Aurelia Butler

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.In the latest in a series of business school-style teaching case studies, Professor Usha Haley considers the supply problems faced by technology and electronics companies because of growing restrictions on US-China trade. Readers are invited to read the article and linked stories and consider the questions raised at the end. China and the US are intense rivals in national security and economic output. Yet the world’s two largest economies — which represent 40 per cent of GDP — remain integral partners in many ways.So, in these circumstances, what should companies do to manage global supply chains and geopolitical risks, and how does uncertainty affect the green economy and economic stability?CIA Director William Burns has argued that, for the US, the answer is “not to decouple from an economy like China’s, which would be foolish, but to sensibly de-risk and diversify by securing resilient supply chains, protecting our technological edge and investing in industrial capacity”. The August 2022 US Creating Helpful Incentives to Produce Semiconductors (Chips) and Science Act reflected that view, with implications for supply chains, nanotechnology, clean energy, quantum computing and artificial intelligence. In December 2022, China announced a $143bn retaliatory package and, in May 2023, banned Chinese companies from buying from US chipmaker Micron Technology, reducing its sales by $3bn. Then, in July, it restricted exports of two key metals essential to the semiconductor, telecommunications and electric vehicle industries. In October, an updated Chips act limited US sales of high-performance semiconductors and access to technology that “could fuel breakthroughs in artificial intelligence and sophisticated computers”. That affected Nvidia (which receives a quarter of its chip revenues from China), Intel and AMD. Global MBA Ranking 2024China has been a major player in global supply chains, dominating the technology and electronics industries. In 2020, its chip sales totalled nearly $40bn, or 9 per cent of the world market, and they are projected to reach $116bn this year. But that is changing. Kearney’s 2023 Reshoring Index indicated that 96 per cent of US chief executives may reshore or already have, including Dell, Google, Microsoft, Intel, Apple, Amazon and Walmart. In 2023, China accounted for the smallest share of US imports in 20 years. And, as global supply chains restructured, US foreign direct investment in China fell to an 18-year low of $8.2bn in 2022. For US and European companies, strategies for resilient supply chains now include the following:Friendshoring & reshoringFoxconn and the other leading Taiwanese manufacturers of electronics responded to customers’ demands by moving production from China to elsewhere in Asia, Mexico and beyond. Companies have hedged bets using a “China plus one” strategy to maintain existing domestic operations while directing new investments elsewhere. Many businesses “friendshored” or moved supply chains to political or economic allies such as India, Thailand and Vietnam. In 2022, Dell said it would move one-fifth of its laptop production to Vietnam. Apple also said it was shifting 18 per cent of global iPhone production to India. US companies “near-shored” to Mexico and Canada to benefit from the United States-Mexico-Canada Agreement on free trade, and reshored production to the US.‘In China, for China’Chips subsidy recipients are not allowed to make semiconductors in “countries of concern” (including China) for 10 years. So some companies are now producing goods made in China for domestic Chinese consumption only, although government-affiliated organisations must buy Chinese brands. Investing in China has exposed foreign manufacturers to IP theft and skewed competition from Chinese subsidised industries that obtain cheap or free land, capital, electricity, raw materials and access to technology. Companies have also faced politically motivated harassment. In October 2023, Foxconn underwent tax probes in four provinces.Chinese investment in the USChinese investments face a high risk of coming under regulatory scrutiny, over national security and competition concerns. For example, a China-linked company’s Wyoming facility came under investigation by the Committee on Foreign Investment in the United States, after a report suggested its proximity to a Microsoft data centre and a US airbase might enable intelligence gathering. Some 33 US states have now prohibited the Chinese government, citizens or businesses from buying agricultural land or property near military bases, and the trend will probably continue. Meanwhile, Chinese investments in US shale gas have been found to skew energy technology development, reduce US patents, increase Chinese patents but offer few benefits to local communities, in research funded by the National Science Foundation. Replacing China in supply chains will take time. It is the largest producer of key components in electric vehicle battery production. Over the next two years, manufacturing incentives in the $430bn US Inflation Reduction Act (IRA) offset one-tenth of an EV’s cost while shutting out battery-content and critical materials from “foreign entities of concern”, including China. But China has begun circumventing the restrictions through joint ventures with US free-trade partners South Korea and Morocco. The US and China remain mutually dependent, even as they balance economic interests with geopolitics.Questions raisedHow are US-China relations affecting global supply chains worldwide?Which companies and countries gain from the current US-China tensions — and which lose?What strategies can companies follow, including staying out of the Chinese market or leaving? What are the upsides and downsides?What risks for companies are associated with leaving or staying in China, and how can these risks be managed? What immediate, medium- and long-term threats exist for global supply chains? And what are the threats to the green economy from changed supply chains?What further problems do reshoring and friendshoring raise for US and European manufacturers? Is the solution worse than the problem?How do you predict US-China tensions will play out in five years and in a decade? Which factors are most important in your scenarios?Usha Haley is W Frank Barton Distinguished Chair in International Business & Kansas Faculty of Distinction, Barton School of Business, Wichita State University More

