How to Restore Business Confidence

After abruptly abandoning its ‘zero-COVID’ approach in late 2022, China reopened its borders on 8th January 2023. This decision was a welcome surprise, as pandemic control measures were one of the main reasons European companies had had an extraordinarily difficult year in 2022, and the removal of the restrictions gave rise to a belief that a swift economic rebound would follow. International banks revised up their growth forecasts for China, and businesses were expecting a surge in new orders resulting from pent-up Chinese demand.

The political will in China also seemed to finally match businesses’ expectations for increased opening of the economy. At the 14th National People’s Congress, held in March 2023, China’s outgoing premier Li Keqiang delivered the government’s annual work report, reviewing the progress made on development plans from 2022, and setting out the key priorities for the coming year. The gross domestic product (GDP) target for 2023 was set at around five per cent, and Li’s presentation emphasised economic recovery and stability. The work report also outlined aims to encourage more foreign investment. The business community saw these as positive messages, as they suggested the Chinese Government would shift focus from ideological considerations—and an emphasis on self-reliance and national security concerns— to prioritising the economy and re-engagement with the world.

While economic indicators at the beginning of 2023 showed momentum was gathering, as the year progressed, China’s recovery began to wane, with many areas of the economy not performing as expected. A key factor in this was that the much-anticipated release of pent-up demand simply did not take place, resulting in an extended contraction of manufacturing activity, producer prices and industrial profits. While services fared somewhat better than manufacturing, growth in this sector showed signs of slowing after an initial strong rebound. On top of this, a host of serious challenges that China’s economy had already been facing—including mounting government debt and the unravelling of the real estate sector—are yet to be resolved. China’s demographic dividend is also fading, and urban youth unemployment broke historic records for several months in a row in 2023, adding more pressure to the country’s recovery. Official statistics, published until July 2023, suggested that one in five people between the ages of 16 and 24 were out of a job in China’s big cities. This data also highlighted the need for targeted policies in order for domestic consumption to live up to its potential as a key driver for the Chinese economy. Rebuilding consumer confidence will also require measures that can improve the outlook for the real estate sector, in which over 70 per cent of Chinese household wealth is tied up.

Some momentum for China’s economic recovery could be regained by providing policy support for the demand rather than the supply side. This is particularly important given that supply-side policies have been a contributor to the significant trade imbalances China has accumulated with both the European Union (EU) and the United States (US). There is a danger that, if not addressed, this may lead to reactions by overseas governments – the growing trade imbalance and the lack of reciprocal market access are often cited by European politicians as key grievances and reasons for dissatisfaction with the relationship with China.

European Business in China Position Paper 2023/2024, Executive Summary: 

EU_China_Business_Report_Exec

European Business in China Position Paper 2023/2024, Full Paper:

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1. Did globalization decline during that period?
2. To what extent did North America and China decouple their supply chains?
3. Did regionalization (“nearshoring”) increase?

In its broadest sense, the term “globalization” captures the interaction of national economies through the movement of people, ideas, capital, technology, goods, and services. Globalization so defined has already crossed a threshold from which it will likely never return, barring a global conflict or a failure to respond adequately to climate change. Indeed, individuals across the world today are more connected than ever before. Consider, for example, that almost two-thirds of the world’s population owns a smartphone, or that the estimated number of international tourists in 2023 exceeds 1 billion. Such human interconnectivity will only increase over time as communication and transportation-related technologies continue to advance. There has also been rapid growth in services trade, and especially in intermediate services.1 When observed through this broad lens, globalization remains deeply rooted and change is one of its enduring characteristics.

