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TENSIONS MOUNT BETWEEN SECURITY AND EFFICIENCY IN GLOBAL TRADE

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TENSIONS MOUNT BETWEEN SECURITY AND EFFICIENCY IN GLOBAL TRADE

The coronavirus pandemic has caused both governments and businesses to question some of the assumptions that have underpinned global trade for decades. By the time the dust settles, the world’s approach to trade could look quite different.

Extended global supply chains brought unprecedented economic efficiencies generated by extreme specialization of production and the ability to reduce costs through just-in-time inventories. These benefits are now being weighed against the risks created by the lack of redundancy and the consequences of severe disruption when key suppliers are not available. Rising economic nationalism and strategic rivalries are prompting multinational companies to rethink their investment and production strategies.

Weighing security over efficiency

In the balance between economic efficiency and security of supply, the pendulum may be swinging back toward security. This shift will apply not only to essential medical supplies and medicines but across the full spectrum of trade. Many automotive production facilities in South Korea, Japan and elsewhere were forced to suspend operations at the onset of the coronavirus outbreak when the flow of critical components from China was interrupted.

Companies may not only rethink supplier relationships. They might also consider further diversifying their own production. Take for example the recently announced decision by Taiwanese semiconductor giant TSMC to build a $12 billion production facility in the state of Arizona, which may represent an attempt to mitigate business risks emerging as a result of geostrategic rivalries, in particular between the United States and China. The compelling economic rationale for TSMC’s Arizona facility is not readily apparent. The costs of semiconductor fabrication are relatively higher when compared to TSMC’s facilities in Taiwan, where the bulk of its manufacturing is done.

Reducing over-dependence on Asia supply chains

The TSMC facility might represent an industry step toward a more U.S.-based high technology supply chain. But there might actually be less to the proposed plant than meets the eye. By the time it is operational in 2024, it is expected to produce semiconductors based on existing (rather than next generation) technologies, and it will lack capacity to produce at a game-changing scale. The 20,000 silicon wafers the Arizona plant is expected to produce each month is only one-fifth the capacity of the larger Taiwan-based fabrication facilities.

However, as the Trump Administration has been vocal in its desire to repatriate elements of vulnerable supply chains wherever possible, the move could also represent an opportunity to hedge against the risk that more production of critical industrial products will be compelled to be manufactured and procured in the United States, something other governments are contemplating as well.

At the recent G20 Finance Ministers meeting in Riyadh, French Finance Minister Bruno Le Maire — a staunch advocate of deepening economic integration — posed a question which just a few years ago would have seemed inconceivable:
“Do we want to still depend at the level of 90 per cent or 95 per cent on the supply chain of China for the automobile industry, for the drug industry, for the aeronautical industry or do we draw the consequences of that situation to build new factories, new productions, and to be more independent and sovereign? That’s not protectionism — that’s just the necessity of being sovereign and independent from an industrial point of view.”

Le Maire’s comment captures the policy debate officials around the world are wrestling with, even in countries that have traditionally been strong pro-trade and pro-integration advocates.

Doubling down on regional trade agreements

Broader strategic considerations were undoubtedly at play in the decision. Taiwan’s position as a global supplier of chips – as well as a highly sensitive flashpoint in U.S.-China relations – means that TSMC is inevitably caught up in the technology and strategic rivalry between the U.S. and China.

TSMC’s investment may not be a bellwether that U.S. companies will re-shore or that multinationals will flock to the United States. More likely, companies will build more diversity into their supply chains with more emphasis on regional trade and less reliance on a single trade partner.

This could have big implications for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Although neither China nor the United States are currently parties to the CPTPP, the agreement is a useful vehicle to achieve greater trade and investment diversification for its current members. As a self-selected, voluntary grouping of economies ostensibly committed to promoting trade and investment among members, the CPTPP could provide some degree of insulation against the surge of export restrictions.

With the CPTPP positioned to take on greater relevance in the post-COVID-19 world, Thailand, South Korea, Indonesia and the Philippines have indicated interest in joining. Japan seems to be the informal new member recruitment manager, with Japanese officials already working closely with their Thai counterparts on the mechanics of accession.

Japan’s role is not a matter of happenstance. Japanese officials understand the dangers of over-reliance on a single market. Japan relies on China for about 37 per cent of its imports of automotive parts and 21 per cent of its imports of intermediary goods overall. In light of the COVID-19 disruptions, Japan is making a concerted effort to reduce its supply chain dependencies on China. The recent stimulus bill passed by the Japanese legislature allocated US$2.2 billion to help Japanese manufacturers shift production out of China.

