New Threat of World Trade Recession

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Hello and welcome to the Trade Secrets section. In case you haven’t noticed, there’s a summit of G7 heads of government. continues today in the Bavarian mountains. Among other things, the leaders officially launched the alleged $600 billion plan for infrastructure and investment to challenge China’s Belt and Road Initiative, which sounds like another iteration of what we’ve been hearing for several years. Today’s flagship article focuses on the latest in a series of upheavals in the global trading system – highly inflationary environment and the growing risk of recessions – and will this not be what finally sends globalization into a long-term retreat. Regular readers will not be surprised to know that I remain quite optimistic. If you think I’m wrong about this or anything else and would like to let me know, I’m in touch. Mapped waters looks at the food crisis caused by the conflict in Ukraine.

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Supply shocks didn’t work, let’s try demand

To be honest, it’s like a gang of malevolent economists (i.e. economists) took a fairly well-functioning global commodity trading system and hit it repeatedly and quickly from different angles, just to see if it collapsed.

In 2020, we received a negative shock to production and demand for goods from the first wave of the Covid-19 pandemic. Demand then reversed slightly for much of 2021, and there was a massive resurgence in sales of consumer durables and thus trade volumes, putting pressure on sclerotic ports. Demand for consumer products also created initial supply issues such as semiconductor shortages.

At the end of 2021, the wave of Omicron caused a new negative supply shock in manufacturing, especially in China. The Russian invasion of Ukraine has since created a range of new effects: an initial negative shipping supply shock due to the blockade of Russian ports and ships, a second push to higher freight costs due to higher fuel prices, and a disruption in global food markets due to disruption shipments of grain in the Black Sea.

Now, with rising global energy prices and inflation, a potentially severe negative macroeconomic shock is coming due to falling real incomes and rising interest rates, and we are all concerned whip effect increased disruption of consumer demand up the supply chain. Because merchandise trade is historically more volatile than gross domestic product, recessions in major economies can lead to a severe reduction in cross-border trade.

Ralph Belusa, Managing Director of Digital Business and Transformation of the German container shipping group Hapag-Lloyd, summed up the results at a recent conference. FT event: “Our reality today is based on heightened, accelerating and interconnected volatility, uncertainty, complexity and ambiguity.” Cheerful thought.

The various consequences of all this so far have been as follows. Trade in goods increased pretty good: over the past few months, they have retreated slightly, but there are no signs of collapse yet. The surge in consumer demand for goods over services that followed the first wave of Covid is still largely in place. Flexport, a freight forwarding company, says that his measure Product preferences are only slowly returning to 2020 levels.

Freight rates were also set drifting down, albeit from historically very high levels. Port congestion, which was particularly common on the US West Coast last year, says Ryan Peterson, CEO of Flexport, repeatedly compared underinvested Long Beach / Los Angeles unfavorably with Rotterdam – also affects Europe. The first of what could be a wave dock strikes in Hamburg and elsewhere does not help.

Threat: A new negative global demand shock, on top of existing supply disruptions, will cause a severe downturn in trade at the end of the year or in 2023 and cause long-term damage. First, it is a clear opportunity, noted by corporate executives as well as macroeconomists. While the combination of high volumes and freight rates meant that shipping companies (including bulk carriers bringing fuel and food long distances to replace Black Sea shipments) were making it up, companies like Maersk, warning about weakening demand in the second half of the year.

On the other hand, a cyclical correction, even a sharp one, does not necessarily mean a trend reversal. As for the energy shocks and high inflation, there are many references to the seething 1970s. But although there were cyclical movements then, they did not reverse long-term post-war growth in world trade, despite the collapse of the post-war Bretton Woods trading system in 1971.

And here’s the thing: while shipping companies are worried about the short term, they are betting big on the future. Maersk is warning for the next few blocks, but this bullish for a longer period. The ratio of new container ships on order to the existing global fleet is approaching more than 30 percent for the first time in nearly a decade. Clearly, companies can be overly optimistic – the shipping industry has a long history of over-adjustments and there was a severe overcapacity in 2020 before the pandemic hit. And, of course, shipowners are not going to publicly predict a collapse in demand for their services. But it is still striking that such huge bets are being made that global trade in goods will develop in the coming years.

Esben Poulsson, Chairman of the International Chamber of Shipping, said at a recent FT event: “These owners are investing in new vessels in the belief that free trade is here to stay, despite talk of a reorientation. I don’t see evidence [the end of globalisation]. I see a lot of political posturing about it.” Until quite a lot of evidence to the contrary is presented to me, this too remains my point of view.

In addition to this newsletter, I write the Trade Secrets column for every Wednesday. Click here for the latest news and visit secrets to see all my columns and previous newsletters.

Mapped waters

The unfolding food crisis is a key concern of the G7 heads of state meeting in Germany today. But in other parts of the world, especially in Africa, it is a real and real disaster, according to my colleagues Andres Skipani and Emiko Terazono. explain. Today’s chart shows how many African countries depend on grain imports from Russia and Ukraine. Eritrea tops the list.

Bar chart of share of wheat imports (%) showing countries dependent on wheat from Russia and Ukraine.

This disruption to trade caused by the conflict in Europe is not the only reason why food struggles have escalated in some African countries. The worst drought in four decades in northern Kenya, Somalia and much of Ethiopia means up to 20 million people in the region could go hungry this year, according to the UN. Food and Agriculture Organization. Tragically, new problems are likely to arise as food shortages fuel conflicts in the region. (Jonathan Moles)

Borderlex News Service explains that the Energy Charter Treaty, accused The law to subject governments to costly litigation if they switch to renewable energy has been reformed, although it remains to be seen if enough has been done to appease critics, in particular in the EU.

Essential Goods Monitoring Initiative reports that governments are (wisely) reducing restrictions on food and fertilizer imports in response to rising prices.

Three Brookings Institution Analysts Consider U.S. Engagement and Recognition skilled immigrants if his attempt to expand the domestic semiconductor industry works.

Sam Lowe’s Most-Favored Nation Newsletter (£ but free trial) look at the UK government got confused by abandoning its own trade protection bodies in order to maintain guarantees for Chinese steel imports.

An online exhibition photographs of trade diplomats at recent WTO ministerial talks show the human stories behind the bureaucracy.

Trade secret edited Jonathan Moles

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