Trade
Making supply chains great again
Author: Editorial Board, ANU
When the ‘factory of the world’ shut down in February as Wuhan and then soon after much of China went into lockdown from COVID-19, manufacturing supply chains were affected globally. For many, this demonstrated the vulnerabilities in supply chains and the danger of so many of them going through one country. It was a reminder of how interconnected economies are and how disruptions can spread rapidly to other countries through complex production systems.
China’s manufacturing purchasing managers index (PMI) fell from 50 in January to 35.7 in February. A number below 50 signals a contraction and it had never fallen so low since the index was inaugurated in 2004.
The inability to secure imports of personal protective equipment and medical supplies from China in those early months of the pandemic exacerbated the health panic many countries faced. Governments raced to find solutions and many are now deploying policies to ensure those sorts of disruptions don’t occur again, both in essential healthcare and in manufacturing more broadly.
Japan, and later South Korea, introduced subsidies to onshore manufacturing and to expand supply chains in Southeast Asia. Those subsidies have become known as China-exit subsidies although Japan has been careful not to officially name China as their target. Japan’s subsidies of US$2 billion to onshore manufacturing and $US200 million to expand supply chains to Southeast Asia (and now South Asia) are over-subscribed.
Other countries are contemplating various measures to achieve supply chain diversification (away from China).
But just how vulnerable are supply chains and what should governments be doing to reduce supply chain risk? Were the many companies that relied on complex supply chains that cross numerous borders and jurisdictions ignorant of the risks? Did they collectively put all their eggs in the one China basket, thereby creating systemic risk?
Governments need to be clear on what the problems that they are trying to fix before they start intervening with subsidies and other regulations.
It’s important to recognise what businesses want and how resilient the supply chains have been.
In this week’s lead essay John Denton and Damien Bruckard from the International Chamber of Commerce argue that ‘“supply chain fragility” has been disingenuously invoked or hyped-up to cover for governmental failures. Inadequate stockpiles of masks, medicines and ventilators cannot reasonably be described as failures of corporate supply chains — they were failures of government planning’.
It’s not clear that supply chains were vulnerable nor that they now need reinvention. Resilience is the ability to bounce back and the evidence points to remarkable supply chain resilience in the face of a once-in-a-lifetime crisis.
The market worked and businesses responded to supply shortages. ‘Alcohol companies produced hand sanitiser, textiles manufacturers made masks and hotels become quarantine centres’, Denton and Bruckard explain. ‘Delivery services ensured door-to-door supply of essential goods such as medical equipment, medicine and food at the height of the crisis’. That this was achieved ‘during the greatest economic shock in a century suggests more robustness than fragility’, they argue.
China’s PMI rebounded to 52.0 by March from its low of 35.7 in February as much of the rest of the world went into lockdown to fight the spread of the pandemic. It is now at a decade high of 53.1.
Supply chains have contributed to the rapid expansion of production at lower cost, with companies able to achieve fragmented, task-based specialisation in the name of just-in-time production. That has enabled more small and medium-sized companies and their workers to join international production networks. Requiring companies to hold reserves of inventory for just-in-case delivery is throwing sand in the gears of efficient global manufacturing.
Forces of comparative advantage and specialisation that fragment production across different locations and forces of agglomeration and economies of scale that concentrate them help to shape supply chains. Businesses diversify as a form of insurance and there’s a cost to that. They weigh and manage risk and their viability and profitability depend on making the right decisions.
Poor policy prescriptions threaten business dynamism and investment and the world is going to need both to recover from the COVID-19 crisis and reduce unemployment.
Denton and Bruckard warn that ‘nativist policies aimed at concentrating…
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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