, the European Union, Canada, and other major economies, effectively igniting a global trade war. As tariff barriers rose, the credibility and authority of the WTO weakened, and the rules-based trading system came under severe strain.

While trade tensions were escalating, the outbreak of COVID-19 added an unprecedented shock. Global supply chains collapsed as production and transportation were disrupted. Food insecurity increased, and many countries faced shortages of essential goods. Before the world could fully recover, the Russia–Ukraine war erupted in 2022, further destabilizing global markets by disrupting supplies of energy, grain, and fertilizers. Sanctions imposed on Russia deepened inflationary pressures worldwide.

Ongoing conflicts in the Middle East, particularly between Israel and Palestine, have further complicated global trade routes and logistics. These overlapping crises have reinforced uncertainty in international markets and highlighted the fragility of global supply chains. In response, many countries have begun shifting away from globalized production toward “near-shoring” and “friend-shoring,” prioritizing trusted partners over cost efficiency.

This changing global environment poses serious challenges for smaller and developing economies such as Nepal. According to recent trade data, Nepal imported goods worth over NPR 513 billion within just four months of the current fiscal year, while exports stood at only NPR 52.7 billion. This imbalance has resulted in a massive trade deficit exceeding NPR 460 billion, underscoring the structural weaknesses of the country’s economy.

Nepal’s production base remains narrow. Agriculture contributes around a quarter of GDP, services nearly 60 percent, while manufacturing accounts for less than five percent. Since most service-sector outputs—such as banking and healthcare—are not exportable, export growth remains limited. Without expanding tradeable goods production, reducing the trade deficit remains unrealistic.

Experts argue that Nepal must focus on value-added manufacturing rather than attempting to compete in capital-intensive industries. While automobile production may be unrealistic, producing components such as high-quality tires or specialized industrial goods for regional markets could strengthen exports. Such diversification requires active private-sector participation supported by clear industrial policy.

Another neglected issue is Nepal’s fixed exchange rate with the Indian rupee, established in 1992. Despite dramatic changes in the relative strength of the two economies, the peg has never been reviewed. Economists argue that periodic reassessment could help correct price distortions and reduce excessive import dependence on India, without necessarily shifting to a fully floating exchange regime.

Nepal’s landlocked geography further increases trade costs, forcing dependence on neighboring countries for transit. Improving road connectivity, customs infrastructure, storage facilities, and digital systems could significantly reduce logistical inefficiencies. Strengthening regional cooperation through platforms such as BBIN and BIMSTEC also offers opportunities for long-term trade integration.

Beyond traditional trade, the information technology sector presents a unique opportunity. Unlike physical goods, software and digital services are not constrained by geography. With appropriate regulatory support, foreign exchange flexibility, and skill development, the IT sector could help Nepal overcome structural trade limitations and generate sustainable export revenue.

Ultimately, Nepal’s trade challenges are inseparable from global geopolitical shifts. Protectionism, conflict, and economic nationalism are reshaping international commerce. Navigating this complex environment will require strategic diplomacy, economic diversification, and policy reforms grounded in a clear understanding of both global risks and domestic strengths.