CHINAMacroReporter

The Pandemic's Impact on Trade

The Pandemic's Impact on Trade

‘There are some people who would say that there was already a retreat from globalization underway.’ ‘The tools of globalization - enormous reductions in the cost of transportation and communication - remain.’ ‘But the marginal utility actually of further advances is declining – that would be one way to put it.’
by

|

CHINADebate

April 18, 2020
The Pandemic's Impact on Trade

1. The Pandemic's Impact on Trade

2. The Slowing of Globalization

3. Is a Breakup Coming?

4. The Pandemic's Impact on Supply Chains

5. More Inventory, More Resiliance, More Cost

6. Redundancy & Resiliance

1. The Pandemic's Impact on Trade

‘Demand has collapsed, supply chains have collapsed, the transportation system is crippled. Everything is down.’

'Everything is Down'

On Tuesday, I had a great interview with Bill Reinsch, a top expert on trade and trade policy.

Bill holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) and is a senior adviser at Kelley, Drye & Warren LLP.

  • Previously, he served for 15 years as president of the National Foreign Trade Council.
  • He concurrently served as a member of the U.S.-China Economic and Security Review Commission from 2001 to 2016.
  • During the Clinton administration, he served as the under secretary of commerce for export administration during the Clinton administration.

Read more of our interview on the nitty-gritty of supply chains, inventory management, and more in the next issue.

  • And we’ll publish the video of the full interview as soon as it’s edited.

Malcolm Riddell: ‘Bill, what is the impact of the pandemic on the trading system?’

Bill Reinsch: ‘Well, in the short run, it's turned everything upside down.’

  • ‘Demand has collapsed, supply chains have collapsed, the transportation system is crippled. Everything is down.’

‘Unlike an earthquake, or an event that's over right away and you can immediately go to cleanup, this one's going to be uneven.’

  • ‘We didn't all get sick at the same time, and so we're not all going to go well at the same time.’
  • ‘It’s going to be a rolling crisis. It's going to affect different parts of the world in a different pace.'
  • 'That's going to slow supply chain reconstruction down.’

‘The Chinese may all be going back to work this week, but if there's nobody available to buy their products and a transportation system that can't get them here, it doesn't matter.’

  • ‘So supply chain reconstruction really is going to depend on both ends and the middle of the chain being available.’
  • ‘And I think we're in for a long period of uncertainty.’

2. The Slowing of Globalization

‘The tools of globalization - enormous reductions in the cost of transportation and communication - remain. But the marginal utility actually of further advances is declining.

Globalization is Retreating, But the Tools are Still There

Malcolm Riddell: 'How do you think the trading system is going to look broadly after the pandemic?’

Bill Reinsch: ‘There are some people who would say that there was already a retreat from globalization underway.’

‘The tools of globalization - enormous reductions in the cost of transportation and communication - remain.’

  • ‘But the marginal utility actually of further advances is declining – that would be one way to put it.’

‘What's going on in China has made it more difficult - and not just because of COVID-19.’

  • ‘The relationship overall is getting worse at multiple levels, and has been getting worse, really since Xi Jinping came in.’

‘The Chinese government has been pursuing policies that are less comfortable for Western companies.’

  • ‘And they're moving back to more state control, which makes it harder for companies to operate there successfully.’

‘But they're also pursuing non-economic policies.’

  • ‘They're persecuting their minorities, their journalists, their academics, they're pursuing a very aggressive foreign policy in the South China Sea and the East China Sea.’

‘So all of this is contributing, I think, to a slowdown in global economic integration, and the virus contributes to that.’

  • ‘But the tools are still there.’

3. Is a Breakup Coming?

‘One way to address the issue is for the countries that do believe in an open, rules-based system to get together and pursue that system.’

A 'Rules-Based' Trading Bloc?

Malcolm Riddell: ‘There's also been talk of the world breaking up into regional trading blocks. Do you see any indication that that's really going to happen?’

Bill Reinsch: ‘There has been a continuation of efforts to develop regional agreements.'

