70 The Economist April 23rd 2022Finance & economics

Supply chains

Stronger links

Over the quarter­century  before  the pandemic,  global  manufacturing  was

transformed by the emergence of complex supply chains, through which fi�rms could effi�ciently produce all sorts of goods at low cost  and  enormous  scale.  The  pandemic put these supply chains through the wring­

er,  causing  wild  swings  in  demand  while forcing repeated lockdowns that frustrated both production and distribution. The re­

sult  has  been  a  surge  in  shipping  delays, shortages of critical components and soar­ ing prices.

Governments  have  become  keener  to boost  domestic  production,  the  better  to reduce their vulnerability to disruptions in foreign supplies. But new work by the imf suggests  that  this  would  be  misguided. Supply  chains  held  up  better  during  the pandemic than is often assumed, it argues, and  greater  self­suffi�ciency  is  likely  to leave countries more vulnerable to future shocks, not less.

The covid recession was unusual. Trade in goods fell sharply at its onset—by 12% in the second quarter of 2020, relative to late 2019—but  then  bounced  back  faster  than has been common in recent downturns. To better  understand  these  gyrations,  the fund’s economists built a model that pre­

dicts  trade  patterns  based  on  levels  of spending  within  economies.  They  found large diff�erences between the amount and type  of  trade  predicted  by  the  model  and what  actually  happened  during  the  pan­ demic—a sign of covid­related weirdness. 

The  virus  distorted  trade  in  part through  its  eff�ects  on  domestic  econo­ mies. Places that experienced higher case­ loads and more restrictive lockdowns im­

ported  more  goods  than  expected,  given the blow to overall gdp, for instance. That in  part  refl�ects  a  shift  in  demand  away from  services  and  towards  goods  such  as home  electronics  and  protective  equip­ ment. Covid also  interfered with the pro­

duction  of  some  goods  at  home,  which then needed to be imported instead. 

But lockdowns in some places also had spillover eff�ects elsewhere. During the fi�rst half  of  2020,  the  researchers  note,  about 60% of the decline in a country’s imports could  be  explained  by  lockdowns  in  its trading  partners.  These  ripple  eff�ects  hit goods  that  were  reliant  on  long  supply chains the hardest. But the drag was small­

er when the places that were locked down had greater capacity to telework. And cru­ cially, the eff�ect of restrictions declined ov­

er  time,  as  working  patterns  and  supply chains  adapted.  Exporters  in  places  that ended  strict  lockdowns  earlier  saw  big gains in market share, with bigger increas­ es occurring in the production of supply­ chain­intensive goods.

A  lack  of  data  means  that  the  fund’s analysis  stops  in  mid­2021,  after  which  a series of unfortunate events, from strand­

ed  ships  to  war,  led  to  port  backlogs  and rising  costs.  Nonetheless,  the  fund  reck­

ons the model might suggest how best to protect  an  economy  against  disruptions. The answer is not by reshoring production, but  by  diversifi�cation:  sourcing  inputs from a wider variety of countries, and us­ ing components that can easily be substi­ tuted for if supply problems arise.

In most countries, the vast majority of components used to make goods tend to be sourced domestically. About 69% of parts in Europe and more than 80% in the west­

ern hemisphere are produced at home, for example. If a fi�rm were to choose to import a critical component instead, it would face a more diverse choice: the market share of the average exporting country in the aver­

WASHINGTON, DC

New research spells out the benefits of diversification

013

age  industry  is  a  little  under  a  third.  Re­ shoring would therefore tend to reduce the diversifi�cation  of  a  supply  chain  rather than  increase  it,  by  making  production even more dependent on a single country: the home economy. That could prove cost­ ly. The fund estimates that in the face of a big disruption (one that causes a 25% drop in labour supply in a single large producer of  critical  inputs),  the  average  economy could be expected to suff�er a fall in gdp of about 1%. Greater diversifi�cation stands to reduce the damage by about half.

