Hello and welcome to Trade Secrets. A quietish start to the new year as far as the renewal of trade war or the building of a durable peace is concerned, with only the will-they-won’t-they about a combative EU response to the China-Lithuania situation to keep us entertained. (Answer: they won’t.) India tried and predictably — you might say deliberately — failed in a stunt to demand a virtual ministerial meeting at the World Trade Organization on the subject of Covid-19 patents in an attempt to give that fading issue a bit of a boost. Today’s main piece looks at the supply chain issue, in which the return to normality has been postponed, and how hard it is to work out what’s going on. Charted waters this week focuses on China’s record trade surplus.
Barometers of bottlenecks
A return to supply chain normality deferred maketh the heart sick, as the Book of Proverbs in the Old Testament has it, almost. As we noted last week, it looked towards the end of last year as if the snarl-ups in ports and logistics across the world were easing somewhat. Freight rates were coming down, delays seemed to have peaked.
Then came Omicron. China’s minimum-tolerance attitude towards Covid has amplified the new variant into big labour shortages in manufacturing, distribution and ports. It’s obviously a negative supply shock rather than the problem of excess demand that we continue to reckon has been the main issue. If we’re right — and assuming the Omicron wave subsides — the variant will delay and complicate but not short-circuit the improvement. But it remains possible that we’re wrong and indefinite supply-side problems will choke world goods trade.
For those (exporters and importers, shipping lines, investors) who don’t have journalists’ luxury of watching and waiting, how will they know where we’re going? As usual, economists in investment banks and consultancies are quickly out of the traps with gauges and indices. The tricky thing is that these are untested against earlier episodes of supply chain seizures in similar circumstances, because there haven’t been any, and while you can observe outcomes it’s harder to isolate precise causes.
The general sense of most indicators is that pressures and shortages looked like they were about to peak and then fall late last year, but instead stalled. One of the most sophisticated measures is from the New York Federal Reserve, described in this blog post, which weights together costs of cargo (airfreight, container shipping and bulk shipping) with manufacturers’ delivery times, backlogs and inventories.
Importantly for our purposes, the Fed measure also attempts to correct for the effects of higher demand in order to isolate just the supply-side issues. On the other hand, it’s only as good as the data you plug into it, and the use of The Baltic Dry index as an indicator for bulk freight costs will raise eyebrows among shipping types who have long warned it gets bounced around a lot by short-term factors.
The consultancy Capital Economics has created a gauge for the G7 economies that also includes labour market shortages, which according to their measure looked even more worrying than product market shortages at the end of last year.
In November the White House created its own “dashboard” of indicators, but it seemed mainly designed to support the narrative that President Joe Biden had saved Christmas by getting ports going. (There’s a detailed rebuttal of that case by the Cato Institute’s Scott Lincicome here.)
The correlation of these indices to actual movements in trade volumes and prices remains unproven. The New York Fed economists promise a future piece relating the index to movements in inflation, which we’ll watch with interest. But data on goods trade arrives with a time lag and is volatile and prone to revision. Global trade contracted in the third quarter of last year, but as shown by the useful monthly index produced by CPB, a Dutch research institute, it recovered in October on both a monthly and three-month moving average basis.
You also need to be very careful when looking at narrowly focused and high-frequency data points. As you can see from the White House dashboard, it looks to the untrained eye as if the infamous west coast port snarl-up was resolved in December as the number of containers in port suddenly plunged. In fact it was a new regime that charged carriers for containers sitting on the dock for more than eight days: the ports remained congested. The number of ships hanging around those ports has similarly dropped, but only because of a new queueing system requiring them to wait 150 miles out at sea. (You can go to the Facebook page of the Marine Exchange of Southern California and try to make sense of charts like this if you have the time.)
We’ll continue to monitor all these supply chain indicators, and chapeau to all the economists trying to make sense of it all. But we have to remember we’re trying to set a course through unknown territory that we’re mapping as we’re going along.
Charted waters
China’s trade surplus soared to its highest level on record last year as a sustained boom in exports helped counter a loss of momentum across the country’s wider economy.
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The data, released on Friday, highlighted China’s dominance of global trade during the coronavirus era, during which its manufacturing industry has benefited from a shift around the world from services to goods consumption.
Trade links
The lockdowns and restrictions from China’s zero-tolerance Covid policy risk greater disruption than during earlier waves of the pandemic, the FT reports.
The FT’s Claire Jones explains how Germany’s reliance on manufacturing has made it particularly vulnerable to supply chain disruptions.
China’s trade surplus soared last year as it rode the recovery in global goods demand.
The Trade Guys podcast from the Center for Strategic and International Studies looks at the latest in climate and trade, including proposed changes to the EU’s carbon border adjustment mechanism.
An unusual Covid-related border dispute has the English football club Chester FC threatened with legal action for allowing fans to attend matches. Its stadium straddles England’s border with Wales, where lockdown restrictions are tougher.
Source: Economy - ft.com