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The Federal Reserve is set to press ahead with plans to cut rates despite an unexpected surge in jobs growth in January, with a $7tn immigration-led economic boost and fewer job vacancies convincing officials the labour market is unlikely to trigger inflation. Fed officials said this week that last Friday’s payrolls data, which showed the US economy added 353,000 jobs in January — more than double the expected amount, justified their patience in keeping borrowing costs on hold at a 23-year high of 5.25 to 5.5 per cent. But most officials think they remain on track to cut rates later this year, with inflation likely to fall even if the US economy continues to add jobs. “The Fed is still all about inflation,” said Larry Meyer, an economist at LHMeyer and former Fed governor. “Neither a strong labour market, nor strong growth will dissuade them from cutting rates as long as the data on inflation is good. And it does not have to be better, just as good as over the last six and 12 months.” Unemployment has remained close to historical lows at just 3.7 per cent, despite a sharp fall in inflation over the past year. That has surprised many economists, who thought rate-setters could not contain price pressures without it costing many US workers their jobs. The Fed expects the labour market to cool this year, but it believes that — unlike in the past — a sharp rise in unemployment will not be necessary to bring inflation to their 2 per cent goal. One reason why is a big influx of foreign workers into the US, helping to contain wage growth and, ultimately, prices. While immigration has become a politically charged topic, with lawmakers on the Hill locked in a months-long debate over migrants entering the country via Mexico, the impact of a post-pandemic wave of new arrivals has been positive for the US economy. The Office for Budget Responsibility, Congress’s independent watchdog, said on Wednesday that the wave would boost output by $7tn over the next 10 years, with the US labour force likely to have 5.2mn more people by 2033 compared with estimates taken in February 2023. “More workers mean more output, and that in turn leads to additional tax revenue,” Phillip Swagel, the director of the CBO, said at a press briefing on Wednesday, adding that the $7tn boost would return $1tn to government coffers.The influx of workers would also help lower labour costs, the CBO said.US employers blamed a pandemic pause in processing employment-related visas in 2020 and 2021 for escalating a labour shortage that forced them to raise wages and offer incentives, such as cash signing bonuses and college tuition, to recruit workers. The shortage remains the most pronounced in blue-collar sectors that rely heavily on foreign-born workers including restaurants, hotels, landscaping and construction.Fed officials, including chair Jay Powell, acknowledge a greater supply of workers from 2022 onwards, both from immigration and more labour force participation, has helped contain wage growth.On Thursday, Thomas Barkin, president of the Richmond Fed, credited immigration as one factor that had helped alleviate pressures in the labour market. Adriana Kugler, a Fed governor and labour market expert, said on Wednesday that the “trade-off between inflation and unemployment”, where disinflation spurs unemployment, appeared to have broken down of late. “There is no doubt that immigration is contributing importantly to labour supply,” said Krishna Guha, vice-chair at Evercore ISI, adding that it was also “part of the reason why the US has been able to deliver this remarkable combination of strong growth, strong employment, falling inflation and cooling wage growth”. Some officials, such as Boston Fed president Susan Collins, are concerned that the rise in workers was a post-pandemic one-off and will not last. While Congress has, as yet, failed to agree tougher rules at the Mexican border, with the Senate on Wednesday rejecting the latest proposal after it faced opposition from likely Republican presidential nominee Donald Trump, any deal could weigh on migrant flows. Business groups, including the Chamber of Commerce, the National Restaurant Association and the National Retail Federation, are lobbying Congress to increase quotas for employment visas and the cap on the H-2B visas used by seasonal workers in industries including agriculture and seafood processing. US-born workers are retiring from the labour market at a faster pace than they are ageing into it, making increasing legal immigration crucial to their efforts to recruit enough workers to grow their businesses, they say.Swagel acknowledged that the CBO’s immigration projections were “a key source of uncertainty” and said his watchdog would prepare an economic analysis of any immigration legislation that is passed. Fed officials this week also pointed to more lukewarm readings from other surveys, such as the JOLTs data for job openings and quit rates, as evidence that the labour market is cool enough to enable them to lower their