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 11, 2021
'The Biden Team Wants to Transform the Economy. Really.'
‘Biden and his more activist advisers hope to modernize key industries and counter an economic threat from China, swiftly emerging as the world’s other superpower. “The package that they put together is the closest thing we’ve had to a broad industrial policy for generations, really,” says Scott Paul, the president of the Alliance for American Manufacturing.’
keep reading
February 10, 2021
‘What the ‘Hong Kong Narrative’ gets wrong'
‘For a significant cohort of the [“pro-democracy”] protesters, the more accurate label would be “anti-China activists.” The one thing that seems to unite them is not a love of democracy, but a hatred of China.'
keep reading
April 15, 2021
'TSMC faces pressure to choose a side in US-China tech war'
‘Taiwan Semiconductor Manufacturing Company (TSMC) has maintained its historic position of neutrality, reflected in the company’s strategy of “being everyone’s foundry”.’
keep reading
April 14, 2021
The Belt & Road in the Post-Pandemic World
In this issue of China Macro Commentary, I have focused just on the ‘Digital Silk Road’ and how it supports the business expansion of Chinese tech companies, and on BRI ‘connectivity’ projects: ports (China is involved in 93 around the world) and on the growing China-Europe freight trains traffic (This wasn't covered sufficiently in the Report, so I included a recent article from the Wall Street Journal), plus on the U.S.'s failure to meet the BRI challenge.
keep reading
April 13, 2021
'2021 Annual Threat Assessment of the U.S. Intelligence Community'
‘China increasingly is a near-peer competitor, challenging the United States in multiple arenas—especially economically, militarily, and technologically—and is pushing to change global norms.’
keep reading
April 13, 2021
In Battle With U.S. for Global Sway, China Showers Money on Europe’s Neglected Areas
‘The number of freight trains running between China and Europe topped 12,400 last year, 50% higher than in 2019 and seven times that of 2016, according to Chinese authorities.’
keep reading
April 11, 2021
'Why manufacturing matters to economic superpowers'
‘Whether such reshoring matters for national economies depends very much on the industry.’
keep reading
April 11, 2021
China in Jamie Dimon's Letter to Shareholders
‘China does not have a straight road to becoming the dominant economic power’.
keep reading
April 11, 2021
'Alibaba’s rivals on alert after China’s regulators hand out record fine'
“Everyone with a clear mind won't self-regulate, you just pretend that you do. Who will pay for the loss if you lost your competitive advantage because you self-regulated and others didn't?”
keep reading
April 10, 2021
Alibaba: 'Promote the healthy and sustainable development of the platform economy'
‘From the perspective of the long-term and healthy development of the platform economy, regulation by law and support for development are not contradictory, but are complementary and mutually reinforcing.'
keep reading
April 9, 2021
'The Best Explanation of Biden’s Economic Thinking I’ve Heard'
‘When President Biden’s thinking about the infrastructure investments necessary, a lot of it is in contraposition to what he is seeing China doing in terms of strategic investments.’
keep reading
April 8, 2021
Liu Ge: Competing with China a farfetched guise for US’ infrastructure plan
‘Historically speaking, it seems the only way for the US government to make costly public investments was to create an adversary that is presumed to threaten its security.’
keep reading
April 8, 2021
'Antony Blinken interview: The secretary of state offers a window into Biden's foreign policy decisions'
‘ “Our goal is not to contain China, hold China back, keep it down,” Blinken underlined.’
keep reading
April 8, 2021
'US adds Chinese supercomputing companies to export blacklist'
‘The Biden administration took its first trade action against China on Thursday, adding seven Chinese supercomputing developers to an export blacklist for assisting Chinese military efforts in a move that will likely further escalate frosty tensions between the world's two largest economies.’
keep reading
April 7, 2021
'Remarks by President Biden on the American Jobs Plan'
‘Look, do we think the rest of world is waiting around? Take a look. Do you think China is waiting around to invest in this digital infrastructure or in research and development?’
keep reading
April 7, 2021
China: 'Power Trader'
‘The theory of power trade better explains China’s economic and trade policies than does the theory of free trade or protectionism,’
keep reading
April 6, 2021
'Train Wreck: Ultimately companies have to choose.’