Among the many facets of globalization, our focus is on international trade, and on global value chains (GVCs) in particular. The volume of trade flows in goods and services has withstood significant challenges in the past, and stands to do the same in the future, even as patterns of trade flows change. Already, many of the negative impacts of the COVID-19 pandemic and increased geopolitical tensions have been met with creative workarounds, demonstrating the resilience of international trade and global supply networks. Changes in the patterns of cross-border trade in goods and services do not indicate a decline in globalization. Our quantitative analysis provides strong evidence that value-added trade supporting the production of goods and services did not recede during 2000-2021, nor was there evidence of a global trend toward reshoring. Instead, the evidence suggests that 2021 was a high mark for the global exchange of goods and services as measured by international value-added production linkages. Regarding the question of whether there has been a decoupling between North America and China, our analysis finds no evidence of decoupling of value-added production linkages. In fact, we find that China and North America increased their value-added production linkages between 2017 and 2021, implying significantly greater linkages than those that could be estimated using gross trade statistics.

Our analysis utilizes the GVC Indicators database created by the University of International Business and Economics (UIBE) in Beijing. The GVC Indicators database breaks down value added into that which flows through GVCs, and that which does not.2 See the appendix for a description of the data and methodology. In the charts that follow, the term “forward GVC participation” captures the degree to which a country’s domestic value added is exported through global value chains. “Backward GVC participation” captures the extent to which a country’s final production includes value added that is imported from global value chains. For each measurement, a higher percentage indicates greater relative importance of value added that is imported or exported through GVCs compared to value added sourced domestically. Thus, higher levels of backward and forward GVC participation indicate greater global integration of production networks.

We concentrate on the world’s three major trading entities: China, the European Union (EU), and North America, defined as the three nations in the USMCA (Canada, Mexico, and the United States). Our calculations for the EU in all years include GVC activity for the 27 member countries as of 2021, and therefore exclude the United Kingdom. Value added originating from China, the EU, and North America accounted for 54% of worldwide value added involved in GVCs in 2021, and final production by the three entities accounted for 57% of GVC-involved final production. Other significant GVC trading nations in 2021 which are not included in our main analysis include India, Japan, Russia, and the United Kingdom.3 In our analysis, we address reshoring within North America and the EU while considering how each bloc’s linkages with China have evolved over time.

To read the full paper, see below. 

Guy Erb is a former U.S. trade policy official and investment banker.
Scott Sommers is a PhD student in Economics at the University of Minnesota.

To read the full paper, please click here.

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The robust recovery in 2021 – driven by strong consumer spending and some uptake in investment, with trade in goods surpassing pre-pandemic levels — marked the highest growth rate in more than four decades, the Report highlighted. Yet the momentum for growth – especially in China, the United States and the European Union – slowed considerably by the end of 2021, as the effects of monetary and fiscal stimuli began to recede and major supply-chain disruptions emerged. Rising inflationary pressures in many economies are posing additional risks to recovery.

“In this fragile and uneven period of global recovery, the World Economic Situation and Prospects 2022 calls for better targeted and coordinated policy and financial measures at the national and international levels. The time is now to close the inequality gaps within and among countries. If we work in solidarity – as one human family – we can make 2022 a true year of recovery for people and economies alike.”

– António Guterres
Secretary-General of the United Nations

With the highly transmissible Omicron variant of COVID-19 unleashing new waves of infections, the human and economic toll of the pandemic are projected to increase again. “Without a coordinated and sustained global approach to contain COVID-19 that includes universal access to vaccines, the pandemic will continue to pose the greatest risk to an inclusive and sustainable recovery of the world economy,” noted Liu Zhenmin, Under-Secretary-General of the United Nations Department of Economic and Social Affairs.

To read the full report by the United Nations, please click here.

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Prior to the pandemic, health and safety measures at ports had focused mainly on accidents and incidents impacting the physical and environmental aspects of safety for port workers. For example, at most ports, it is mandatory for all port workers to wear high-visibility clothing, hard hats, protective footwear and, when near water, lifejackets. However, the rapid spread and severity of COVID 19 led to a surge in worldwide demand for medical grade face masks, sanitizing fluid, dispensers, goggles, disposable overalls and other material with which to protect workers from airborne infections.

