Covid-19 will end the post-1945 era of globalisation
The coronavirus is accelerating the ongoing shift towards protectionism and autarky, says Edward Chancellor
Past cycles of globalisation have been vulnerable to sudden shocks. World War I brought the Victorian free-trade era to a shuddering halt. The 1929 crash led to beggar-thy-neighbour tariffs. The financial crisis in 2008 damaged faith in globalisation. The Covid-19 pandemic could well prove a harder blow.
Protectionist pressures tend to increase when growth weakens. In 2015 restrictions affected a greater share of world trade than in the 1930s, according to Global Trade Alert, and world trade volumes started to decline. Since the advent of President Donald Trump in 2017, thousands of new trade distortions have been introduced.
The US-China tariff war accounts for less than a quarter of recent anti-trade measures, estimates Simon Evenett, professor of International Trade and Economic Development at Switzerland’s University of St. Gallen. Still, Trump’s preference for conducting policy on Twitter took a toll. Last October, the International Monetary Fund warned that jitters over trade policy were dampening global growth prospects. It was at this critical juncture that Covid-19 emerged.
The pandemic has exposed the fragility of cross-border supply chains. Producers have used cheap dollar funding for trade credit to lengthen their supply chains, often incorporating several countries. These chains are cost-efficient but vulnerable. When Beijing tried to halt the spread of the epidemic in January, many Chinese factories were shut.
Apple had problems sourcing parts for its iPhones. It soon became clear that many Western firms lacked an adequate understanding of their supply chains. Global trade links suddenly appeared as complex, interconnected and vulnerable to shocks as the financial world when the subprime crisis emerged.
SICKEN-THY-NEIGHBOUR
Covid-19’s threat to world trade took a more insidious turn last month. In January, Beijing stopped the export of certain medical supplies, such as face masks, including those produced by foreign manufacturers. As the virus spread across Europe, export restrictions proliferated. Since 1 January more than 50 governments have imposed exports curbs on medical supplies. Germany stopped the export of 240,000 masks to Switzerland. France prevented Valmy from fulfilling its contract with Britain’s health service to supply millions of masks.
“FRANCE PREVENTED VALMY FROM FULFILLING ITS CONTRACT WITH THE NHS TO SUPPLY MILLIONS OF MASKS”
India, a major producer of generic medicines, imposed a range of export restrictions on medical supplies and drugs, including fever-reducer paracetamol. The European Union, which produces half the world’s ventilators, restricted their export.
Beggar-thy-neighbour trade policies have become sicken-thy-neighbour, says St. Gallen’s Evenett.
Panicked reactions to the pandemic bring short-term relief at lasting cost. Companies may be reluctant to invest for export markets if those markets are shut off at whim. Export bans also foster bitterness between trading partners. Deprived of medical supplies from Germany, Italy and Serbia turned to China for relief. Medical export restrictions succour nationalists who argue in favour of self-sufficiency in manufacturing. White House trade adviser Peter Navarro says US dependence on China for key medical supplies and drugs is a “wake-up call”.
What might the world look like when the pandemic passes? For a start, supply chains are likely to become shorter and more robust. Cross-border manufacturing will take on a geopolitical aspect as managers question whether production is located in trusted countries. Moves to repatriate manufacturing, especially in healthcare, will receive fresh impetus. The age of multinational oligopolies is ending. Takeover authorities will pay less attention to consumer prices when considering mergers and more to issues such as competition and security. If China becomes the scapegoat for the pandemic, as is likely, it can no longer serve as the workshop of the world.
Some of the macroeconomic consequences that follow a turn in the globalisation cycle are foreseeable. The disinflationary forces unleashed by the era of free trade will come to an end. When trading links frayed at the close of the 19th century, the great Victorian bond bull market came to an end. The current bond bull market, nearly four decades old, will be replaced by a multiyear bear market. As interest rates rise, a higher discount rate will be applied to stocks and houses, both of which will trade in future at lower valuations. Manufacturers will no longer be able to outsource manufacturing to the cheapest geographies, so costs will rise. Profits will decline and labour’s share of national income will rise.
