Being “not China” may have been the easy part. A big tout for manufacturing in several important Asian economies was that they enjoyed cordial relations with Beijing and solid historical ties to the US. Leaders didn’t mind taking a few rhetorical shots at America, if it was convenient for domestic politics, but professed no appetite for choosing between the two superpowers. This sort of opportunistic fudge is likely to get harder — and the consequences of a deeper transformation of trading arrangements stand to be profound.
Call it friendshoring or China+1, this was never an exit from the Asian giant but a hedging of bets. Malaysian Prime Minister Anwar Ibrahim’s pitch to a conference last year was illustrative: “I offer our nation as the most neutral and non-aligned location,” he proclaimed. And Vietnam officials deserve a medal for the number of times I have heard the nation proclaimed a trade-war victor.
Behind all this credential burnishing lurked hard questions: Was America’s desire to curb dependence on supply chains anchored in China a passing phase or part of a more lasting change?
President Donald Trump has delivered at least part of the answer. Try not to be too distracted by the guessing game about when or whether the promised tariffs on Canada and Mexico will be implemented: Trump gave a series of apparently contradictory answers on Wednesday about his plans for the two neighbours. These levies were never going to be a light lift given Trump declared their free-trade pact renegotiated in his first term as a “model agreement.” A memorandum rolled out in recent days aimed at curbing China’s access to tech, energy and a host of other vital US industries may be more indicative of his current direction. Trump is also calling out Mexico to rein in imports from China, which have climbed.
It will matter more where things are made, not just where they transit along the way to Stateside customers. This represents a new degree of trade disruption that will underscore the allure of regional alignments. “In the next phase of nearshoring, we expect pressure to mount for a migration of productive capacity,” Morgan Stanley economists Seth Carpenter and Rajeev Sibal wrote in a note on Sunday. “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 is dependent on exports to keep the rate of economic growth respectable, particularly when domestic consumer spending has disappointed and the overhang from a real-estate crash will take years to work through. For the US, it will take time to redevelop a broad manufacturing base, if it can be done at all. Mexico and Canada, consequently, may become more important to American industrial strategy, not less. If low-cost, efficient supply chains that easily pass from one jurisdiction to another fall from favour, this will likely put a break on disinflation for years. Asia is likely to be further pulled into China’s orbit.
Uber-regionalism may be the underlying trend to keep an eye on. When economic historians chronicle this period, will they point to Trump’s first election in 2016? That is what many consider to be the big break with the so-called Washington consensus that had prevailed since the 1980s and championed the primacy of open markets, deregulation and less state meddling. This neglects important markers along the way that were rich in symbolism, such as the rioting in Seattle that scuttled World Trade Organization talks in 1999.
Dani Rodrik, an economics professor at Harvard University, 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 it’s the exceptions that show the rule. For one thing, the reaction to globalization has been largely confined to manufacturing, rather than services. And the dollar remains the hegemonic medium of exchange, and US Treasury notes, the prime financial asset. But for factories, a transformation is underway. There are legitimate arguments about how it will go, and how to prevent national security partners a long way 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.
Credit: Bloomberg
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