In March 2020, the World Health Organization stated that severe and mounting disruption to the global supply of personal protective equipment was putting lives at risk. Ports, like many other sectors, were initially not well equipped to meet the demands for essential supplies of appropriate face masks, sanitizing fluid, disinfectants and other more specialized equipment to protect the health and safety of port workers with regard to COVID-19, nor did they have the necessary processes and procedures in place to manage the move to telecommuting as required by government legislation in many countries. Emergency procedures for ensuring social distancing among work groups to reduce the spread of infection and to isolate symptomatic staff members had to be put in place and plans needed to be drawn up to safely manage the movement of personnel at ports. This was more complicated for essential workers such as ships’ crews, who had to rely on arrangements for accommodation made by shipowners and port authorities. 

To read the full report from UNCTAD, please click here. 

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Trade can also play a key role in addressing the challenge of global warming. While trade results in carbon emissions, it is fundamental to the solution to climate change in terms of facilitating the transition to low-carbon growth and supporting adaptation to rising temperatures and changing precipitation patterns. Trade is also critical to recovery from increasingly frequent extreme weather events.

Open trade policies and efforts to reduce trade costs remain critically important while recognizing the need to recalibrate an approach to trade that places it firmly and squarely within a resilient, inclusive, and green approach to development. [1] This note summarizes three inter-related policy challenges to which trade can be a fundamental part of the answer: (i) the recovery from COVID-19 and economic resilience to future global shocks; (ii) delivering on the promise to end extreme poverty and achieving a more inclusive world; and (iii) mitigating carbon emissions and adapting to climate change.

To read the original report by the WTO and WBG, please click here.

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The time is ripe for the U.S. to negotiate or join a digital trade agreement. As the American Leadership Initiative has written, the U.S. must seize this opportunity to set global internet standards of openness, transparency, and democracy, as opposed to China’s increasingly influential vision of an autocratic internet that facilitates state control, censorship, and surveillance. China’s growing technology leadership and autocratic internet standards ultimately undermine our national interests, including democracy itself. Developing new global internet standards is also an important step to achieving other goals: strengthening America’s economy and national security; addressing the growing role of digital technologies throughout the economy and working with our allies to provide open markets and interoperable regulations for the growing number of workers and small businesses who use digital technologies.

The Administration has pledged to reject business as usual in the trade sphere, stating that new trade policies and agreements must be “worker-centric.” While this term is often used to describe more robust labor protections and provisions, it is part of a larger initiative to develop new trade policies that have not only expanded worker provisions, but also stronger environmental protections, stricter provisions regarding state-owned enterprises and subsidies, and other policies that will allow the balance of benefits from trade agreements to accrue more to workers and less to large corporations.

New digital policies can be crafted to fit into this “worker-centric” framework – policies that will address workers’ needs in a shifting economy, whether as part of a standalone agreement or part of a larger bilateral or plurilateral agreement.

To read the full report from the American Leadership Initiative, please click here.

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To read the full report from the World Trade Organization, please click here.

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Worse, governments face a conundrum. They are mindful that foreign subsidies can erode the market access won in previously negotiated multilateral and regional trade agreements. Yet, evidently, governments want to retain subsidies to tackle pressing national and global concerns, such as the COVID-19 pandemic response, decarbonisation, and the clean energy transition. What one government regards as a good subsidy and a legitimate exercise of national sovereignty can be viewed more negatively by trading partners.

Recriminations have been exacerbated by a lack of comparable and reliable information on subsidy schemes and awards. In this Hinrich Foundation sponsored report, authors Simon J. Evenett and Johannes Fritz of the University of St. Gallen assembled an inventory of 18,137 corporate subsidies awarded by China, the EU, and the US since November 2008 to assess the scale of national and cross-border commerce affected by these trading powers’ subventions.

Given that trillions of US dollars of trade are involved, and the growing discord between governments over subsidy matters, the time is ripe for deliberation about the nexus between subsidies, market access, and the potential for enhanced international cooperation. The paper concludes by describing six specific goals of this needed policy dialogue on the trade-related aspects of corporate subsidies.

