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Don’t study the mistaken classes about globalization

Economic

Don’t study the mistaken classes about globalization

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The cost of world trade is rising and there are no signs of slowing down. After all, the major reopening in the US and Europe after months of Covid-19 lockdowns has sparked some catching up to do, and companies are trying to top up their inventories in response. With persistent bottlenecks in the supply chain, particularly the shortage of shipping containers themselves, and the longest delays in a decade, prices are galloping at record highs. By mid-July, container freight rates for shipping goods from Shanghai to Los Angeles were 236% higher than a year ago; from Shanghai to Rotterdam they were 595% higher.

The bottlenecks are going nowhere: in the short term, prices will remain high due to the uneven global recovery and limited alternatives to ocean freight, especially since it can take a year and a half to build a new ship, and the industry has been underinvested for years. And while the fall in global tariffs should help, having reversed nearly a third of the Trump administration hike, it won’t be enough if ongoing tensions, particularly between the US and China, lead to further non-tariff barriers.

At the same time, demand is only rising with a new infrastructure cycle, trillions of dollars in fiscal stimulus, and a sizable chunk of excess savings just waiting to be spent. So who pays the highest price? Europe is already feeling the dilemma, because the later reopening enabled US companies to take the lead: While shipments of goods from Asia to the USA are currently growing by around 30%, shipments to Europe are only increasing by around 10%. Most countries in Europe, and especially Germany, are struggling to replenish already low stocks.

After the supply disruptions caused by Covid-19 in 2020, this is the second shock for global supply chains in a short period of time. So it’s high time for a reconfiguration. In the future, resilience will take precedence over efficiency. But don’t learn the wrong lessons about globalization.

Global supply chains can break – not because they are global, but because they are supply chains – and chains can break. The closure of the Brenner motorway is just as fatal for the European auto industry as the closure of the Suez Canal. Chemical parks are currently under water – in Germany. It would be naive to assume that on-shoring or near-shoring alone could solve the problem of resilience. Rather, working in partnership with suppliers – from joint development through to investments – is crucial in order to create reliability and trust. If you only see suppliers as a counterpart to get every penny out of, you shouldn’t be surprised if supply chains collapse during challenging times like these. This partnership approach is critical to resilience; Geographical proximity or even the nationality of the partner plays (almost) no role.

However, the legitimate call for more resilience is mixed with irritating tones about national security of supply. What used to apply at best to food security is now being carried over to many areas, from chips and batteries to artificial intelligence. The example of computer chips is particularly revealing. Even if there is no local demand (apart from the acute shortage), Europe is toying with the development of large production capacities – in order to reduce the alleged dependence on Asian producers. This is not very effective. It ignores the fundamental insight into trade profits, the comparative advantage theory: instead of trying to catch Asia’s lead in manufacturing, Europe should focus on its strengths; in the case of chips, about the design and the machines used to manufacture them. After all, the idea of ​​“self-sufficient” Asians is also misguided. The factories in Taiwan would not run without American development know-how and European production machines. The dependencies are mutual.

The secret longing for decoupling in the world economy is a break with earlier beliefs. At the time of the Cold War, the doctrine of “change through trade” still applied: Economic exchange was seen as a tried and tested means of minimizing the risk of political and even military conflicts. Political tensions – especially between China and the USA – are seen today as a pretext for breaking economic ties. It would be fatal if the Covid 19 crisis – along with all the other suffering – accelerated this process. Throwing out the baby with the bath was never a good idea. Global supply chains not only follow the irrefutable logic of trade as an engine of prosperity. They also make the world safer.

Ludovic Subran is the chief economist at Euler Hermes.

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