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The new recessionary threat to global trade

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Hello and welcome to Trade Secrets. If you haven’t noticed, there is a G7 summit of government leaders in the Bavarian mountains today. Among other things, the leaders formally launched an alleged $600 billion plan for infrastructure and investment to challenge China’s Belt and Road Initiative, which sounds like the umpteenth repetition of things we’ve been hearing for years. Today’s main piece looks at the latest in a series of shocks to the world trading system – an environment of high inflation and the increasing risk of recessions – and whether this will be the one that will ultimately pull globalization back in the long run. Regular readers won’t be surprised to learn that I remain quite optimistic that I don’t. If you think I’m wrong or something else and want to let me know, I’m at alan.beattie@ft.com. mapped waters looks at the food crisis fueled by the conflict in Ukraine.

Contact us. Email me at alan.beattie@ft.com

Supply shocks didn’t work, let’s try the question

It’s frankly like a gang of malicious economists (i.e. economists) have taken a fairly well-functioning global commodity trading system and repeatedly hit it hard in quick succession from different angles to see if it topples over.

In 2020, we received the negative shock to production and demand for goods from the first wave of the Covid-19 pandemic. Thereafter, for most of 2021, demand reversed and there was a massive rebound in consumer durables sales and thus trade volumes, putting pressure on sclerotic ports. Demand for consumer goods also caused upstream supply problems, such as shortages of semiconductors.

At the end of 2021, the Omicron wave caused another negative supply shock to manufacturing, especially in China. The Russian invasion of Ukraine has since produced an entirely new container load of effects: an initial negative supply shock to shipping from the blockage of Russian ports and ships, a second upward pressure on freight costs due to higher fuel prices and a rupture of global food markets from the disruption of grain transports in the Black Sea.

With the global rise in energy prices and inflation accompanied by a potentially significant negative macro shock from falling real incomes and higher interest rates, we are all concerned about the bullwhip effect that is amplifying consumer demand disruptions in the supply chain. Since trade in goods has historically been more volatile than gross domestic product, recessions in major economies could cause a severe contraction in cross-border trade.

Ralf Belusa, managing director for digital business and transformation at Germany-based global container shipping group Hapag-Lloyd, summed it up at a recent FT event: “Our reality today is based on increased, accelerating and interconnected volatility, uncertainty, complexity and ambiguity.” A happy thought.

The various effects of all this so far are as follows. Goods trade volumes have held up pretty good: They have retreated somewhat in recent months, but there is still little sign of a collapse. The surge in consumer demand for goods over services that followed the first wave of Covid is still largely there. Flexport, the freight forwarding and supply chain company, says that: his mate of preference for goods is only slowly tracking back to 2020 values.

Freight rates are the same float down, albeit of historically very high levels. Port congestion, last year mainly a phenomenon of the American west coast – Ryan Peterson, CEO of Flexport, repeatedly compared underinvested Long Beach/Los Angeles with Rotterdam – is also affecting Europe. The first of what could be a wave of dock strikes in Hamburg and elsewhere does not help.

The Threat: Another negative global demand shock on top of existing supply disruptions, severely depressing trade later in the year or into 2023 and causing damage in the longer term. The first is a distinct possibility, noticed by CEOs and macroeconomists alike. While the combination of high volumes and freight rates is driving shipping lines (including bulk carriers that bring fuel and food over longer distances to replace supplies from the Black Sea) to use, companies like Maersk are warning of declining demand in the second half. of the year.

On the other hand, a cyclical correction, even an abrupt one, does not necessarily mean a trend reversal. With energy shocks and high inflation, there are many references to the 1970s. But although there were cyclical movements then, they reversed the post-war long-term increase in world trade, despite the collapse of the Bretton Woods post-war trading system in 1971.

And here’s the thing: Despite shipping companies worrying about the short term, they’re putting big bets on the future. Maersk warns for the coming quarters, but is optimistic for the longer term. The ratio between ordered new container ships and the existing global fleet is heading for more than 30 percent for the first time in nearly ten years. The companies are, of course, much too optimistic – there is a long history of over-corrections in the shipping industry and there was serious overcapacity in 2020 before the pandemic hit. And, of course, shipowners are not going to publicly predict a collapse in demand for their services. Yet it is striking that such large bets are being made on the global commodity trade that will advance in the coming years.

Esben Poulsson, president of the International Chamber of Shipping, recently told an FT event: “Those owners are investing in new ships in the belief that free trade will last, despite the rumors of reshoring. I see no evidence of [the end of globalisation]† I see a lot of political nonsense about it.” Until I get some pretty thick proof that it’s different, that’s just my opinion.

In addition to this newsletter, I write a trade secret column for FT.com every Wednesday. Click here to read the latest news and visit ft.com/trade secrets to see all my columns and previous newsletters.

mapped waters

The unfolding food crisis is a major concern for the G7 heads of state meeting in Germany today. But in other parts of the world, especially in Africa, it is a real and current catastrophe, as my colleagues Andres Schipani and Emiko Terazono explain. Today’s chart shows how much African countries depend on grain imports from Russia and Ukraine – Eritrea tops the list.

Bar Chart of Share of Wheat Imports (%) with Countries Dependent on Wheat from Russia and Ukraine

This collapse of trade due to conflict in Europe is not the only reason why the struggle to eat has become acute in several African countries. The worst drought in four decades in northern Kenya, Somalia and much of Ethiopia means up to 20 million people in that region could go hungry this year, the UN Food and Agriculture Organization said. Tragically, further problems are likely to arise as food shortages fuel conflict in the region. (Jonathan Moules)

The news service Borderlex explains that the Energy Charter Treaty, which is accused of exposing governments to expensive lawsuits if they switch to renewable energy, has been reformed, although it is questionable whether enough has been done to satisfy critics in the EU in particular.

The Essential Goods Monitoring Initiative reports that governments have (sensibly) lowered import restrictions on food and fertilizers in response to rising prices.

Three Brookings Institution analysts look at the need for the US to pull in and give in skilled immigrants if his effort to expand its domestic semiconductor industry comes to fruition.

Sam Lowe’s Most-Favoured Nation Newsletter (£ but Free Trial) looks at the UK government is confused by setting aside its own trade defense authorities to maintain import guarantees for Chinese steel.

A online exhibition photos of trade diplomats during the recent WTO ministerial negotiations show the human stories behind the bureaucracy.


Trade Secrets is edited by Jonathan Moules


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