A lasting impact

The COVID-19 pandemic will recede at some point. But its impact on trade will endure. The world can expect to see less China-reliant supply chains and increased use of regional trade agreements, providing a particular boost to the economies of Asia that multinationals see as the alternative to China.

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Stephen Olson is a Research Fellow at the Hinrich Foundation. Over the course of his 25 year international career, Stephen has lived and worked in Asia, the Middle East, and the United States, holding senior executive positions in the private sector, international organizations, government, and academia. He is currently a Visiting Scholar at the Hong Kong University of Science and Technology.

This article originally appeared on TradeVistas.org. Republished with permission.
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Free Trade in Free Fall: How Companies Can Navigate the Pandemic

Even before the global pandemic arrived in every corner of the globe, free trade and the globalized trading system were in critical condition. The bruising U.S.-China trade war, along with regional conflicts such as the Japan-Korea trade war, Brexit, import tariffs, the decline of the WTO, left companies struggling to adjust supply chains and many wondering whether the globalized trading system will survive.

Yet these challenges pale in comparison to the trade and supply chain issues the COVID-19 pandemic generates on a nearly-hourly basis. Demand has plummeted around the world for goods and services as vast portions of humanity are isolated in their homes and left without incomes. Export restrictions on medical supplies, food and other critical products, while still limited, are on the rise, creating fears of reverse protectionism. Airfreight capacity has dropped as tens of thousands of flights are grounded. Logistics companies are struggling to deliver goods as nearly every country in the world has implemented ever-tightening border restrictions in a matter of weeks.

As a result, companies and individuals are struggling to keep our grocery stores, pharmacies, and retailers stocked with the cheap and plentiful products consumers have grown accustomed to, not to mention supply the medicine and equipment that our frontline healthcare workers desperately need. While these are dark days in trade, there are ways to immediately protect your company and your supply chain.

First, companies must protect their workers from the disease. Crisis management procedures to keep people healthy, whether that means remote working procedures or social distancing policies to keep production facilities running, should be implemented and revisited as the crisis moves on. While most companies have implemented these policies as a result of government orders, companies should continuously evaluate how to both keep their employees safe and their companies running. Fighting this disease and its economic ramifications is a marathon, not a sprint, so companies should find ways to maintain continuity as long as possible.

Next, now is the time to be hands-on with your supply chain. Companies need to examine every aspect of their supply chain and logistics: every container, every ship, every truck, every port, and every border crossing. In this way, you can understand how your goods must pass to understand how the pandemic will affect each shipment. Seafreight remains stable, though that could change, so companies with any slack in their supply chain should consider moving goods in advance through slower means.

Companies also need a proactive examination of their legal risks.  This assessment must include a review of which contracts may be broken through force majeure and other similar break clauses, whether initiated by you or the other party. At first, only producers were using force majeure as they realized they did not have the raw materials, labor shortages, and logistical support to deliver products. Now, importers and end-users are breaking their contracts as demand drops and shops close. Similarly, insurance markets are struggling to find ways to insure goods, services, and even projects as supply chain issues threaten to slow projects around the world. A holistic examination of your legal risks will save your company money and time when legal challenges arise.

Companies also need to find help from their governments. Governments are looking to help companies stay afloat, keep people employed, and keep goods and services flowing, but they are frequently looking for answers from companies. If you are not part of a trade association, join one. And if you do not have representation in Washington, now is the time to make sure that government authorities know how best to help your company and industry navigate this crisis and to remind them of the value that trade brings to communities around the world, and where you need help.

The COVID-19 crisis will leave the global trading system permanently altered, but it is also a reminder that, just as our physical health is intertwined with our neighbors, our economic health is also dependent. Long-standing trade relationships are under strain, contracts will be voided, and shipments unfulfilled. Yet a healthy dose of compassion and understanding that your business partners are facing the same challenges as your company may help you maintain your trading relationships through these hard times and allow them to rebound faster when the crisis is over.

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Benjamin Kostrzewa is a Registered Foreign Lawyer at Hogan Lovells, working in Hong Kong and Washington serving the needs of clients on both sides of the Pacific. Before joining Hogan Lovells he served as Assistant General Counsel at the Office of the U.S. Trade Representative.