To read the full report from the Hinrich Foundation, please click here.

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• Trade in the CPTPP region has largely paralleled the members’ trade flows with the rest of the world. The main beneficiary appears to be Vietnam—at least in the sense that after it ratified the CPTPP, Vietnam has notably expanded its trade in goods, and its inbound investment has been solid, despite the Covid-19 pandemic. This can be a positive signal to other Southeast Asian countries that are considering CPTPP membership, such as the Philippines, Indonesia, and Thailand. Japan and Singapore have led the region’s trade in digitally deliverable services, also a key sector for potential CPTPP members and services export superstars such as the Philippines, South Korea, and the United Kingdom.

• The CPTPP matters for its users: member country firms that export to the CPTPP region find the CPTPP’s market access, services liberalization, and e-commerce provisions beneficial to their businesses. E-commerce provisions are facilitating online sellers: of micro and small online seller-exporters, 73 percent find the provisions of the CPTPP that ensure free data transfer across borders as somewhat or very beneficial, some 66 percent find the CPTPP’s ban on server localization to be beneficial, and 61 percent find the agreement’s liberalizing trade in services to be important. The benefits are even greater for midsize and large firms. Firms also highlight as beneficial the CPTPP’s provisions that commit members to protecting the consumer against unwanted spam and shielding consumers’ privacy.

• The CPTPP has garnered interest and formal applications from several non-members seeking to join an agreement that includes high-quality e-commerce provisions with some of their main trading partners. Especially for some of the Southeast Asian countries, accession to the CPTPP could also help kick-start and lock in domestic digital regulatory reforms. As a major development, both China and Taiwan formally applied to the CPTPP in September.

• Preliminary econometric evidence shows that trade agreements, such as the CPTPP, that have robust and binding e-commerce chapters in addition to goods and services chapters indeed have value in promoting trade in goods and services, as well as digitally deliverable services, among the member countries. Of course, as the number of comprehensive agreements with e-commerce chapters is still small and these agreements are nascent, further research will be needed in the next two to three years to further dissect the value added of digital trade provisions in trade agreements.

• The CPTPP is nascent, and much of its life has been marred by the Covid-19 crisis. At the same time, the agreement could not be timelier, precisely because high-quality e‑commerce provisions help promote small business recovery through e-commerce; surveys time and again show that over the course of the Covid-19 pandemic, firms that sell online have outperformed firms that do not sell online.

CPTPP members certainly appear to agree that the agreement’s e-commerce provisions create new value in their trade relations. In its August 2021 meeting, the CPTPP Commission decided to form a Committee on Electronic Commerce to facilitate continued discussion on the implementation and operation of the e-commerce chapter. The new committee is tasked to “position the CPTPP to play a central role in global rulemaking in this field.” The members agreed to assess the CPTPP’s impacts on themselves.

To read the full report from the Center for Strategic and International Studies, please click here.

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As the US economy rebounds amid elevated inflationary pressures and Europe grows at a rapid clip, an uneven global rebound looms. Although emerging-market and developing economies (EMDEs) generally retain good access to global capital markets for now, their relatively slow pace of COVID-19 vaccination will continue to hamper their economic recoveries and strain their public finances—already stretched owing to the fiscal pressures of the pandemic over the past year and a half. Higher interest rates in the rich countries, particularly the United States, could tip EMDEs into liquidity and even solvency crises. The likelihood of crises is higher if advanced-economy central banks move abruptly, surprising markets. Global policymakers should prepare now by enhancing mechanisms for providing liquidity to EMDEs and, in cases of insolvency, for restructuring their sovereign debts. Perhaps even more important, the scope for uneven recovery can be limited if rich countries make an all-out effort to deliver vaccines globally and enhance less prosperous countries’ infrastructures for getting shots into arms.

To read the full report from the Peterson Institute for International Economics, please click here.

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