Encouraging  diversifi�cation  is  a  tricky matter.  The  fund  suggests  that  lowering barriers  to  trade  and  investing  in  infra­ structure  could  help.  Geopolitical  ten­ sions, sadly, mean that openness to deeper integration is in short supply. But the gains to be made, at least, are now clearer.  n�

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The Economist October 10th 2020 Special report The world economy 7

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stopped crossing borders; Davos 2021 was postponed. However, the supply-chain panic has left a lasting impression. For business, it is further evidence of the risks of distant disruption. For govern- ments it offers more reasons to turn inward. The result is to accel- erate changes to globalisation that were already in train.

Global supply chains were forged in the period from the mid-1980s until the financial crisis 25 years later. Trade surged in volume and changed in nature. It grew nearly twice as fast as global output, as emerging markets in Asia were bedded in to the world economy. After China joined the World Trade Organisation in 2001, its share of world exports of many parts and capital goods grew from under 10% to over 30%. Countries often specialised not in specific goods, but in bits of them. Taiwan, South Korea and Japan made semiconductors for the consumer-electronics industry. China supplied parts to German carmakers. The rise of computing made such complexity manageable. Globalisation brought cheap- er goods to the rich world and, thanks to what Ben Bernanke, then Fed chairman, called a “global saving glut”, low interest rates. It also displaced many workers. Perhaps a million Americans lost their jobs to Chinese competition.

The 2010s slammed on the brakes. Trade stagnated as a share of gdp; foreign direct investment fell. As China’s middle class grew, it consumed domestically more of what it produced. Its share of world exports stopped rising in 2015, but its share of world imports continued to grow. As manufacturing became more automated, savings from locating production where workers were cheapest shrank. The rise of social media made consumer fads more vola- tile, necessitating faster production and shipment to satisfy impa- tient buyers. “Just in time” delivery of parts worked better with closer suppliers. And disasters highlighted the risk of a specialised economy. The tsunami that hit Japan in 2011 cut Toyota’s produc- tion in America by nearly a third because of a shortage of parts, while flooding in Thailand inundated factories producing a quar- ter of the world’s hard drives. Firms began to see long supply chains as unwieldy and risky. Trade started to concentrate in re- gional blocks. Globalisation became slowbalisation.

Then Donald Trump was elected in November 2016, and a trade

war began between America and China. Companies realised they were exposed to political risk from economic nationalism, as much as from distant disruption. In 2019, as average American ta- riffs on Chinese imports rose from 12% to 21%, and tariffs in the other direction rose from 17% to 21%, America’s share of Chinese imports and exports fell to its lowest in 27 years, before China’s wto entry. America circumvented and then sabotaged the wto, stopping the nomination of judges to its appeal board and thus its ability to adjudicate trade disputes. In Europe Britain voted for Brexit in June 2016. Many European leaders grew frustrated with unfettered markets, wishing to have national champions that could compete with China’s state-backed giants.

The blow struck by covid-19 has made supply chains a “ceo and board level topic,” says Susan Lund of McKinsey, a consultancy. Until this year, she says, many firms did not realise how much their supply chains depended on China. In a survey conducted by McKinsey in May, some 93% of firms reported plans to make sup- ply chains more resilient. The firm finds 180 products for which a single country accounts for over 70% of exports and reckons the production of 16-26% of goods exports could change location in the next five years. Firms are worried not just about trade wars and other shocks, but about their environmental footprint and labour standards. These are easier to monitor closer to home.

There has been an upsurge in government intervention to protect jobs and rescue firms; by the end of April the eu had approved more than €2.2trn ($2.6trn) in state aid. Even before the pandemic France and Germany wanted Europe’s state-aid and competition rules loosened in the name of promoting national champions.

Interdependence days Politicians have also come to realise how much health-care sys- tems depend on trade. Shortages of personal protective equipment (ppe) spurred many to limit or block exports of these and similar goods. The imf counts 120 new export restrictions this year. For many medical goods production is highly concentrated: China ac- counts for 60% or more of exports of antibiotics, sedatives, ibu- profen and paracetamol. Britain has launched “Project Defend”, which will try to reduce reliance on Chinese production of critical products with a mix of reshoring and guarantees that supplies pass through friendly countries.