  • ‘For example, EU-Canada is now going to be implemented. EU-Vietnam is on the way. EU-Mercosur has been sort of on and off, but seems to be moving forward. The RCEP agreement in Asia was reached late last year minus India, but still a significant development.’

‘The missing piece in all of these is the United States.’

  • ‘We're not a party to any of them.’

‘So the biggest danger of regional breakdown is that we end up in kind of an East-West thing, based on a fundamentally different approach to the rules.’

  • ‘The West, meaning Europe, United States, Australia, New Zealand really, but also Japan and Korea, are a part of the Western rules-based economy.’
  • ‘China really doesn't pursue a rules-based system. They don't pursue it domestically, and they don't really pursue it internationally.’
  • ‘That's a fundamental difference.’

‘The Trump administration argues that the WTO is not really equipped to deal with a problem that is as big and as complicated as China.’

  • ‘You can debate whether that's right or not.’

‘But one way to address the issue is for the countries that do believe in an open, rules-based system to get together and pursue that system.’

  • ‘Then basically tell the countries that don't - and China's not the only one but it's the biggest - "If you want access to our markets, you need to adhere to the rules." ’

‘We may be moving in that direction.’

4. The Pandemic's Impact on Supply Chains

‘You’re going to see a decline in “just-in-time” manufacturing and a return to some level of inventory buildup.’

Of Pandemics & Supply Chains

Malcolm Riddell: ‘What is the pandemic’s impact on supply chains?’

Bill Reinsch: ‘Well, short term, basically they're blocked.’

  • ‘And it doesn't make a huge difference in a lot of cases because demand has collapsed,
  • ‘So the fact that people aren't making anything doesn't matter so much because there's nobody around to buy them anyway.’

‘But I'm more concerned about the longterm - longterm, you're going to find people restructuring their supply chains.’

  • ‘It used to be all price quality and delivery, and now you have to build in resilience and redundancy, and managers are going to want to make sure that they've got not only a plan A, but plan B and C that includes, usually, some domestic sources of supply just to make sure.’
  • ‘You’re going to see a decline in “just-in-time” manufacturing and a return to some level of inventory buildup.’

5. More Inventory, More Resiliance, More Cost

‘So efficiency and cost savings, which is what you get with just-in-time and no inventory, create a vulnerability.’

From 'Just-in-Time' to Inventories

Malcolm Riddell: ‘You mentioned keeping increased inventories. How is this going to change the overall way manufacturing looks today?’

Bill Reinsch: ‘Well, as I said, I think it's going to roll out over a period of time. It's not something that's going to be immediate.’

‘From an inventory perspective, it's actually kind of a retreat.’

  • ‘We used to do it that way.’

‘Automobile manufacturers again are a good example.’

  • ‘They used to have mountains of parts, all in Dearborn or wherever their assembly plant was.’
  • ‘And when they needed more, they'd just go out to the store room and get more and bring them into the assembly line.’

‘Now it's all just-in-time, and stuff goes back and forth across the border, from Windsor, Ontario in particular, daily.’

  • ‘Parts are shipped in the morning, they arrive in the afternoon, and they’re incorporated into the car that day.’

‘We saw the dangers of this in 9/11 when the, then custom service closed the border.

  • ‘The result: a multi-mile backup of trucks on both sides of the border trying to get in,
  • ‘And the result was assembly lines stopped.’’

So efficiency and cost savings, which is what you get with just-in-time and no inventory, create a vulnerability.’

  • ‘If you want to eliminate the vulnerability, you go back to storerooms and go back to inventory, but that costs you money. It costs you money in space, it costs you money in theft, storage costs, and so on.’

6. Redundancy & Resiliance

‘What is going to happen is the supply chain managers will get new priorities.’

Building Supply Chain Redundancy & Resilience

Malcolm Riddell: ‘When you say that we're going to see a more redundancy and resilience built-in, how does that actually work?’

  • ‘How do you build in redundancy and resilience?’’

Bill Reinsch: ‘Well, not easily.’ If you're going to do something as simple as change a supplier of a critical component you have to deal with, you have to identify other sources, you have to test them, you have to certify them, you have to have some experience with them.’

