Reshoring should be driven by business, not politics

Hello from Brussels, but the big news today comes from Geneva. World Trade Organization director-general Roberto Azevêdo is set to announce he is stepping down in September, a year early. The reasons aren’t immediately clear (he’s making a statement later today; the story was originally broken by Bloomberg). But we’ll do a special extended intro here to offer our thoughts. As we’ve said recently, the WTO has had a very muted response to the pandemic, with Azevêdo characteristically super-cautious in speaking out about those export restrictions that we at Trade Secrets keep banging on about.

Like most Brazilian trade folk, Azevêdo is a smart cookie but right from the beginning the Financial Times noted that it was unusual for the organisation to be run by a technocratic former diplomat (in his case a WTO ambassador) rather than a politically more heavyweight minister. He was never going to be the man to stand up to US trade representative Robert Lighthizer or EU trade commissioner Big Phil Hogan in public and tell them they were getting it wrong. The big issues over WTO reform and particularly the appellate body stand-off remain resolutely unresolved.

Who will replace him? After a Brazilian, a Frenchman (Pascal Lamy), a Thai (Supachai Panitchpakdi) and a New Zealander (Mike Moore), the Africans think it’s their turn and have a summit scheduled for July to sound out candidates. One frontrunner is Amina Mohamed, Kenya’s former trade minister, who would be the first woman to do the job. The Europeans also have a couple of potential female candidates in Arancha González (former chief of staff to Lamy) and Cecilia Malmstrom, who has just stepped down as EU trade commissioner. But González has just started as Spain’s foreign minister and Malmstrom is known not to be interested. In any case, would the Trump administration, at loggerheads with the EU over the future of the organisation, really countenance a European in charge? And that’s really the issue. You could make Xi Jinping or Angela Merkel head of the WTO but it wouldn’t make any difference unless governments, and particularly the US, are prepared to listen.

In the meantime, a smart idea would be to appoint deputy director-general Alan Wolff to do the job on an acting basis and not rush the appointment. Wolff, an American, is not only a serious intellectual heavyweight, highly experienced (he was one of the negotiators who got the Uruguay Round over the line in 1994) and extremely well-connected in the trade world; he also used to work alongside Lighthizer as an antidumping lawyer for the US steel industry.

On more global matters, today’s main piece is on what governments can do to encourage repatriation and diversification of supply chains. Relatedly, Tall Tales of Trade looks at Lighthizer’s exceedingly selective view of what constitutes success in reshoring manufacturing to America, while our chart of the day looks at a decline in UK imports of medical supplies.

Breaking the chains

There’s one person at least who thinks history is on his side when it comes to bringing factories home, and that’s Robert Lighthizer. The US trade representative triumphantly declared the end of “reflexive offshoring” in a New York Times op-ed this week, on somewhat flimsy evidence (see Tall Tales below).

Still, he and others who fervently want production reshored — or, more constructively, supply chains diversified — aren’t likely to rely on history and the Covid-19 pandemic. If you’re a government, and you think that your companies have wrongly bet everything on China, what can or should you do about it?

Many companies will adjust supply chains on their own. There is also clearly a role for governments in stockpiling — or even running or regulating a national manufacturer — of emergency kit such as personal protective equipment. But there’s plenty of talk from policymakers who want to go beyond that and force a fundamental rewiring of global trade in goods in the apparent belief that they can second-guess corporate investment decisions.

Lighthizer’s solution is rewriting trade deals to require companies to base themselves in the US to sell there, through tougher rules of origin or simply tariffs. But while that may shorten supply chains, it won’t diversify them, and leaves companies and consumers vulnerable to economy-specific shocks at home: think natural disaster, or foot-and-mouth disease.

In the EU Thierry Breton, the EU’s internal market commissioner (whose views stand, let’s say, at a tangent to those of Big Phil Hogan, the trade commissioner), wants government grants, loans and direct intervention to build up European supply capacity. But it’s not clear how this would work, nor whether it would be legal under WTO rules. And it has the same problem as Lighthizer’s ideas of replacing one kind of vulnerability with another.

China’s president Xi Jinping, left, and Japan’s prime minister Shinzo Abe © Kim Kyung-Hoon/Bloomberg

Some pronouncements are being leapt on prematurely as evidence that governments are already on an all-out repatriation or diversification crusade. Japan recently announced a $2bn fund to help companies examine their supply chains. To some surprise in Japanese officialdom, this was portrayed in the international media as Tokyo bribing its companies to leave China and come back home.

It could morph into that, of course, but the amount of money, certainly at this stage, is far too small (0.04% of gross domestic product) to be a major economy-wide incentive in itself. It is intended to facilitate research and pilot projects involving resilience and diversification, not overcome the one-off expense of moving, let alone the continuing burden of a higher cost base.

Some of the money is for companies exploring the possibilities of switching or diversifying supply chains outside the country rather than reshoring, and Japanese officials insist it will be WTO-compliant. In any case, initial reaction from corporate Japan was cool. Businesses invest in China to sell there as well as source there.

Even for companies acting in good faith, it’s not clear how much difference official intervention will make without huge incentives. Speaking of Japanese companies, John Neill of the UK supply chain company Unipart, whom we quoted earlier this week on this subject, has an interesting vignette.

When former UK prime minister Margaret Thatcher handed out big incentives to Japanese car companies to invest in the UK in the 1980s, he said, she made them promise to source locally as much as possible, creating joint ventures if necessary. “I have to say from first-hand experience, they absolutely honoured that,” Neill said. “They have done a good job in helping to build the local supply chain. But despite all of that effort, their UK sourcing is still probably not much more than 20 per cent or 30 per cent”.

In spite of Lighthizer’s views to the contrary, it’s not always mindless globalism, excessive short-termism or the vagaries of corporate fashion that cause companies to source abroad or from a single supplier. It’s a straightforward business decision. Anna Stellinger, deputy director-general of the Confederation of Swedish Enterprise, puts it nicely: “The key to diversification is that it must be driven by business logic. It cannot be politically steered. No politician will be able to dictate global value chains in an intelligent way.” Obviously, though, that’s not going to stop them trying. We’ll be keeping an eye out.

Charted waters

A drop in imports of medical supplies that coincides with the arrival of a pandemic is perhaps not the best timing — but that is what happened in the UK, where new figures show such imports steadily fell in the months to March.

Tall tales of trade

Robert Lighthizer claims 2019 was a bumper year for reshoring and US manufacturing © Andrew Harrer/Bloomberg

Let’s have a quick look at Robert Lighthizer’s claim that 2019 was a bumper year for reshoring and strengthened US manufacturing. It’s based on an annual report by Kearney, the management consultants. The report does indeed document a relative shift in US consumption from low-cost Asian goods to domestic manufacturing. But leaving aside the contention that this one year proves a historical turning point, the report goes on to say that American manufacturing gross output, which rose from 2016 to 2018, stayed flat from 2018 to 2019. Why? “[In] part due to export decline resulting from the trade war.” Oh. 2019 was also a really bad year for manufacturing jobs. Same reason. Oh again.

Still, an opportunity for the future? “Might such a strategic redistribution spur a dynamic resurgence of US domestic manufacturing,” Kearney asks? “It seems unlikely.” Oh, once more. The familiar problems of low productivity, high costs, lack of labour at offered wage rates, etc, aren’t going to be disinvented by being beastly to China. Companies are more likely to diversify imports to other low-cost countries than increase domestic production. This may be a good thing, but it’s not what Lighthizer claims is happening. Sure, if all you care about is relative performance, a trade war might hurt you less than the other guy. But that’s an inane way to judge success.

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Source: Economy - ft.com