Trade
Global value chains aren’t going anywhere
Author: Christian Bachheimer, Singapore
Countries across the world are already attempting to decouple global value chains (GVCs) in preparation for the post-COVID-19 future. This is both motivated by security concerns brought about by COVID-19 and a continuation of the post-global financial crisis deglobalisation campaign. But are the forces of decoupling really operating unimpeded, or will GVCs prove too resistant?
The present international trade order is dominated by GVCs that account for two-thirds of intra-industry trade flow. GVCs link clusters of competitiveness and technology where states and corporations are deeply co-invested in providing infrastructure and institutions that connect producers’ supply chains.
COVID-19 is accelerating the decoupling that was already rising from increasingly strained relationships between China and the West. The crisis brought to light an apparent overdependence on China for critical medical supplies and other key production components as shortages materialised worldwide. Potential vulnerabilities to US technology supply chains and rare earth resources suddenly became real. COVID-19 also deepened the perceived risk of doing business in China — especially against the backdrop of a quickly deteriorating geopolitical situation where international trust is fast evaporating.
Despite the rhetoric of self-reliance and the return of domestic manufacturing, no single country can produce the whole set of activities facilitated by GVCs. GVCs and their primary clusters are sticky due to high fixed costs and immense economies of scale that stubbornly resist decoupling by external forces with competing locations.
GVCs depend on infrastructure built by governments to entice and cajole investors. This infrastructure — the foundations of East Asia’s competitiveness — have since matured into resilient manufacturing locations. Few governments will be able to afford such groundwork at the scale and speed necessary to duplicate East Asia’s export platforms post-COVID-19.
GVCs also rely on private investments geared toward shareholder return and the market’s ‘invisible hand’. China’s industrial FDI stock rose to over US$1.6 trillion in 2019 from US$190 billion in 2000. Decoupling would require countries to replicate present supply chains with an equivalent investment level over a much shorter period while offering no meaningful incentive to move away from efficient locations. The US$2.2 billion handed out by the Japanese government pales in contrast to the US$8.8 billion required to build a single Foxconn plant, or the US$12 billion for a TSMC microchip plant.
The mass relocation of GVCs would also require a trained and competitive workforce equivalent to East Asia’s labour pool. China has well over 100 million workers in manufacturing — more than the United States, Germany, Japan, France and Italy combined. The sheer disparity in the size of China’s labour force entrenches GVCs and prevents mass scale decoupling.
The resilience of existing GVCs is further cemented by the lack of alternative locations that could host GVCs. Most score worse on FDI attractiveness — including Mexico, Thailand, Vietnam and Indonesia. Comparatively small Malaysia is an exception. While India could have been a potential contender, its lack of infrastructure framework, ever changing rules and unaccommodating labour and land regulations are major drawbacks.
These hard truths are not changing in the foreseeable future, and international trade must continue. Ever more complex products require critical materials and components that are unevenly distributed across the world — inevitably creating interdependence among countries. For example, 85 per cent of rare earths are controlled by China, the Democratic Republic of the Congo controls 60 per cent of cobalt and Chile boasts 57 per cent of the world’s lithium. Decoupling cannot be fully effective as any relocated clusters would still rely upon vital materials dominated by certain countries.
As decoupling is costly, impractical and marred with uncertainty, greater trade integration should be on every country’s agenda. Supply chain diversification — instead of decoupling — is the surest path to security. Entanglement arising from integration also offers states the capacity to leverage trade as a diplomatic solution by increasing the cost of defecting from GVCs. Decoupling cannot provide this mechanism short of military action that threatens more than it protects.
While multilateral institutions might not be perfect, they still offer…
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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