The great trade unwinding

TikTok is the go-to social media app for American teens, the place where they post their latest dance videos, slam dunks, or — in the case of those who used it to try to thwart US president Donald Trump’s June rally in Tulsa — conduct their political activism.

It has also become the centre of the US-China decoupling story, one that began with equipment and chipmakers like ZTE and Huawei and is now centred on TikTok’s Chinese owner, ByteDance, which is being forced to sell the app to a US tech company, Microsoft.

All of this supports the idea that technology trade and investment patterns are likely to shift in the future. So far, that story has mostly been more rhetoric than reality. Despite headlines about trade wars, between 2014 and 2017, only around 7 per cent of global trade routes shifted, according to a McKinsey Global Institute analysis of UN Comtrade data. But according to a new MGI report on supply chains, changes are likely to speed up dramatically.

Thanks to myriad risks — from fractious politics to climate change and pandemics, or the growing number of cyber attacks and financial crises — shocks to global trade are becoming more frequent. Companies can now expect month-long disruptions to supply chains every 3.7 years. That means that over the course of a decade, companies can expect to lose the equivalent of 40 per cent of a year’s profits, the report says.

MGI also estimates that up to 26 per cent of global goods exports, worth some $4.6tn, could move to new countries over the next five years. And that is a conservative estimate, based on what is economically feasible right now. Politics may, of course, force changes that are not in a country’s economic interests but instead represent the desires of electorates or autocrats.

Part of this story is about a pendulum that swung too far over the last few decades toward concentration in supply chains, both geographically and economically. Hyper-concentration of low-value supply chains in Asia produced businesses that were efficient, but not necessarily resilient, particularly when hit by natural disasters or unexpected political events.

Covid-19 has exposed the fragility that results when China and India produce the bulk of the world’s pharmaceutical ingredients. Indeed, the MGI report finds 180 key tradable products for which a single country accounts for more than 70 per cent of exports. Concentration is highest in mobile and communications equipment, one of the most politically contentious areas right now. It is also common in lower profile industries such as textiles and apparel.

That underscores another development: we are now living in a world in which two superpowers with very different political and economic systems, the US and China, are both major producers and consumers. Rising wages in China have increased the buying power of Chinese consumers but also made it much more likely that production of lower-value goods such as furniture or clothing will move to other countries.

At the same time, the rise of China and its ringfencing of strategically important areas, including the technology sector, have contributed to the inherent friction of having “one world, two systems”. That problem was then exacerbated by Mr Trump’s go-it-alone trade policies.

Over the past 20 years, China has become a much richer country. It has not only got a huge industrial base, but also richer consumers who are increasingly buying homegrown brands — such as Xiaomi phones over Apple. When the US makes it tough for Chinese sellers to do business in America, they move elsewhere.

One Chinese fintech group I spoke to recently, which serves more than 600,000 mostly small and midsized sellers in China, says that there has been a notable shift in client business, away from purchasers in the US over the past two years, and towards Europe, which now represents roughly half of trade flows on the platform. It is possible to imagine that two entirely separate consuming and producing ecosystems might emerge, one centred around the US, and another around China — even if getting there will be a painful and bumpy process.

But trade is getting bumpier anyway. The MGI report notes that “as a new multipolar world takes shape, we are seeing more trade disputes, higher tariffs, and broader geopolitical uncertainty. The share of global trade conducted with countries ranked in the bottom half of the world for political stability, as assessed by the World Bank, rose from 16 per cent in 2000 to 29 per cent in 2018. Just as telling, almost 80 per cent of trade involves nations with declining political stability scores.”

The tectonic plates of trade are shifting in ways that will reshape economics and politics. In the US, lawmakers from both parties are once again supporting industrial policy, a no-go area for decades, and advocating public intervention in private markets in strategic areas including semiconductors. In China, supply chains that once churned out cheap clothes and assembled devices to sell to richer consumers in the west are now increasingly serving domestic markets.

In this sense, perhaps the biggest trade shift of all is the way in which the two superpowers are trading places.

rana.foroohar@ft.com

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