Trade
The end of global supply chains as we know them?
Author: Davin Chor, Dartmouth College
‘It’s the end of the world as we know it’. So rings the lyrics of a classic song from the mid-1980s by the rock band R.E.M. These words aptly capture the foreboding sentiment gripping manufacturing companies that rely on global supply chains as they scramble to cope with the fallout from the ongoing tariff war between the United States and China.
Prior to 2016, the world was accustomed to low barriers to trade. Tariffs on manufactured goods — including parts and components or goods-in-process — declined steadily for decades as more countries joined the WTO and more regional trade agreements were signed. The arrival of modern communications technology and the falling costs of air travel enabled companies to cast a wider net when identifying overseas suppliers. This expanded the range of inputs — even relatively specialised ones — that they could reliably source from abroad.
Manufacturing firms took advantage of this business environment and fragmented their production chains across country borders, motivated by forces such as low labour costs and proximity to key markets. China was of course one of the biggest beneficiaries, with its deep integration in global supply chains being a major driver of its export boom.
The US–China tariff war threw a significant spanner in the works. When the initial tariff salvos were fired in 2018, most firms remained optimistic. But fast forward to mid-2019, as the positions of both the United States and China have hardened, and now firms are convinced of the ominous realisation that these tariffs are here to stay. The intent of the current US administration appears to be the ‘decoupling’ of the economies of the United States and China. In other words, global supply chains aren’t just collateral damage in this tariff war. They are instead a prime target, with the current administration seemingly keen to reduce the US dependence on China as a trade and supply chain partner.
Already, 2019 is poised to be a very bad year for US–China trade flows. According to the US Census Bureau, the value of US imports from China has dropped significantly (more than 9 per cent) on a year-on-year basis for every single month so far for which data is available. The largest drop was in March — the value of imports decreased from US$38.3 million to US$31 million, an 18.7 per cent change from 2018. While the ongoing disruption to supply chains between the United States and China is likely to account for a good portion of this decline, a fuller accounting exercise will have to await more in-depth research.
Supply chain professionals are now scrambling. Some are rushing to get their companies’ orders in to try and beat the implementation dates of key tariffs. Others are searching for alternative sources of inputs outside of China, as a first step in a broader re-organisation of their supply chain strategies. These changes are easier in theory than in practice — suppliers outside of China, such as Vietnam, reportedly lack the capacity to accommodate the sudden rise in demand that they now face. Small-business manufacturers and major brand-name firms alike are being affected.
What does this all mean for the future of global supply chains? Some may see the tariff actions of the past two years as mere bumps in the road. Once cooler heads prevail, so will the old state of affairs. But this optimistic view downplays the potential long-term repercussions of the trade war.
Recent developments may hasten the erosion of China’s supply chain competitiveness in labour-intensive industries such as textiles, apparel, footwear and toys. Even before 2016, rising labour costs and concerns about product quality were already affecting China’s attractiveness as a manufacturing location in these industries. The tariff war is only reinforcing these concerns. This in itself may not be the worst development — it presents an opportunity for China to double down on restructuring its economy and shift even more aggressively into higher-end manufacturing activities in electronics, semiconductors or telecommunications equipment.
In the short-run though, Chinese workers caught in this structural transition are likely to experience some pain. The slowdown in China’s exports between 2013–2016 was accompanied by a rise in labour strikes, which quickly drew the attention of Chinese authorities concerned about social stability. With these ongoing tariff wars, economic dislocation and the impact on workers as supply chain orders dry up will have to be…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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