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Hello from Brussels. Following a quiet beginning after the summer, the trade policy docket is filling up again.
First, in further Continuity Trump news, it looks like the US is contemplating whacking more tariffs on imports from China. More constructively, the EU and US have also announced the inaugural meeting of the bilateral Trade and Technology Council, designed to find common ground on a big range of issues including a lot of data and digital. The first gathering is fixed for Pittsburgh, a longtime mercantile city that has successfully transitioned from smokestack to tech, at the end of September. We’ll have more on the council’s agenda and likely outcomes over the next couple of weeks. Today’s main piece asks one of the hardest of all questions: has Trade Secrets, or at least today’s author, been wrong all along about the impact of Covid-19 on globalisation?
Charted waters looks at how supply-chain disruptions are weighing on one of the drivers of German growth.
Keeping faith in the might of the market
Since the beginning of the pandemic we’ve spent quite a long time rubbishing the notion that it was going to be the end of globalisation, or even cause a major restructuring of global supply chains. (Ruptures induced by political intervention, such as the US’s attempted decoupling from China, or Brexit, are a different matter).
To be fair, it’s been a pretty good bet over the past couple of decades to predict that companies would keep globalisation going even when governments were falling down on the job (see: the Doha round) and unpredictable shocks were throwing sand in the wheels of globalisation (see: the September 11 attacks). But we’ll be honest: this optimism is currently being given a tough test.
Global growth this year recovered from the Covid shock, and economies in most of the big trading nations (if not the developing world) have substantially reopened from the pandemic lockdowns. And yet, with the Delta variant causing local shutdowns in critical parts of supply chains, every day brings another story of soaring container costs, clogged ports and semiconductor shortages. Malfunctioning product and labour markets are causing prices and wages to spike higher. Put on some murk-tinted glasses and, as various people have warned, it looks a bit like the supply shocks of the 1970s, with the implication that loose monetary and fiscal policy to support growth risk setting off an inflationary spiral.
For the moment, though, we’re sticking with our optimism that the Covid-related issues will improve by themselves without broad-based government efforts to manage supply chains, as long as the authorities keep fiscal and monetary policy supportive.
First of all: as FT colleagues have pointed out, thanks to the time it takes to create new capacity, supply in the shipping industry in particular is intrinsically lumpy and vulnerable to big cycles and short-term frictions, and prices accordingly volatile. To adapt the old saying, the Baltic Dry price index of ship charter rates has predicted eight out of the last three major shifts in world trade. Second, fiscal stimulus packages putting money into households’ bank accounts and the effect of lockdowns on spending patterns have caused demand and prices of consumer durables to surge at the expense of services. (On that subject, it’s not clear to us that it’s a smart idea for the boss of a company whose job it is carrying stuff around the world to demand people give him less stuff to carry, but what do we know?)
Companies are certainly looking more intently at the risks in their international production processes as a result of Covid. But it’s not as if those supply chains were previously immovable. Supply chains were already being shifted out of China before the pandemic for cost and risk-spreading reasons.
Companies will adjust: that’s what they do. They’ll have to hold a bit more inventory? Fine. Some more production will shift from China to Vietnam? We can live with that. There will be dislocations and shortages, and so prices will sometimes jump. That’s the process of adjustment happening more jerkily than usual. HSBC economists argue here that there will be some more disruption from short-term inventory stocking, but that may not last and in any case will support trade flows in the medium term.
There was a lot of chatter about the end of globalisation when the Ever Given cargo ship got stuck in the Suez Canal in March. We’ve now got global trade data for the first half of the year: goods volumes slowed from the very rapid recovery at the end of 2020, sure, but the sky has conspicuously failed to fall in.
At this point, let’s reiterate that there are some big caveats to leaving everything to the market. There are some products (not that many, according to European Commission analysis, but some important ones) that are liable to create bottlenecks in other production processes. This is especially true where technological challenges and economies of scale combine to make supply very inelastic in the short run and where hostile governments are prepared to block exports for strategic reasons. Semiconductors are the obvious ones. It’s absolutely legitimate for policymakers to intervene where necessary to build capacity in those circumstances.
But that’s not a reason for assuming companies can’t adjust at all, and certainly not for imposing broad-based trade restrictions in the name of resilience or independence. The US is not safer or more prosperous as a result of the steel and aluminium tariffs imposed by former US president Donald Trump. There’s a good argument that the clodhopping sanctioning of Chinese tech under Trump merely spurred China to become a more effective competitor, an issue to which we will return. The costs of trade friction from exercising the alleged economic sovereignty of Brexit are evident in the shortages the UK is suffering. Note that these shortages are markedly worse than its continental neighbours despite Britain’s early success in Covid vaccination.
We’ll get into some of the specifics of all this in future newsletters — the macro policy response, the comparison with the 1970s, what’s going on in specific sectors. But for the moment we (or today’s author in any case) will stick with our initial view: Covid by itself will not be a major medium-term disruption to cross-border flows in goods, services, capital and data. For more reasons than personal pride we sincerely hope we’re right.
The eurozone’s economy continues to bounce back from the pandemic. But there’s been a shift in what’s providing the lift.
Over the course of the second half of last year, it was a revival of the region’s makers, accompanied by a rise in sales of consumer durables, that spurred growth. With economies reopening, it’s now the dominant services sector that is providing most of the lift.
Manufacturers, meanwhile, are being hit by supply shortages. The chart below shows that, while orders for German carmakers are on the up, production has fallen. Claire Jones
At the beginning of the 1960s exports accounted for just 1 per cent of South Korea’s gross domestic product. By the end of the decade, the figure had jumped to 10 per cent. The Peterson Institute for International Economics looks at how, through canny policy decisions, the Asian economy achieved this.
The new China Trade Monitor newsletter reports that US climate change envoy John Kerry failed to establish common ground with Chinese officials on combating carbon emissions, with Beijing raising the issue of US restrictions on the import of Chinese solar panels.
London Heathrow has dropped from being Europe’s busiest airport to tenth place, with its management blaming the UK’s complex Covid-related travel restrictions.
Nikkei has a nice piece ($) on why a Vietnamese car manufacturer’s purchase of a Korean supermarket chain presents an obscure but burdensome test for foreign investors in Vietnam.
China and India are driving (Nikkei, $) the price of thermal coal to a record high as surging electricity demand collides with a reluctance to invest in cleaner energy sources.
The OECD has published two big research reports on the logistics industry in Asean countries. Alan Beattie, Francesca Regalado, and Claire Jones