Trade
Securing supply chains and global production after COVID-19
Author: Editorial Board, ANU
The lockdowns that started in China’s Hubei province on 23 January were a major disruption to the international supply of manufactured goods. Its capital Wuhan, the epicentre of the COVID-19 pandemic, is an industrial powerhouse that produces nearly 10 per cent of all motor vehicles made in China and, for example, is home to more than 100 parts suppliers for Honda alone.
The rest of China went into lockdown soon after, temporarily shutting down the world’s ‘global factory’.
As the world’s largest trading nation and the second-largest economy, the lockdown in China affected importers, manufacturers and consumers everywhere. For those who advocate for reducing dependence on the Chinese economy, and even to decouple from it, this event provided further proof of a broken business model.
But then most of the rest of the world went into lockdown too. Supply chains everywhere were affected.
The forces for on-shoring manufacturing have been unleashed. There is a related push to reduce dependence on the Chinese economy. Shortages of food in some countries and medical and protective equipment in most have led to the widespread use of export restrictions and the rapid repurposing of factories to boost self-sufficiency where possible.
Temporary measures to restrict exports of food, medical equipment and medicines will be difficult to undo. The forces that try to shorten supply chains will be harder to resist.
As Shiro Armstrong argues in the first of this week’s feature essays, economic nationalism is ‘gathering momentum in many countries’ and that ‘will make the world poorer, weaker and less secure’. Reducing vulnerability in supply chains by on-shoring production, putting up barriers to foreign investment and shortening supply chains is ‘the North Korean model of eliminating risk in international economic engagement’. The hermit kingdom is secure from external supply risk.
Supply chains are vulnerable to disruptions. So is production anywhere. Shortening supply chains or bringing supply onshore to reduce vulnerability is a fallacy. Eliminating reliance on foreign inputs increases reliance on domestic inputs, which are also subject to lockdowns in a pandemic.
Shortening supply chains or on-shoring production outside of a global crisis can increase risk, especially if driven by political goals rather than business decisions. Armstrong explains that ‘supply chains that are concentrated onshore are more vulnerable’ because ‘a natural disaster or home-grown crisis could wipe out whole industries’. And ‘the best insurance against drought or crop failure in one part of the world is openness to supply from producers all around the world’. The key is to manage supply chain risk, not avoid it.
One of the most pressing of these risks is the way in which ‘concerns about national security and sovereignty’ are strengthening the forces of protectionism, as Ken Heydon argues in another of our features this week. The ‘real risk is that on-shoring gains will prove illusory, particularly when they are pursued behind a protective tariff wall or through ostensibly temporary measures, such as state subsidies, that become subject to protectionist capture’.
A return to business as usual is not the answer though, with the pandemic exposing problems in global value chains. As Larry Summers says, ‘economic thinking has privileged efficiency over resilience’ and ‘going forward we will need more emphasis on “just in case” even at some cost in terms of “just in time”’.
Some accumulation of inventories can help but the real role for government is much more fundamental.
Peter Gourevitch and Deborah Seligsohn explain in our third feature that efficiency is not the only consideration, and ‘sometimes it fails us when we need security, stability, equity’. They argue that the real vulnerabilities in trade and international commerce are the inadequate social safety nets. ‘Most advanced economies have realised that universal healthcare is an essential component for the entire population’ and COVID-19 ‘has laid bare how frayed labour protection is, especially in the United States’.
Supply chains can be made more resilient by making society more resilient. People should be able to shift jobs to respond to crises and external shocks as production priorities change rapidly. That will help society benefit from the ‘efficiencies of trade while distributing the benefits more justly’ and to ‘combine free trade with support for the whole population’, as…
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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