Best friends forever?

“Friend-shoring” sounds like the logical next evolution of globalization, but it’s proving more difficult to carry out in practice.

So far, there’s little hard evidence to support the idea that global supply chains are shifting in any meaningful way as a result of the Biden administration’s push towards friend-shoring — the White House’s catch-phrase for reducing American economic dependence on China and other authoritarian regimes.

That’s not for a lack of trying, though. President Joe Biden has tightened export controls on strategic US goods like semiconductors, signed legislation that incentivises companies to reshore their production capacity and maintained his predecessor’s tariffs on more than $300 billion worth of Chinese exports.

But trade between the world’s two largest economies continues apace. US imports from China, while slowing lately, are broadly consistent with their 2021 levels, according to data from the US census bureau.

The numbers show that US farm exports to China have grown 16% above the pace of last year’s sales and American shipments of medical products needed to treat COVID-19 have grown as well.

To be sure, there has been a shift in the US-Sino energy trade as a result of Russia’s invasion of Ukraine. The US has pivoted its energy exports to Europe and China has simultaneously increased its purchases of Russian energy.

US energy exports to China are down by 13%, while US exports to other countries are up by 89%.

And there has been some anecdotal evidence that certain US companies — like Apple — are looking to diversify their exposure to the Chinese marketplace by shifting some of its product manufacturing to Vietnam and India.

That’s a good example of contingency planning known as “China + 1” (or even China + 2), whereby multinationals add manufacturing operations outside of China but retain existing production facilities there — particularly those that serve the lucrative Chinese marketplace.

According to Chad Bown says the shift in the energy sector may be a harbinger of things to come  for the broader US-China trade relationship. “In a new world with commerce increasingly based on geopolitical blocs, countries like the United States and China may continue to trade — just a lot less with each other”.

Source: Bloomberg


The Big Slowdown

Global merchandise trade will grow next year at a much more subdued pace than previously expected, with “strong headwinds” battering the world’s major economies while poorer nations face food insecurity and debt problems.

Those are among the key points in a report released Wednesday by the World Trade Organization, which revised its forecasts for global commerce for this year and next. 

While the WTO raised its projection for global goods trade growth to 3.5% this year from a previous estimate of 3%, the figure next year will be just 1%. That’s a big downward revision from its previous estimate for global goods trade in 2023 to expand 3.4%.

Among the potential drags on activity: “Major central banks are already raising interest rates in a bid to tame inflation but overshooting on tightening could trigger recessions in some countries, which would weigh on imports.”

The WTO also said that risks to the forecast remain “numerous,” including an escalation of the Russia-Ukraine war, and an “under-appreciated risk” of a decoupling of the US and China.

The Ukraine war increased prices for energy by 78% and food by 15% in August versus the same period a year prior

Container throughput improved this year as port congestion and supply disruptions in the US and China eased. The RWI/ISL index suggests “continued stagnation in merchandise trade.”


Since 1311 bond yields have fallen with metronomic regularity

They are on pace to drop below zero for good in 2066.

From 2015 to 2021 long-term interest rates sat at record lows. On average, during this period ten-year government bonds yielded 1.9% in America, 1.1% in Britain and zero in Germany. But just as investors got used to vanishingly low rates, those rates vanished. In 2022 America’s yields have risen from 1.5% to 3.8%, Britain’s from 1.0% to 4.1% and Germany’s from -0.2% to 2.0%.

Such abrupt surges have raised fears of an imminent recession and caused asset prices to plunge. Nonetheless, increases in long-term yields are likely to be temporary.

With apologies to homeowners with variable-rate mortgages, many borrowers have done well in 2022 because prices have risen faster than expected, inflating away some of their debts. Even after their recent rise, current ten-year government bond yields lag inflation over the past 12 months by five percentage points in America and a whopping ten points in the Netherlands.

This gap reflects investors’ expectation that inflation is likely to subside fairly soon. But recent research on long-run trends in interest rates suggests that creditors hoping for healthy real yields in future are still likely to be disappointed.

In 2020 Paul Schmelzing, an economist, published a dataset of interest rates and inflation dating back to the 1300s, in countries representing four-fifths of advanced-economy GDP. It showed that real long-term yields fell from the low double digits in the early Renaissance to the low single digits today. The trend applied to both public- and private-sector debt, and to seven of eight countries studied (the exception was Spain, where rates averaged 27% following Napoleon’s defeat in 1814).

Last month Mr Schmelzing, along with Kenneth Rogoff of Harvard and Barbara Rossi of Pompeu Fabra University, released a working paper that tried to identify key points in history when the path of interest rates changed. Surprisingly, GDP-weighted real rates followed nearly a straight-line long-term trajectory during the entire period, falling by an average of 0.016% per year. The only two events that appeared to disrupt the trend were the Black Death and a wave of sovereign-debt defaults in the late 1550s. All other deviations — including those following the founding of America’s Federal Reserve in 1913 and the advent of inflation-targeting central banks—could not be distinguished statistically from random chance.

This trend may be of little use to speculators, as rates have drifted towards its level only over long periods. People investing on behalf of their grandchildren should take note: the 700-year pattern suggests that current real rates should be just 0.7%.

The authors speculate that the trend may be more likely to flatten out as rates approach negative territory than to continue for ever. However, they “do not see evidence of that yet”. A simple linear extrapolation implies that on average, real rates will sink below zero for good in 2066.

Source: The Economist