Global trade roars back, but tensions persist

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Posted on Jul 21, 2021 2:47 PM by

The strategist

[By David Uren]

Globalization is back with such force that shipping companies are struggling to keep up, sending freight rates to astronomical levels.

The onset of the pandemic early last year reduced trade volumes and highlighted the vulnerability of the extensive supply chains that are the hallmark of globalization, with different elements of production located in various countries.

At one point, 70% of the world’s ports were affected by Covid-19, leaving ships unable to dock and hundreds of thousands of crew members stranded at sea. Political leaders around the world began to speak out strengthen the resilience of supply chains and repatriate production. The reaction against globalization was itself global.

In the United States, Donald Trump went to the elections last November promising tax breaks for companies bringing manufacturing back to the United States and tariffs on American companies relocating their production, while Joe Biden committed to reserving US government procurement for US companies.

In China, Xi Jinping articulated the concept of a “circular economy,” which meant a shift in the focus of international trade towards domestic consumption and production.

In Australia, Scott Morrison spoke of strengthening the nation’s “economic sovereignty” with a new “Supply Chain Resilience” office established within the Prime Minister’s Department and Cabinet, and a dialogue established with the Japan and India on the subject.

The mood of the moment was well expressed by one of the government advisers on the post-coronavirus economic strategy, former CEO of Dow Chemical Andrew Liveris: “Australia has drunk the juice of free trade and has decided that the relocation was OK. the era is over… We must now realize that we really need to examine the key capabilities of offshoring. “

By May of last year, global trade volumes had plunged 17%, but the fall then stopped and by October, global trade volumes had returned to pre-pandemic levels. The World Trade Organization, which expected trade to decline 13% for the year, recorded only a 5% drop.

Monetary and fiscal stimulus, especially in the United States, bolstered the purchasing power of households, while homebound workers shopped online. Effective management of the pandemic across much of Asia, especially China, has allowed economic growth to pick up quickly.

However, the imbalances of the recovery are creating tensions. Comparing the three months to April with the last three months of 2019 before the pandemic hit, the volume of US imports is up 8.6% while the volume of exports is still 4% lower. (Trade volume estimates are derived from the Dutch government’s CPB World Trade Monitor.)

China’s imports are up 18.2% and export volumes are 23.6% higher than pre-pandemic levels. Exports from other emerging Asian countries, including India and Vietnam, are 11.8% higher in the last quarter of 2019, while exports from other advanced Asian countries except Japan (Korea South, Taiwan and Singapore) are up 9%.

In the wake of the pandemic, globalization is not so much about the distributed manufacturing model, but rather a simple story of shifting manufacturing from Europe and the United States to Asia, especially China. Supply chains are struggling to adapt to an increasingly imbalanced distribution of production and consumption.

This resulted in the accumulation of shipping containers in the United States and Europe [and] blockages in the main ports. The Maersk shipping company complained that it takes three weeks to straighten out the shipment in Oakland, Calif., And that there are delays in Hamburg. Rotterdam, the largest port in Europe, is at full capacity.

Shipping costs have skyrocketed. The global average shipping rate on the world’s busiest container routes, as measured by the Freight Baltic Index, has fallen from $ 1,400 per container to a record $ 6,500, the cost of shipping from China to Northern Europe now reaching $ 13,200. A logistics department reported last week that shipping quotes from Shanghai to Los Angeles were as high as $ 32,000 per container.

The shipping industry’s difficulties in adjusting to the post-pandemic economic surge were highlighted by the blockade of the Suez Canal in March this year by a giant container ship, the Never given. This has resulted in congestion in ports across the Mediterranean and northern Europe that has never been cleaned up.

There is now a global shortage of shipping containers, which are produced only by two Chinese companies, and there is an acute shortage of shipping space.

Opinions are divided on the diagnosis of what looks like a case of sclerosis of the arteries of the global economy. Some argue that post-pandemic bottlenecks, of which the shipping industry is the most important, will dissipate as the global economy recovers its balance, with more ships and containers built and stabilized. demand as the world emerges from the pandemic.

Others suggest that the observed disruptions now reflect a deeper problem with fiscal and monetary stimulus in the advanced world exceeding the supply capacity of the global economy, with the risk of higher inflation taking hold.

David Uren is a senior fellow at ASPI.

This article is courtesy of The Strategist and appears here in abridged form. The original can be found here.

The opinions expressed here are those of the author and not necessarily those of The Maritime Executive.

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