Unhappily, the political appeal of protectionism grows during slumps. When economies lack demand, governments covet spending that leaks overseas on imports. This is what led to a devastating round of protectionism in the 1930s. Protection also rose after the financial crisis. It does not help that China’s stimulus has tried to keep production going, whereas rich-world governments have supported household incomes. Brad Setser of the Council on Foreign Relations, a think-tank, notes that China’s current-account surplus, which was shrinking, has exploded this year. Its exports have recovered strongly, outward flows of tourists have all but stopped and commodity prices have fallen, making imports cheaper. Were China’s trade surplus in July sustained for a year it would add up to $700bn, surely enough to worsen the trade war with America.

Such is the confluence of forces bearing down on global trade—organic slowbalisation, trade wars, suspicion of supply

Changing places The pandemic will not end globalisation, but it will reshape it

For a time economic contagion seemed more threatening than the pathological kind. Though the spread of covid-19 was main- ly in China, the damage was appearing along supply chains that produce the world’s goods, notably cars and consumer electronics. China is the world’s second-biggest exporter of parts, so as its fac- tories shut down, manufacturers everywhere faced delays. Even before the virus took off in South Korea, Hyundai had halted pro- duction because of a shortage of imported parts. The World Eco- nomic Forum (whose annual bash in Davos epitomises globalisa- tion) advised companies to bring production closer to customers.

As the pandemic spread, location ceased to matter much. There was no escaping the disease: the world economy saw its deepest, most synchronised collapse on record. Some of the least global- ised economic activities—restaurants, cinemas, fitness classes and other services—suffered most. More than goods, people

International trade

8 Special report The world economy The Economist October 10th 2020

2 chains—that some draw comparisons be- tween today and the early 20th century. Then, a peak in globalisation collapsed un- der the weight of the first world war, Span- ish flu and then the 1930s depression.

The comparison is too pessimistic. Trade has not done as badly as feared. In April the wto forecast that goods trade would fall by 13-32% this year; today it seems more likely to be just 10%. The imf

says the decline in trade will be commen- surate with the slump in demand from the recession. That is in contrast to the after- math of the financial crisis, when trade fell by more than its usual relationship with gdp suggested. It also shows that supply chains have not been wholly wrecked. They were crucial for the response to ppe short- ages, argues Sébastien Miroudot of the oecd club of mostly rich countries. South Korea, which has been exporting millions of test kits to America and Europe, was unique- ly placed to ramp up production using existing supply chains and relationships.

The logic of turning inward in response to the pandemic is shaky. A recent working paper by Barthélémy Bonadio of the Uni- versity of Michigan and three co-authors studies 64 countries and finds that one-quarter of the drop in gdp this year was transmitted along supply chains, but that reshoring production would not have reduced the damage. Mr Miroudot distinguishes a supply chain’s robustness (the ability to keep working through a crisis), from its resilience (the ability to bounce back from one). The his- tory of supply chains is that they are not robust but they are resil- ient, because companies are quick to find workarounds. Their ro- bustness could be improved, but not by repatriating production, since disaster can strike at home as well. Had New York been the centre of mask production when covid-19 struck, the result would have been a “real big mess”, argues Shannon O’Neil of the Council on Foreign Relations.

Governments might choose to ignore all this in favour of pro- tection. But most firms are not about to abandon their cross-bor- der investments. A survey by the us-China Business Council shows little change in the number of American firms saying they have moved or plan to move out of China. The survival of the “phase one” trade deal struck in 2019 suggests that even the Trump administration knows there are limits to the desirability of decou- pling from China. Rather than a wholesale break, covid-19 is likely to cause an acceleration of forces already in motion. Firms will trade off a bit of efficiency for more robustness, realising that in the long run the robotisation of manufacturing may lead to more local production anyway. Governments will shorten and diversify supply chains for medical equipment. But America and China will trade under a darker cloud of mutual suspicion, balancing com- mercial and geopolitical interests.