benchmark federal funds target later on this year.The Atlanta Fed’s tracker showed pay growth fell back in January — though, at 5 per cent, wage deals are still outpacing pre-pandemic norms. The Employment Cost Index, seen as the Fed’s preferred measure of pay growth, also ticked down between the third and fourth quarters of last year. Loretta Mester, president of the Cleveland Fed and an FOMC voter, said on Tuesday that she still planned to cut rates three times — in line with what she thought back in December. While January’s jobs report showed the labour market was “remarkably resilient”, Mester said other indicators, such as the ECI, pointed “to some moderation”. “At this point, I suspect we will see further moderation of wage growth, with a gradual slowing in job growth and an uptick in the unemployment rate over the year from its very low level,” she said. “On net, January payrolls offer more reason not to rush, but no need to panic and throw the steering wheel hawkish,” said Guha. “This is not the start of 2023 when they had a similar labour market surprise but with hot inflation and wage data.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Two years ago, the west stunned the rest of the world by imposing unprecedented economic sanctions on Russia after Vladimir Putin’s assault on Ukraine. Yet the euphoria in western capitals about this response turned to disenchantment when the Russian economy did not collapse as some had anticipated. Russia’s economic outperformance relative to expectations has been a gift to Kremlin propaganda. “They are supposed to be smothering and pressuring us from all sides”, boasted Putin recently. In his telling, a stabilising currency and the return of growth after the initial impact of sanctions demonstrates the invincibility of a Russia supposedly under economic attack from the west. Many have allowed themselves to be impressed. The IMF has in the past three months more than doubled its estimate for Russia’s 2024 growth in gross domestic product, which it now puts at 2.6 per cent. So does Putin have a point? Have sanctions failed? And are there lessons for us in Russia’s economic management? The answers are no, no, and quite possibly.First, note that strong GDP growth does not tell the story it might in other countries. GDP, the sum total of all paid activity in an economy, is influenced by how much people want to buy: since its full-scale attack on its neighbour, Moscow has gone on a shopping spree for soldiers, imported weapons, and ramped up its own arms production. The Bank of Finland’s Institute for Emerging Economies (Bofit) finds that most of the growth in Russian manufacturing is in war-related subsectors. The rest of industry has largely stagnated. Car production, for example, remains a third below where it once was. This does not mean the growth in GDP is not “real”. Activity has clearly increased, as is visible from other indicators such as the falling unemployment rate. But the aggregate figure reflects a changed composition of economic activity — and even then, on Russia’s own numbers, GDP has barely caught up with its pre-invasion level. Big economic problems — from exploding district heating pipes to egg shortages — proliferate alongside revived GDP growth. Public utilities and residential infrastructure are deteriorating badly, worsened by sanctions-related deficits in spare parts and machinery. War economy, yes. Broad resilience, not so much.It is an error, then, to conclude from Russia’s GDP growth that sanctions have failed. Redeploying resources towards war camouflages the underperformance of the ordinary economy. The correct counterfactual is how badly the Russian economy would have performed in its previous configuration. The GDP fallout from sanctions would have been much greater. Besides, the sanctions were not comprehensive: for nearly a year after the invasion, Russia was selling oil and gas without sanctions at prices it had itself driven up.Nevertheless, Moscow is exploiting a possibility that liberal market democracies ignore: if you disregard economic policy orthodoxies, you can mobilise resources for political goals, and squeeze more real activity out of an economy in the process. In the 1930s, the Nazis’ central banker Hjalmar Schacht found ingenious ways to inject liquidity into a broken German banking system, then military mobilisation restored depressed demand, employment and growth.Russia, too, has jettisoned much conventional economic wisdom. (The FT has reported “a lot of interest in Schacht” at the Russian central bank.) Capital controls and heavy-handed intervention in corporate decisions staved off currency collapse and financial disorder. Massive worker and resource mobilisation has been achieved through a mix of planning, deficit spending and repression of consumption.This ought to give liberal market democracies pause. Not that they should emulate warmongering dictators. But they should realise that mobilising and allocating very large resources — not to war, but to worthwhile investments — is perfectly doable. As Keynes said: “Anything we can actually do, we can afford.”Admittedly, Moscow’s experience reminds us why the orthodoxies arose in the first place: the war economy cannibalises its own economic future. Non-military infrastructure suffers because investments are diverted. Bofit points out that Russia spends less on scientific research than a decade ago. But western countries could mobilise their resources to do precisely the opposite.In truth, Russia’s cheerleaders have little to cheer. The rest of us should (while tightening the screws on sanctions) note its ability, for now, to deliver on politically-directed economic goals. Our goals being infinitely better, we should not let that put us to [email protected] More