MUST READ: Bill Reinsch succinctly but brilliantly summarizes the situations in China and the U.S. and between the two.
keep reading
April 6, 2021
'Buy American!': Pushing U.S. Companies to Onshore Supply Chains
The debate about how to deal with China commercially ‘has moved in two directions: running faster—improving our innovation capabilities in critical technologies to better compete with China—and slowing China down by restricting its access to U.S. technology.’
keep reading
April 4, 2021
'Why Defending Taiwan is in the U.S. National Interest'
‘As long as Washington assesses that American security is best served by defending forward—an approach that has served the United States well over the past 70 years—Taiwan’s de facto independence will remain a key US interest and driver of American policy in Asia.’
keep reading
April 4, 2021
'Why China Is Going All "Wolf Warrior," All the Time'
‘All this is to say that, living in Beijing as I do, I think the current approach is predictable and consistent with everything else we are seeing in China in the New Era.’
keep reading
April 3, 2021
'With Swarms of Ships, Beijing Tightens Its Grip on South China Sea'
‘Not long ago, China asserted its claims on the South China Sea by building and fortifying artificial islands in waters also claimed by Vietnam, the Philippines and Malaysia.’
keep reading
April 2, 2021
'Genesis Celebrates Launch In China With Dazzling, World Record-breaking Drone Show Over Shanghai's Iconic Skyline'
'The spectacular visuals were coordinated to present the world of Genesis, delivering an audacious storytelling concept while also breaking the Guinness World Records for "The Most Unmanned Aerial Vehicles (UAVs) airborne simultaneously".’
keep reading
April 2, 2021
Mo' Infrastructure, Mo' Problems Copy
‘China’s reliance on building roads, railways and airports to support growth has caused a spike in debt, with some of that money funneled into unnecessary infrastructure and uneconomic boondoggle developments.’
keep reading
April 2, 2021
How Does the U.S. Compare to China?
Two reports from Bloomberg – ‘Biden Starts Infrastructure Bet With U.S. Far Behind China’ and ‘Biden’s Biggest-Ever Investment Plan for U.S. Still Trails China’ – highlight a few of the differences.
keep reading
April 2, 2021
USTR | '2021 National Trade Estimate Report on FOREIGN TRADE BARRIERS'
‘Made in China 2025 seeks to build up Chinese companies in the ten targeted, strategic sectors at the expense of, and to the detriment of, foreign industries and their technologies through a multi-step process over ten years.’
keep reading
April 2, 2021
‘2021 Report Card for America’s Infrastructure’
‘The 2021 Report Card for America’s Infrastructure reveals we’ve made some incremental progress toward restoring our nation’s infrastructure.’ ‘For the first time in 20 years, our infrastructure is out of the D range. America's Infrastructure Scores a C-.’
keep reading
April 2, 2021
'US to make it easier for diplomats to meet Taiwanese officials'
'Plan to loosen restrictions on contacts with Taipei threatens to provoke China.'
keep reading
April 2, 2021
Biden Starts Infrastructure Bet With U.S. Far Behind China
Even though he didn’t rely solely on the China challenge to justify his new American Jobs Plan; devoted to infrastructure and more, President Biden certainly he had China in his sights. Because as Jonathan Hillman, a senior fellow at the Center for Strategic and International Studies, wrote“The United States is entering what could be a decades-long competition in which economic and technological power will matter just as much, if not more, than military might.” “Starting this race with decaying infrastructure is like lining up for a marathon with a broken ankle.”
keep reading
April 2, 2021
President Biden Lays Out His ‘American Jobs’ Plan
‘It has become a cliché in U.S. policy circles that the best China policy is to invest in core U.S. capabilities: education, infrastructure, and research and development,’ writes Evan Medeiros of Georgetown University in ‘How to Craft a Durable China Strategy,’ in Foreign Affairs.
keep reading
April 2, 2021
'China’s Dangerous Double Game in North Korea'
‘Beijing’s North Korea policy is primarily motivated by a desire to counter U.S. power in the Asia-Pacific region and increase Chinese influence on the Korean Peninsula.
keep reading
April 2, 2021
'Japan’s Suga to Be the First Foreign Leader to Meet With Biden'
‘Japan walks a narrow line as it seeks to maintain close ties with its only military ally, the U.S., while avoiding damage to economic ties with its biggest trade partner, China.
keep reading
April 1, 2021
'Convicted in Hong Kong'
‘Everyone in the former British colony understands the message being sent from Hong Kong’s new masters in Beijing:’
keep reading
April 1, 2021
'U.S. dollar at risk as China races ahead on digital yuan'
‘So why should America care about any of this?’
keep reading
April 1, 2021
PRC Foreign Ministry Response to the USTR's 'National Trade Estimate Report'
‘The accusations and slanders made by the US against China's industrial policies are groundless.’
keep reading
March 31, 2021
'Consumer boycotts warn of trouble ahead for Western firms in China'
‘Western executives in China cannot shake an unsettling fear that this time is different.’‘Their lucrative Chinese operations are at rising risk of tumbling into the political chasm that has opened between the West and China.’
keep reading
March 31, 2021
'How the Pandemic is Changing the Belt & Road Initiative'
‘The building of roads, railways, ports, and power plants is giving way to a BRI centered on technology—primarily telecommunications, connectivity, health care, and financial services.’
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.