Further ahead the future of globalisation will be determined less by goods than by services. Before covid-19 services trade was not suffering from slowbalisation: it was growing faster than gdp. Exports of services account for around a fifth of all trade, according to the wto (although what exactly counts as services trade is a mat- ter of some debate). Like trade in goods, trade in services has suf- fered this year as tourist flows have collapsed. But consumers are unlikely to have suddenly lost their taste for travel, and countries have little long-term incentive to close borders to tourists. It seems likely that tourism will eventually rebound.

Meanwhile, the surge of investment in remote working during 2020 might open the door to more trade in digital services. When

work is carried out remotely, it does not matter where it is done. On the more futur- istic end, this involves remote presence. Whereas the export of repair services previ- ously required high-skilled engineers to cross borders, virtual- and augmented-re- ality technologies now allow experts in one country to help lower-skilled workers fix machines in another, says Ms Lund. Rich- ard Baldwin of the Graduate Institute in Ge- neva points to the potential for remote workers in poor countries to carry out basic office tasks for firms in the rich world. Be- fore the pandemic the wto was already talking up the potential for more trade in digital services, predicting that if develop- ing countries adopted digital technologies, they could reap the rewards of a higher share of international services trade.

Services trade is hard to liberalise because it often means har- monising regulations. Fields such as education, health care, ac- counting and finance are littered with barriers to entry and re- quirements for local credentials. The most successful model for remotely provided services is India’s it sector, which faces few reg- ulatory hurdles. But disputes over cross-border data flows and the taxation of internet giants augur badly for faster digital integra- tion. Digital trading, just like trade in goods, is increasingly con- centrated in regional regulatory blocks. Yet Mr Baldwin argues that the rise of online services trade will bypass tensions between East and West, because it will take place within time zones: South America will supply cheap digital services to North America, Afri- ca to Europe, and South-East Asia to North-East Asia.

The increased digitisation brought on by covid-19 can only help services trade, even as goods trade continues to slowbalise. But the extent of that help depends on how much the pandemic reshapes labour markets, the subject of the next chapter. 7

Bumping along World

Sources: IMF; OECD *Value of imported parts as a share of output

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Trade as % of GDP

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191020001990

Import intensity of production*, %

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The Economist September 12th 2020 Finance & economics 63

In quentin tarantino’s “Kill Bill: Vol- ume 2”, an action drama, the protagonist,

played by Uma Thurman, punches her way out of a coffin. Global trade in goods has performed a similar death-defying stunt during the covid-19 pandemic. In April things looked dismal. Some predicted glo- bal trade would slump by more than 30% this year, compared with 2019. But after a gut-wrenching spring, trade volumes re- corded their biggest monthly rise on record in June, the last month of available data (see chart). Oxford Economics, a consul- tancy, predicts that in 2020 as a whole vol- umes may drop by 10%.

This resilience has defied recent experi- ence, as well as expectations. In 2009, when global gdp fell by 0.1% in the final year of the financial crisis, trade plunged by a whopping 13%. This year the imf fore- casts that global gdp could fall by 4.9%, ie, 50 times more than in 2009. So why will the hit to trade probably be smaller?

After the financial crisis trade volumes fell much further than gdp mostly because people stopped buying heavily traded dur- able goods, such as cars. But in the current crisis, untraded domestic services have been harder hit than they were back then. Going to the cinema or a restaurant halted during lockdown. Buying an imported fridge did not. That has made the drop in trade relative to gdp smaller.

Moreover, the robustness of the world’s production apparatus has underpinned trade flows. Covid-19 froze supply chains, but in Asia at least they swiftly started to thaw. According to Simon Evenett of the University of St Gallen in Switzerland, the number of trade restrictions applied on

medical goods and medicine since the start of the crisis peaked in April, and has since fallen by 15%. Even more importantly, lock- downs were lifted more quickly than ex- pected, allowing exporting powerhouses like China and Germany to reopen factories and boost output.

Pandemic-induced demand gave trade in some products extra pep. America’s im- ports of protective equipment tripled be- tween March and July, calculates Panjiva, a trade-data company. Covid-related pro- ducts including computing equipment for home-working has accounted for the ma- jority of China’s year-on-year export growth in each month since June. Eytan Buchman of Freightos, an online market- place, reports that ocean-freight prices are surging for routes between America and South-East Asia, partly because of “near- frantic” e-commerce offerings by small businesses.