  • ‘We did a study a year ago on how supply chains are affected by changes in rules of origin, and we looked at NAFTA automobile rules as an example, and we had one automobile company tell us it takes them seven years to certify a new supplier.’

‘What is going to happen is the supply chain managers will get new priorities. And they're going to be:’

  • "Get me backup options."
  • “I want to have two or three backups for each part and component, and I want those backups to be closer to the United States than Asia.”
  • “I would like them to be onshore. I would like them to be in Mexico or Canada.”
  • “I would like them to be in a reliable place, preferably an ally and not somebody that might cut me off for political reasons."

Malcolm Riddell: 'Okay, I'm a manufacturer, and I have built-in redundancy. How does that work?’

Bill Reinsch: ‘What companies do now is have existing multiple sources for the same part.’

‘So, for example, if you're an automobile manufacturer, and you're assembling your vehicle in Mexico, all the vehicles you're assembling are going to get a transmission.’

  • ‘Your transmission might come from any one of two or three different countries. And those manufacturers all have specifications. They're all producing now. They're all selling now.’

‘The theory is that if even if one factory blows up, you can go to the others and they can ramp up production.’

  • ‘Now that's not foolproof, but you have an existing relationship with all of them and that's how you balance it.’

‘This is not an optimal outcome from an economic standpoint. This is going to be a series of sub-optimal outcomes.’

  • ‘Manufacturers are going to have to pay more.’

