Imagine a world in which China builds every single car.

Unthinkable, right? Think again.

China today has enough capacity to manufacture half of the world’s 80 million vehicles. By 2030, China’s capacity could climb to 75% of the world’s volume, according to Global Data.

This year China will export 6 million vehicles to more than 140 countries worldwide, blowing past Japan for global leadership.

Chinese brands like SAIC’s MG, Chery, Geely’s Volvo and BYD are leading the way, winning in every time zone from Brazil to Thailand, from the UK to Australia.

Call it the coming China car colossus.

All Aboard

Of course, we knew Chinese cars would eventually find their way into global markets.

But what makes things alarming is that Chinese brands are only part of the story. Now global automakers are racing to make China the epicenter for global automotive production, too.

• Tesla shipped 344,000 China-built cars to Canada, Australia, Europe and other markets worldwide last year.

• GM sends tens of thousands of made-in-China Chevys to Mexico and other markets. Chevy’s six best-sellers in Mexico are all built in China

• Ford has exported more than 100,000 trucks and SUVs from China to Southeast Asia, Africa and the Middle East. The made-in-China Lincoln Nautilus is exported to the US, too.

• Stellantis invested $1.7 billion into Leapmotor last year to build Stellantis portfolio brand products for export to worldwide markets.

• Volkswagen, Renault and BMW export huge numbers of made-in-China EVs back to Europe.

• Hyundai and Kia will begin selling 200,000 made-in-China cars in their home market and the global markets.

• Mercedes exports the Smart brand from China to several European markets including Germany.

• Even the ultra-cautious Japanese brands are joining the race. Honda and Nissan will soon start delivering made-in-China products overseas, including (gasp!) to their home market.

This is a problem. Global automakers had set up joint ventures and built massive plants in China to sell to Chinese consumers. With sales of non-Chinese brands there now dropping fast, Americans and Europeans feel that they must convert those plants to ship products to markets worldwide.

Chinese JV partners cannot believe their good fortune: “Look at these easy profits from exporting joint venture products to our partners’ global markets.”

Why is everyone hell-bent on building in China? Simple. Nowhere else can compete when it comes to scale, cost, quality – and subsidies. “We are making record margins on those Chevy exports to Mexico,” one GM executive told me.

Supply Chain Dangers

But there is an even bigger problem with building every car in China: Supply chains.

China has methodically built a monopoly over much of EV production from mining to mineral processing to battery-cell manufacturing. With control of internal combustion engine and as well as EV production, China would dominate a large swath of the industrial inputs crucial to national defense.

Tens of thousands of jobs would disappear. Tax revenues would dive. We would forget how to make things, even the most basic things. The West would be extremely vulnerable.

Does the idea of utter China domination in autos seem extreme? It’s not. Consider solar panels, where China supplies more than 90% of global demand. Or shipbuilding where China production accounts for more than half of global output. Or so many of our home appliances. Ditto.

Without tariffs, made-in-China cars could overwhelm global markets and crush established automakers.

So What

How will Western political leaders respond?

We got a hint of things this week in Paris where French President Macron met with Chinese leader, Xi Jinping: “France welcomes all industrial projects. BYD and the Chinese industry are very welcome in France.” Translation: We are not going to tolerate imports from China much longer.

Getting Chinese automakers to build in your country might be an option. But it is a harder case to make when your own automakers are manufacturing in China for export back to home markets. As a native of Detroit, it is hard to watch the Detroit 3 commit such massive, self-inflicted damage.

An executive at a major American parts supplier recently described the challenge to me in blunt terms: “Will Western nations have a renaissance of manufacturing innovation at home? Or will we watch our auto companies turn into just logos on vehicles built in China?”

It is time for the West to take things in a new direction. Without decisive action, the future of cars – and critical supply chains – may soon become “all China, all of the time.”

Future Cars & Markets

Electrics 

The company is expected to be valued at just $5 billion, down from $20 billion in early 2023. I test drove the Zeekr 001 last autumn at a track in New York and gave the vehicle high marks for performance, handling, fit and finish. Prices in China start at a very attractive $37,000.

