Trendy terms like reshoring, friend-shoring and fragmentation are having a field day. They offer a pithy way to frame developments that, taken in isolation, might seem incremental. Such turns of phrase can also be safely lobbed about at Davos parties without fear of great challenge. But they can also suffer setbacks: US-China trade surged to a record last year, in defiance of all the learned writings about decoupling. Another flaw is that catchy expressions don’t do nuance well; the dispatch of merchandise may have peaked, but services are doing splendidly. The most global of markets, that of currency trading, has swollen to an eye-popping $7.5 trillion a day, according to the Bank for International Settlements.
A new publication from the Center for Economic Policy Research and the International Monetary Fund scrutinises these kinds of tensions and endeavours to put the disruptions of the past few years into perspective. Yes, trade flows and the allocation of dollars are undergoing a significant transformation. But it can be subtle, uneven and unfold in ways that make the embrace of popular labels problematic. Nor did these shifts begin with Donald Trump or the pandemic. That will make them longer-lasting and, as a consequence, their implications less predictable.
This is different terrain from the 1990s, a decade marked by the relentless expansion into Asia and the former Soviet bloc of brands like Starbucks, Microsoft and Boeing, and the forward march of supply chains driven by Japanese automakers and European chipmakers. The contemporary scene has a different vibe, but nonetheless, stops short of a rewrite of economic history. IMF Director of Research Pierre-Olivier Gourinchas, writing in the e-book, acknowledges the system’s durability, while being discouraged by the trends:
Despite all the talk of de-globalisation, trade in recent years proved to be very resilient to multiple shocks and the world economy is still highly integrated. Even when we look at trade between China and the United States, where the trade relationship is most tense, we still have that US imports from China in 2022 are over 30% higher than in 2017… So, is it all ‘scare tactics?’ Not really. Although we are not yet in a fragmented world, we are observing important cracks in the system.
Gourinchas notes that US imports of products subject to the tariffs imposed by Trump, and kept by Joe Biden, are down noticeably. Capital flows, while relatively unhindered, are beginning to reflect nations’ strategic and economic ties — to the extent that it’s possible to distinguish between the two. Industrial policy, once considered a relic of the Cold War, is getting a new lease of life.
BloombergSome of this is well-trod ground. It’s the gems in the e-book’s section on value chains and foreign direct investment that are intriguing. Some of the biggest victors in the race for American FDI, such as South Korea and Canada, happen to be allies of Washington. Relative losers are China and, surprisingly, Vietnam. The China part makes sense. Vietnam, however, has been often hailed as a trade-conflict winner. The nation has a long history of strained relations with its neighbour and is inching closer to the US. Biden recently visited Hanoi to bless the warming of ties.
More wrinkles emerge in a chapter by Caroline Freund of the University of California, San Diego and economists from the World Bank and IMF. They found that tariffs are causing some decoupling between the US and China, but not a rupturing of dependence on the world’s second-biggest economy. The opposite may be true, with indirect links multiplying. To serve American customers wanting diverse sources, these third countries still the need the stuff — or components of the stuff — made in China. In other words, you don’t just grow expertise or niches overnight.
Freund and her collaborators see huge tensions between efficiency and the desire for disentangling. In a paper presented at the Federal Reserve’s Jackson Hole retreat in August, Laura Alfaro of Harvard Business School and Davin Chor of the Tuck School of Business at Dartmouth College made a similar point. Factories where China is the ultimate owner will be difficult to pry from value chains:
Despite a decrease in US direct reliance on China, there has been an increase in China’s import share in ‘friendly’ nations, including the EU, Mexico and Vietnam. And although China is unlikely to replicate other countries’ strategies of circumventing policy restrictions via domestic production in the US through FDI (as Japan did in the 1970s and 1980s), Chinese firms are stepping up FDI and production facilities in Vietnam and Mexico in critical areas, albeit from a low base.
The only true bull market in this era of economic statecraft may be for snappy terms that can grace august magazine covers. Unfortunately, they can obscure as much as they illuminate. The quirks of economic and financial fragmentation, if that is truly what we are witnessing, may end up underscoring just how connected people and markets really are.
