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Hello from Brussels, where a demonstration yesterday against Covid-19 restrictions got a little nasty and some real riot, or at least a little looting, part of a wave of protest in Europe against renewed restrictions. Given Belgium has actually handled the pandemic quite well and has it relatively high vaccination rates, it’s a bit of a concern.
Today’s chapter deals with how world trade performs in goods and supply chains, with the analysis of two of the major institutions in the region, the World Trade Organization and the Asian Development Bank. The answer, as we have been bouncing around for some time, is better than you would expect, given the panicked tone in many circles.
The trade disaster yet to come
As we look towards year-end, it already seems to us fairly certain that the 2021 summary for goods trade will proceed as follows. Trade recovered very sharply from the pandemic shock, more or less recovering from last year’s losses, and then apparently slowing down to trend growth. The speed of the recovery put intense pressure on supply chains and created bottlenecks in certain goods and certain ports. Trade tensions between the US and China have remained high. But – and here’s the interesting bit – the idea that companies will undertake radical restructuring of value chains in response to the transport crisis or geopolitical risk has remained theoretical.
We have always been skeptical that Covid would cause a major shift in the post-cold war pattern of globalization. Of course, as we said more recently, the bottlenecks and shortcomings of the past few quarters have made us think of silence. There was certainly an awkward degree of turmoil. But, call us reckless if you will, today’s Trade Secret author’s view remains that there was nothing that would justify a major government-led restructuring of globalization.
So, let’s look at the numbers. The WHO’s annual World Trade Report points out that trade in goods (goods) is back to its pre-pandemic trend, with a significantly smaller shock than that caused by the financial crisis. It also notes that trade recovered faster than gross domestic product, and that economies that suffered greatly from Covid benefited from exports to countries that were relatively unharmed. You can play around with reverse causality here if you feel like it (maybe economies traded more because they grew for other reasons), but it’s certainly not the case that countries that turned inwards did better.
Look specifically at supply chains, the ADB is good on the historical context. The growth of global value chains slowed after 2008 and has remained anemic since the “slowdown” following the “hyperglobalization” of the early 2000s. (Do not blame us for the neologisms.) While the events of last year did place severe strain on value chains, the Asian bank concludes that the 2020 figure was largely in line with the post-2010 trend. This is in line with other data on trading and investment intentions cited by Harvard Kennedy School’s Megan Greene, in a Financial Times op-ed last week. There is just not much evidence that supply chains are being shortened or even radically restructured. Maybe there will be: these things take time. But that’s not happening yet.
Back to the WTO report. There’s an interesting film by the Peterson Institute’s Chad Bown, which emerged as the trading world’s oracle about global chip trading, the wisdom of semiconductors if you will. Bow points out (page 93 of the report) that, contrary to the common sense that the world economy had to navigate dangerously narrow and treacherous mountain passes controlled by semiconductor bandits, chip production held up fairly well during the coronavirus crisis.
It now faces a lot of tension, mainly in the technologically less sophisticated chips that go into cars and so on, but this is due to a massive and probably unsustainable increase in demand. Things are looking nasty at the moment, but in the longer term, governments’ possible response to them is a more serious risk than the global economy hitting a brick wall due to a general slide shortage. A subsidy spiral, coupled with trade constraints, could lead to an abundant global semiconductor industry that is inefficiently segmented by country and indefinitely dependent on government handouts.
As Bown puts it: “Governments are known for showing too much love. . . Interdependence may have helped to maintain peace during a period of rising geopolitical tensions. Changing the supply chain geography to reduce that interdependence could provoke new vulnerabilities. ”
At this stage – and here, of course, they are speaking their book – the WTO wants a major festival of global cooperation to maintain open trade in strategic products. Without it, of course, there are risks for individual countries, especially small countries, on the assumption that trade will always deliver. There is a coordination problem if you are the cup that opens their market in medical goods and immediately ends up with domestic shortages because everyone else imports and accumulates. We get it. The point is just that there is not much in the performance of trade and supply chains due to the pandemic to justify breaking the free trade model for globalization.
Perhaps because of the WTO ministerial meeting taking place next week, the decade before the global financial crisis is on our minds at the moment. There was endless hand-wringing over the failures of trade policy, tearing of clothes over the collapse of the WHO Doha Round of negotiations in 2008 and all that. But trade yourself? Trade itself was just good. As we said back in september, the saviors are currently business people, not bureaucrats. Many things have disappointed over the past year, but given what it has faced, the actual buying and selling of goods across borders itself is not high among them.
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