Huawei Blows Past Li Auto, NIO. Just when you thought there was no more room for new players in China’s auto industry, enter Huawei. The company targets sales of 600,000 cars in 2024, only its second year of production. For some context, Mazda sold about 360,000 cars in America last year.

VinFast Pivot. VinFast sold 10,000 vehicles in Q1 2024. The company aims to deliver 100,000 for the full year. To get there, VinFast plans to appoint up to 100 dealers in America. The flagship VF 9 is joining the VF 8 in American showrooms this month.

I visited with executives at VinFast headquarters in Hanoi and the VinFast plant in Haiphong last month. I saw significant progress on several fronts: The VF 6 and VF 7 are good looking vehicles that could be mistaken for Hyundais or Kias. The plant managers are zealous about quality in every aspect and detail. And the company is developing new initiatives in Thailand, Indonesia and India. This week VinFast announced pricing of its VF 3 starting under $10,000.

Batteries / Supply Chains

IRA Impact: EVs and Batteries. The Inflation Reduction act has spurred investments in EVs and battery plants in America totaling $188 billion, according to a report by the Environmental Defense Fund. This takes care of the top layer of battery assembly. Now starts the hard work of building battery supply chains. Georgia, Michigan and North Carolina are leading the way.

Advanced Technologies

TSMC Chips and Cultures. Read this fascinating profile of the practical things that get in the way of progress at the TSMC plant in Arizona. TSMC insiders say the key to the company’s success is an intense, military-style work environment. Engineers work 12-hour days, and sometimes weekends too. That is a giant adjustment for most American workers.

New Numbers / Milestones

Lucid Earnings. In its earnings call this week, the Newark-based maker of luxury vehicles revealed new highs in revenues but stubbornly high costs, too. The Lucid Air is extremely good, but how many people in the world have heard of it, or taken a test drive?

BYD: Exports Are The New Priority. BYD exports jumped to 41,000 units in April, almost 200% higher than the 2023 April number.

GM/Detroit Pain in China. GM lost $100 million in the first quarter of 2024, with its market share falling to its lowest level since 2003. Ford has lost a stunning $5 billion in China over the past five years.

Michael Dunne is an entrepreneur, author, and keynote speaker. In 2018, Dunne founded Dunne Insights to deliver world-class advisory services on global electric and autonomous vehicle markets.

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Industrial policy has enjoyed a major return to popularity in the United States, with the introduction of the Inflation Reduction Act and the CHIPS and Science Act in August 2022, driven by the need to expedite the clean energy transition and mitigate geostrategic concerns by reducing dependence on China.

The subsidies linked to domestic content requirements in these statutes have shifted sourcing patterns, while restrictions on the exports of advanced microchips to Chinese firms have directly affected trade. The World Bank’s October 2023 East Asia Update measures how these laws have reduced Chinese and ASEAN exports to the United States and increased those from Mexico and Canada.

The direct impact of US industrial policy extends beyond its borders by providing preferential treatment to FTA partners and discriminating against others. It may also have spillover effects by contributing to an already growing appetite for similar policies in East Asia and around the world, particularly Europe. This tit-for-tat policy game could apply to subsidies and other instruments of protection as countries try to compete on an increasingly uneven playing field.

To some, these developments signal the end of the export-led model in spearheading growth. While trade growth in East Asia averaged over 8 per cent in the years leading up to the 2008 Global Financial Crisis, it is expected to fall to 4.4 per cent in the post-pandemic years.

While diversifying trade patterns will increase the resilience of trade flows and the sustainability of the export-led model, the two-decade steady decline in the region’s trade growth rate is a cause for concern. Supply chains are shortening and some policy-induced reshoring has taken place. But the slowdown has mainly affected goods rather than services trade. There is huge potential for growth in services trade, especially intermediate services, with digitalisation further reducing barriers.

This has led some commentators to assert that globalisation is not dead but simply transforming. Similarly, if the export-led model of old is dead or dying, then it may be superseded by one in which the composition and the pattern of trade changes, but not its role or importance. The composition will shift away from goods towards services while the pattern of trade will be determined less by efficiency and more by geopolitical factors.

Rapid growth in digital trade is related to this compositional shift towards services. Digitalisation increases the scale, scope and speed of trade and will affect assessment of the export-led model’s viability in at least three ways.