More

CHINAMacroReporter

February 7, 2021
'Remarks by President Biden on America's Place in the World'
“We’ll confront China’s economic abuses; counter its aggressive, coercive action; to push back on China’s attack on human rights, intellectual property, and global governance.”“But we are ready to work with Beijing when it’s in America’s interest to do so. We will compete from a position of strength by building back better at home, working with our allies and partners, renewing our role in international institutions, and reclaiming our credibility and moral authority, much of which has been lost.”“That’s why we’ve moved quickly to begin restoring American engagement internationally and earn back our leadership position, to catalyze global action on shared challenges.”
keep reading
February 7, 2021
'In Search of Today’s George Kennan'
‘Kennan provided a framework to break through the bitter divide between those who believed America should return to its prewar isolationism, and those who believed the USSR was itching for a dramatic showdown with the capitalist west.’
keep reading
February 7, 2021
' "Longer Telegram" Sets Off Fierce Global Debate'
'The fierce global debate set off this week by a thought-provoking paper - “TheLonger Telegram: Toward a New American China Strategy” – has underscored the urgency and difficulty of framing a durable and actionable U.S. approach to China as the country grows more authoritarian, more self-confident and more globally assertive.'
keep reading
August 1, 2021
'Why China Is Cracking Down on Its Technology Giants'
‘Why, you may ask, is China crushing some of its most innovative unicorns? We’re in a new era led by President Xi Jinping, and politics are in command.’
keep reading
August 1, 2021
'The most significant philosophical shift since Deng'
‘Carnage in China's financial markets signals the beginning of a new era as the government puts socialism before shareholders and regulatory changes rip apart the old playbook. According to some analysts, it is the most significant philosophical shift since former leader Deng Xiaoping set development as the ultimate priority 40 years ago.’
keep reading
July 25, 2021
How China's Middle-Class China is Transforming China and the World
‘Among the many forces shaping China's domestic transformation and its role on the world stage, none may prove more significant than the rapid emergence and explosive growth of the Chinese middle-class.’
keep reading
July 22, 2021
Part 2 | The DiDi VIE (as an example)
‘The prospectus has a diagram, above, of the corporate structure, which looks almost normal. But everything below the double arrow — the actual ride-hailing business, etc. — is slightly askew.’
keep reading
July 22, 2021
Part 1 | 'Owning Chinese Companies Is Complicated'
‘ “Variable interest entities”(VIEs): The problem with this is that it sort of sounds like you’re kidding. But this is a standard method for mainland Chinese internet companies to go public, and the market has come to accept it.’
keep reading
July 22, 2021
Part 3 | Revising the Rules
‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
keep reading
July 22, 2021
China: Signals Blinking Red & Oops, We Missed the Risks
I had intended to make this issue all about ‘Variable Interest Entities’ (VIEs) and the emerging risks to about $1.8 trillion dollars’ worth of Chinese shares listed on U.S. exchanges – that is, 4% of the capitalization of the U.S. stock markets.
keep reading
July 22, 2021
'Crackdown on US listings: Will China close $1.6tn VIE loophole?'
‘If Chinese authorities start to question “Variable interest entities”(VIEs), amid the crackdown that has already battered ride-hailing company Didi Global -- another VIE user -- the resulting loss of investor trust could send shock waves through global financial markets.’
keep reading
July 18, 2021
Why the U.S. Lacks Leverage over China
During the celebration of the Chinese Communist Party’s Centennial celebration, Mr. Xi stood in the same place on the balcony facing Tiananmen Square where Mao Zedong stood when he announced the founding of the PRC; Mr. Xi wore a gray Mao suit, among a sea of blue western suits; and he centered himself right above the portrait of Mao, who is similarly attired.
keep reading
July 18, 2021
'I will aim for Mao's Status.'
‘There on the gate was Xi Jinping, Chinese president and party general secretary, in a gray Mao suit. Just below his feet was the portrait of Mao Zedong, also dressed in a gray Mao suit.’
keep reading
July 18, 2021
'US warns companies of risk of doing business in Hong Kong'
“In the face of Beijing’s decisions over the past year that have stifled the democratic aspirations of people in Hong Kong, we are taking action,” said Antony Blinken, US secretary of state. “Today we send a clear message that the US resolutely stands with Hong Kongers.”
keep reading
July 18, 2021
'Biden’s Warning on Hong Kong'
‘The pretense of Chinese and Hong Kong authorities is that their crackdown on the rule of law and dissent will have no effect on Hong Kong’s viability as an international center for trade and finance.’
keep reading
July 18, 2021
'China Plans to Exempt H.K. IPOs From Cybersecurity Reviews'
‘China plans to exempt companies going public in Hong Kong from first seeking the approval of the country’s cybersecurity regulator, removing one hurdle for businesses that list in the Asian financial hub instead of the U.S.’
keep reading
July 18, 2021
Hong Kong and the Limits of Decoupling
‘The United States’ inability to make China regret—much less reverse—its transgressions in Hong Kong suggests that financial separation, sanctions, and economic barriers are less reliable tools than many in Washington believe.’
keep reading
July 15, 2021
Part 1 | 'Joe Biden is determined that China should not displace America'
‘Biden’s emerging China strategy, while still protean, sounds of a kind with Mr Doshi’s prescription for “blunting and building”.’
keep reading
July 15, 2021
The Biden Doctrine and Its Discontents
