Trade
COVID-19 and the ‘zoom’ to new global value chains
Author: Christopher Findlay, ANU, Fukunari Kimura, Keio University and Shandre Thangavelu, University of Adelaide
COVID-19 has sent shock waves running up and down global value chains (GVCs). Social distancing and high levels of uncertainty have caused a significant drop in demand for goods, with GVCs carrying the economic shock through supplier countries.
Recovery from the shock is anticipated once COVID-19 cases fall below a certain level, but financial fragility are likely to linger from the large negative wealth effects caused by the pandemic. Several stages of fiscal and monetary policy stimulus are likely to be introduced over the coming months across many countries.
On the supply side there are significant disruptions to GVCs in the immediate term caused by lockdowns, suppliers shutting down and more restrictive border controls. The breakdown of the logistics sector has led to disruptions spreading across countries. Disruption to regular shipping channels has led to a surge in demand for air freight.
GVCs have made important contributions to employment, productivity and incomes for both developed and developing countries. They have provided for greater knowledge sharing and supported the growth in innovation that we have experienced over the past two decades. GVCs continue to benefit the global community.
In the longer term, a heightened perception of vulnerability to disruption will lead to changes in GVCs. Responses include duplication and higher levels of stockpiling. There could also be architectural changes including redesigning products to reduce the specificity and raise the substitutability of inputs in sourcing and having fewer complex loops, where input suppliers use final products from downstream as inputs. The addition of new services, such as vulnerability analysis and chain management, is also highly likely.
All of these changes are particularly difficult in the current environment as they require time and funding. But a rolling pandemic creates the scope for China, now emerging from their pandemic, to lead the way in time for the return of demand in the rest of the world.
Currently there is also a drop in demand for services as people stay home and businesses shut down. The lockdown on movement directly and most deeply affects sectors that involve GVCs including tourism, hotels, restaurants and air transport. This is not likely to be made up for by larger later purchases. But substitution to new forms of services is possible through the application of digital technology — health services providers now offer more telemedicine, for instance.
On the supply side, more people are now working from home, schools and universities are being delivered online, and business meetings are shifting to video conferences. Firms are learning how to do things differently. In a digital environment, it is a short step to organise procurement across borders. Trade in services will increase as this continues to develop, creating new opportunities for suppliers in developing countries.
Given the dynamic nature of GVC networks, it is possible that a transformation of GVC activities in goods and services will lead to both greater opportunities and resilience. But policy reform supported by regional cooperation will be critical to the realisation of stronger GVCs. This reform must centre around free trade, developing digital infrastructure and creating international regulatory coherence in digital trade protocols and tax to encourage the use of digital supply networks.
A joint commitment to avoid protectionist responses — including export controls and tariffs, particularly in medical equipment — may greatly increase the ability of nations to respond to the pandemic, as affirmed by a group of APEC Trade Ministers.
The capacity and connectivity of digital infrastructure across borders is important. Digital infrastructure capacity includes the soft skills required for its application. The first step is to use the databases on digital restrictiveness that are currently available to determine digitally-constrained economies and consider them against others that have been extremely successful in digital infrastructure investment.
Virtual platforms or ‘digital supply networks’ will become more important for matching providers and users and providing assurance to both parties. In this respect, accelerating progress on agreements on digital trade protocols and taxation is critical to support these transformations.
Tackling unnecessary policy impediments to value chain operations, such as a lack of alignment…
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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