New trade order: US-China neutrality may not give countries an advantage
- Gobal value chains and trade patterns are expected to shift but may not follow a pre-set pattern dictated by assumptions of geopolitics. Being friends with both the US and China may count for little.
Being ‘not China’ may have been the easy part. A big manufacturing pitch in several Asian economies was that they enjoyed cordial relations with Beijing and solid historical ties to the US. Leaders didn’t mind taking some rhetorical shots at America if it was convenient for domestic politics, but showed no desire to choose between the two superpowers.
This sort of opportunism will probably get harder now—and the consequences of a deeper transformation of trading arrangements could be profound.
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Call it friend-shoring or China+1, this was never an exit from the Asian giant but a hedging of bets. Malaysian Prime Minister Anwar Ibrahim’s proclamation at a conference last year of his nation being “the most neutral and non-aligned location" is illustrative. Vietnam officials have also repeatedly declared their nation a trade-war victor.
Behind all this credential burnishing lurked hard questions: Was America’s desire to curb dependence on China-anchored supply chains fleeting or part of a lasting change?
US President Donald Trump has delivered part of the answer. Don’t be too distracted by when or whether his promised tariffs on Canada and Mexico will be implemented. Trump’s statements last week about his plans for the two US neighbours were seemingly contradictory.
These levies were never going to be a light lift, given that Trump declared their free-trade pact renegotiated in his first term was a “model agreement." A recently rolled-out memorandum aimed at curbing China’s access to tech, energy and various other vital US industries may indicate his current direction better. Trump has also called upon Mexico to rein in imports from China, which have climbed.
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It will matter more where things are made, not just where they transit through on their way to the US. This represents a new degree of trade disruption that will underscore the allure of regional alignments. “In the next phase of near-shoring, we expect pressure to mount for a migration of productive capacity," Morgan Stanley economists Seth Carpenter and Rajeev Sibal wrote in a note. “No longer will it be good enough for goods to trade through friendly partners."
A shift of this magnitude won’t be executed overnight. China remains the world’s largest manufacturer and depends on exports to support its economic growth, particularly with weak domestic consumer demand and a real-estate-crash overhang that will take years to work through.
For the US, redeveloping a broad manufacturing base will take time, if it can be done at all. Mexico and Canada, consequently, may become more important to America’s industrial strategy, not less. If low-cost, efficient supply chains that easily pass from one jurisdiction to another fall out of favour, this will likely slow down disinflation for years. Asia will probably be further pulled into China’s orbit.
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Uber-regionalism may be the underlying trend to watch. When economic historians chronicle this period, will they point to Trump’s first election in 2016? That is what many consider to be America’s big break with the so-called Washington Consensus, which had championed the primacy of open markets, deregulation and minimal state meddling since the 1980s.
This neglects important, symbolism-rich markers along the way, such as the rioting in Seattle that scuttled World Trade Organization talks in 1999.
Dani Rodrik, an economics professor at Harvard, sees the drive toward regionalism gaining momentum. He recently recalled the resistance to his 1997 book Has Globalization Gone Too Far?
“When I circulated the manuscript among trade economists... one of them reacted by saying, you know, all this is fine, but don’t you think you are giving ammunition to the barbarians," Rodrik told ‘The Economics Show’ podcast from the Financial Times this month. “Why is it the barbarians are only on one side of this issue and that somehow people on the other side pushing for hyper-globalization regardless of its consequences were somehow doing it for everybody’s benefit?"
There will be caveats to these grand themes, and sometimes exceptions show the rule. For one thing, the reaction to globalization has been largely confined to manufacturing, not services.
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The US dollar remains the hegemonic medium of exchange, and, as the US Treasury notes, also the world’s prime financial asset. But for factories, a transformation is underway.
There are legitimate arguments about how it will go and how to prevent America’s national-security partners far away from North America, like Japan and South Korea, from being frozen out. Supply chains have never been static—they are always evolving. This new chapter will test their durability. ©Bloomberg
The author is a Bloomberg Opinion columnist covering Asian economies.
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