The geopolitical consequences of an end to globalisation are more fraught. As the history of the 1930s shows, the struggle for raw materials in a multipolar world can become a casus belli. For years, Beijing has been pursuing a 1930s-style autarky, tying up supplies of commodities from various countries, such as Venezuela, with loans from the China Development Bank. More recently, Beijing’s Belt and Road Initiative has increased its number of client states. At the same time, the People’s Republic has reduced the share of foreign components in domestic manufacturing. China may unwittingly have provided the catalyst for this crisis, but if globalisation fails it will enjoy a head start.
A version of this article was first published on Breakingviews. Edward Chancellor is a financial historian, journalist and investment strategist.
Governments Can't Blame Inflation on Energy and Putin Anymore
TAGS Money and Banks
At the end of February 2023, the price of oil (WTI and Brent), Henry Hub and ICE natural gas, aluminum, copper, steel, corn, wheat, and the Baltic Dry Index are below the February 2022 levels.
The Supply Chain Index and the global supply-demand balance, published by Morgan Stanley, have declined to September 2022 levels. However, the latest inflation readings are hugely concerning.
Considering the previously mentioned prices of commodities and freight, if price inflation were a “cost-push” phenomenon, it would have collapsed to 2 percent levels already. However, both headline and core inflation measures, from the Consumer Price Index (CPI) to Personal Consumer Expenditure Prices (PCE) show extremely elevated levels and rising core inflationary pressures.
We have mentioned numerous times that there is no such thing as “cost-push” price inflation. It is only more units of currency going toward relatively scarce goods and services.
The monetary aspect of inflation has been proven on the way up and in the commodity correction. The Federal Reserve’s rate hikes have deflated the price of commodities despite rising geopolitical tensions, supply challenges, and robust demand growth. Rate hikes make it more expensive to store, take long positions, and finance margin calls. Powell offset the entire supply-demand tightness impact on prices.
Governments cannot blame price inflation on Putin’s war or the so-called “supply chain disruptions” anymore. Printing money above demand is the only thing that makes prices rise in unison. If a price rises due to an exogenous reason but the quantity of currency remains equal, all other prices do not rise. A PCE index of 4.5 percent in January 2023 with all the main commodities below the January 2022 level shows how high inflationary pressures are.
Price inflation is accumulated, and the narrative is trying to convince us that bringing down inflation from 8 percent to 5 percent in 2024 will be a success. No. It will be a massive destruction of more than 20 percent of purchasing power of citizens from inflation in the period.
However, rate hikes are not enough. Broad-based money growth needs to come down rapidly. So far, in the United States, broad money growth is flat and has declined to more reasonable levels in December 2022. However, the latest European Central Bank reading of broad money growth in the euro area points to a 4.1 percent increase, which is very high compared to modest gross domestic product (GDP) growth and certainly very high compared with the estimates for 2023.
Broad money growth was too aggressive in 2022 and it may take some time to ease the inflationary pressures to a level that does not make citizens even poorer.
Two recent papers published by the Bank of International Settlements remind us that money growth was the main culprit for the price inflation surge. Claudio Borio, Boris Hoffmann, and Egon Zakrajšek conclude that
(Does money growth help explain the recent inflation surge?). Reis explains that “Inflation rose because central banks allowed it to rise. Rather than highlighting isolated mistakes in judgment, this paper points instead to underlying forces that created a tolerance for inflation that persisted even after the deviation from target became large” (The burst of high inflation in 2021–22: how and why did we get here?)
The supply chain and Ukraine war excuse has vanished, but inflation remains too high. Many market participants want rate cuts and money supply growth to see higher markets, with multiple and valuation expansion. However, rate cuts are very unlikely in this scenario and central banks know they have caused a problem that will take more time than expected to correct.
Governments cannot expect price inflation to correct when public spending is rising, which means higher consumption of new monetary units via deficit and debt.
Citizens are suffering these inflationary pressures via weakening real wage growth added to much higher cost of living as the prices of nonreplaceable goods and services—education, healthcare, rents, and essential purchases—are rising much faster than the headline CPI suggests.
We are all poorer, even if headline price inflation is slightly lower. Slowing inflation growth does not mean lower prices, just a slower pace of destruction of the purchasing power of currencies.
Someone will invent another excuse to blame price inflation on anything except the only thing that causes prices to rise at the same time: printing currency well above demand.
Daniel Lacalle