Policymakers have played a pivotal role in the trade revival. Monetary and fiscal firepower was bigger and faster than trade experts had expected. Central-bank liquid- ity measures kept trade finance flowing better than it did during the financial cri- sis, says Jennifer McKeown of Capital Eco- nomics, a research outfit.

Although the trade performance is cause for relief, no one should declare vic- tory yet. A second wave of lockdowns, or overhasty efforts to curtail economic stim- ulus, could derail the recovery. The value of exports from South Korea dipped in August relative to July, as did those of China after adjusting for an artificially depressed base in 2019. Robert Koopman, chief economist of the World Trade Organisation, which oversees global trade, doubts there will be a sustained v-shaped recovery.

Overlaying this is a concern about the lingering unevenness of trade. Brad Setser of the Council on Foreign Relations, an American think-tank, says that the trade slump has shrunk the gap between most countries’ imports and exports, reducing imbalances. Yet there have been two stand- out exceptions. The first is China, whose rapid reopening has sent its exports of goods surging to a level last seen before the Sino-American trade war—almost $60bn higher than imports in August. The second is America, whose policies to stoke de- mand have had the side-effect of causing its trade deficit to increase further—to around $80bn in July.

This imbalance is ominous. Although the so-called Phase One trade deal between America and China was meant to prop up American exports to China, so far it has dis- appointed. Trade may not have perform- ed as badly as many feared. But it still has an alarming ability to pack a Thur- manesque punch. 7

WA S H I N GTO N , D C

Commerce has shown a strange resilience to covid-19

Global trade

Down but not out

Houdini act World merchandise trade % change on a year earlier

Source: CPB World Trade Monitor

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Page 1

ECON 335 International Economy

Instructor: Huiran Pan

Writing Assignment

Deadline: 11:59PM (Pacific Time) on May 7, Tuesday

Canvas online submission will be automatically shut down at the deadline.

Late submission through email will result in 20% deduction in the writing assignment grade

for any delay less than 48 hours. No more late submission will be accepted or graded after 11:59PM

(Pacific Time) on May 9, Thursday.

ECON 335 fulfills the general education requirement in Explorations in Social Sciences. The writing

assignment is designed to give you practice in applying economic concepts to real world issues as well as

to hone your argumentative and writing skills.

Grading

It accounts for 15% of the course grade. Your assignment will be graded according to the following

criteria (see detailed rubrics on page 3):

• Content: demonstrate clear understanding of the material and correctly apply relevant

economic concepts and theories to the issue(s) in question.

• Analysis: present an in-depth economic analysis; thoughts and arguments are developed

precisely and logically.

• Writing: clear and concise meaning, good transitions, free of spelling and grammatical

errors, and correct formatting and citations.

Requirement

Read the following articles posted on Canvas→ Assignments→Writing Assignment.

“Down but not out,” Anonymous, The Economist, Vol. 436(9211), September 12, 2020, pg. 63.

“Changing places,” Anonymous, The Economist, Vol. 437(9215), October 10, 2020, pg. S7-S8.

“Stronger links,” Anonymous, The Economist, Vol.443(9293), April 23, 2022, pg. 70.

Write a report in your own words to answer the assignment questions on page 2.

Do not merely copy the words or directly quote the sentences in the articles or line up unrelated

answers to the assignment questions. You may use as references the articles above, the textbook, and

your lecture notes. No other print or online sources (including Google or Chat GPT) are allowed. If

you cite the articles above and/or the textbook, please include your citations and references using APA

format. For guidance of APA format, see https://libraryguides.fullerton.edu/citations/APA.

This is an individual assignment. Do not discuss with any other students/tutors about the writing

assignment. If you have questions regarding the writing assignment, please ask the instructor.

Plagiarism will result in zero and will be reported to the Student Conduct Office.

Format

The report should be two to three pages, 1.5 line-spaced, 11-point font. Cover page, references, tables,

and graphs are not counted into the page limit. The report needs to be typewritten using Microsoft

Word. No handwritten papers will be accepted.