Trade
The empty modern promise of sovereign capability
Author: Editorial Board, ANU
As the old aphorism goes, governments are terrible at picking winners, but losers are great at picking governments. It’s advice which many governments seem to have forgotten as they start using taxpayers’ money to build industries that are deemed to be vital.
The latest vital manufacturing industry supposedly in need of government help to build ‘sovereign capability’ is semiconductors. Semiconductors are an essential component in electronic devices, from communications, computing and cars through to military systems, healthcare and clean energy.
COVID-19 wreaked havoc on global semiconductor supply chains. And with China as a growing major global supplier of semiconductors, and production concentrated in Northeast Asia, the United States has taken the bold step of moving to subsidise its semiconductor industry — thus ‘Japanising its industrial policy’ the Financial Times has said. Some suggest that US partners in Asia, like Australia, Japan and other countries should now do the same.
There’s a major problem with this strategy: it won’t work. Sovereign capability in semiconductors is a largely empty promise.
There are four fallacies that undermine the plausibility of the sovereign capability idea.
The first is the ‘made locally’ fallacy. The notion that our supply chain challenges are solely the result of international trade does not stack up. This fallacy was exposed during COVID-19. Plenty of the things people have struggled to buy during the pandemic were made locally. Making things locally does not guarantee a resilient supply chain.
The second fallacy is the input fallacy. Things we think we ‘produce’ locally actually include many inputs that come from overseas.
Take the simple surgical face mask as an example. Face masks have at least four components: the medical grade fabric, the elastic, the thin metal strip that bends over your nose and the stitching that holds it together. Having genuine sovereign capability in the production of face masks means being able to produce all four of these things domestically, and then assemble them domestically, too.
And that’s just a simple face mask. A ventilator has more than 240 components, all of which have their own array of inputs as well. To be sovereignly capable, a country needs to make every single one of them.
The third fallacy is the ‘just in case’ fallacy. A new catch phrase of politicians is that we need to move away from ‘just in time’ business models towards ‘just in case’. Requiring businesses to hold buffer stocks, they argue, is a great way to make our supply chains more resilient.
It’s also a way to make countries poor. Business owners will tell you that stockpiling inventory costs money. Requiring local businesses to hold buffers in case a once-in-a-100-year pandemic strikes would make those businesses uncompetitive.
The bigger question for ‘just in case’ supply chains is: just in case of what? If local cafes need to prepare for a once in 100-year pandemic, why not the zombie apocalypse, World War III, and world-destroying asteroids? Where do we draw the line?
The fourth fallacy is the ‘essential business’ fallacy. The idea of having sovereign capability in producing essential goods and services assumes we know what an ‘essential’ good or service is. Many governments around the world have had three years to agree domestically on what constitutes an ‘essential business’. Most still don’t have an answer.
What constitutes ‘essential’ depends on the crisis. Hand sanitiser is essential during a pandemic, but pretty low on the list during World War III. And what about inputs? Many governments designated PPE as essential during COVID-19, but not the components used to make it. Governments designated ventilators as essential, but not the machines used to treat sleep apnoea, even though it’s essentially the same machine.
‘Sovereign capability’ is not a serious solution. But supply chain resilience is a serious problem. So, what can be done it about?
In our lead article this week, Samuel Goodman explores what countries can do to strengthen the resilience of global supply chains for semiconductors.
First, we need to understand when a supply chain is at risk and when it is not. ‘Individual states should analyse their supply chains for the points of greatest vulnerability’, recommends Goodman. Whether a supply chain is at risk depends on how many alternative suppliers are available for a particular good or service and how easily businesses in one industry…
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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