President Biden has framed China as a threat both to the U.S. and the liberal world order.
keep reading
July 15, 2021
Part 2 | Joe Biden is determined that China should not displace America
‘Mr Biden’s aides invariably start any discussion of China strategy with the need to restore American greatness after decades of decline.’
keep reading
July 15, 2021
'What's Wrong with Biden’s new China doctrine'
‘Mr Biden’s aides invariably start any discussion of China strategy with the need to restore American greatness after decades of decline.’
keep reading
July 8, 2021
Didi: Xi Surprises Us Again
Beijing shocked the financial world when it pulled the rug out from under Didi days after its IPO on the New York Stock Exchange and also announced new regulations reigning in overseas IPOs and Chinese companies already listed.
keep reading
July 4, 2021
The Chinese Point of View
Here are a few of my thoughts on the importance of Wang Jisi’s ‘The Plot Against China.’ Yuen Yuen Ang’s ‘The Evolution of Chinese Corruption’ speaks for itself - but note especially how Mr. Xi's anti-corruption campaign could hurt China's economy. I have now lived long enough that when a friend complains about his or her spouse, I say to myself, ‘There are no doubt two sides to this story.’
keep reading
July 4, 2021
'How Corruption Powers China's Economy'
‘China has managed to sustain four decades of economic growth despite levels of corruption that even Xi has described as “grave” and “shocking.” Why does it seem to have bucked the trend?’
keep reading
July 4, 2021
'How Beijing Sees U.S.-China Relations'
‘In Chinese eyes, the most significant threat to China’s sovereignty and national security has long been U.S. interference in its internal affairs aimed at changing the country’s political system and undermining the CCP.’
keep reading
July 1, 2021
Five Themes that Point to Where the Chinese Communist Party & China are Heading
As the Chinese Communist Party begins its second century, it’s useful to identify enduring patterns that might aid us in understanding China today and the directions it might be heading.
keep reading
July 1, 2021
From Rebel to Ruler: One Hundred Years of the Chinese Communist Party by Tony Saich
‘In our discussions, you've identified five themes that have been more or less consistent throughout the history of the party but have oscillated between different points on a continuum:’
keep reading
July 1, 2021
'From Rebel to Ruler': Tony Saich on Chinese Communism at 100
‘At so many points during its century-long existence, the CCP appeared to be in its death throes, whether as a result of external attack or self-inflicted internal strife.’
keep reading
June 27, 2021
European Chamber in China: 'Business Confidence Survey'
A mere 9% of European companies are considering moving any current or planned investment out of China, the lowest level on record. Instead, companies are strengthening their positions in JVs, onshoring supply chains and increasing spending to secure market share. The ambition not only to stay but also to expand their China footprint is more than justcapital flooding in due to optimism about growth. Companies are taking action to secure their operations in China and mitigate exposure to geopolitical trends in order to have a better chance of navigating a future that looks to be fraught with risk, at least in the near- to medium-term.
keep reading
June 27, 2021
'How China & America Should Compete'
‘China and the West urgently need a new framework for understanding the state of the world and their place in it. Such a framework must recognize, first and foremost, that properly regulated economic competition is not a zero-sum game.’
keep reading
June 27, 2021
'Jimmy Lai & the Death of Free Speech in Hong Kong'
Jimmy Lai’s tabloid, the Apple Daily, with its peculiar blend of scandal, gossip, and serious political reporting, was Hong Kong’s indispensable voice of free speech. Now that voice has been silenced, and Lai is in prison with others who tried to protect the right of Hong Kong’s citizens to speak and write freely, to be ruled by law, and to vote for their own autonomous government. Their politics are diverse Yet they stand together. When freedom is under siege, people cannot afford the narcissism of small differences that is tearing apart liberal politics in countries where people think democracy can be taken for granted.
keep reading
June 27, 2021
'European Companies in China: Between Decoupling and Onshoring'
‘Instead of leaving the market, European companies are exploring ways to separate their China operations from their global ones.’ ‘Following the Covid-19 outbreak, European companies in China spent the first few months of 2020 solemnly appraising their investment strategies.’
keep reading
June 24, 2021
'Apple Daily closed, but press freedom stays in Hong Kong'
‘Freedom of the press is a good thing. The West's freedom of speech must be consistent with national interests and public security.’
keep reading
June 24, 2021
Bitcoin’s growing energy problem: ‘It’s a dirty currency'
“Bitcoin alone consumes as much electricity as a medium-sized European country.”
keep reading
June 24, 2021
'China steps up crackdown on bitcoin mining industry'
‘China’s latest intervention places further pressure on what was once one of the world’s most vibrant markets for trading and mining digital currencies.’ ‘It comes at a time when many governments are scrutinising the industry’s effect on the environment and determining the types of financial oversight that should be applied to cryptocurrencies.’
keep reading
June 24, 2021
'Congress on China: Then and Now'
‘With the Senate voting on June 8, 2021, to adopt the United States Innovation and Competitiveness Act, it is safe to say that this is the most comprehensive action by Congress on China policy EVER.’ ‘The language of the United States Innovation and Competitiveness Act is about a long-term competition with China as opposed to war with an enemy.’
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.