First, digital goods and services are likely to make up most future trade growth, while digitalisation will facilitate future services trade growth. Second, reported statistics on trade may underestimate the true volume of digital trade, given a host of measurement difficulties. Third, many of the barriers that inhibit goods trade in developed countries do not apply to services trade, while increasing digitisation enhances the ability of traders to circumvent protectionist barriers.

The export-led model is unlikely to die anytime soon. Though the shift towards embracing industrial policy may represent more than a transitory phenomenon in the United States, the fact that Washington’s security-driven trade policy has favoured friend-shoring and near-shoring more than reshoring implies a change in the pattern rather than the volume of trade.

Such policies have so far favoured countries which have free trade agreements (FTAs) with the United States, at the expense of China and ASEAN member states. But this could change if attempts by ASEAN countries like Indonesia and the Philippines to sign limited FTAs with the United States for critical minerals materialise.

Similarly, the rapid growth in digital trade is altering the product composition of trade, as new digital goods and services are traded and modes of delivery change. Trade statistics probably underestimate the true significance of these changes on volumes of trade, given measurement difficulties that lead to under-reporting.

The main reason why the export-led model is likely to survive, in one form or another, is the region’s long-standing commitment to free and open trade, which has facilitated massive economic transformation and social progress. The growth and spread of supply chains in the region has underpinned its economic success and is largely irreversible.

There is evidence that this commitment is still present. Recently, Malaysia decided to remove price controls and subsidies on sensitive agricultural products. The Philippines has removed the long-standing and controversial foreign equity limitation on public services, allowing 100 per cent foreign ownership in all public service sectors outside of public utilities. The ASEAN-led Regional Comprehensive Economic Partnership initiative, bodog poker review with its open rules of origin at a time of global pressures against liberalisation, is another indicator of the region’s commitment to openness, as is the recent launch of negotiations for the ASEAN Digital Economy Framework Agreement.

If there is a risk to the export-led model, then it is likely to come from outside. But the primary question, of whether the region’s long-standing commitment to openness will be sufficient to withstand disruption and fragmentation from a sharp escalation in geopolitical tensions, remains.

Jayant Menon is Senior Fellow at the ISEAS-Yusof Ishak Institute in Singapore.

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While China’s support for Russia is widely reported, Hong Kong’s substantial contributions to Russia’s war efforts are less known. Recent reports have identified Hong Kong as a prominent node in Russia’s illicit procurement network, acting as a transshipment hub for diverting Western-made microelectronic components to companies affiliated with the Russian military. Since Russia’s invasion of Ukraine, Hong Kong has doubled its integrated circuits exports to around $400 million worth of semiconductors in 2022, second only to China and far exceeding any third country in the volume of semiconductor trade with Russia. Many of these transactions violate U.S. export control regulations against Russia, and multiple individuals and entities operating from Hong Kong have been sanctioned for their involvement in the Russian military’s procurement network.

Hong Kong’s complicity in sanctions busting is not merely a byproduct of being one of the busiest shipping hubs in the world; it is a direct consequence of Hong Kong’s increased subservience to China, now that Beijing has wiped out the last vestiges of autonomy in the special administrative region. In today’s Hong Kong, the government follows Beijing’s orders in virtually all matters of governance, particularly for issues with geopolitical salience. High levels of semiconductor trade between Hong Kong and Russia, as well as the Hong Kong government’s public scorn for Western sanctions, have made Hong Kong’s allegiance clear: it sits firmly in the camp of an emerging China-Russia axis.

RUSSIA’S SEMICONDUCTOR SUPPLY CHAIN

Numerous reports indicate that despite sweeping Western sanctions, Russia’s defense industrial base has successfully established alternative routes to import dual-use components needed for manufacturing military equipment. Lacking scalable domestic substitutes, Russia relies on foreign-made microelectronic components to produce a range of military gear, including weapons like drones and cruise missiles. Examining Russian weapons captured in Ukraine, the Royal United Services Institute (RUSI) discovered in August 2022 that the majority of microchip components in Russian systems originated from the United States, East Asia, and Western Europe. Tracing the supply chain of microelectronics, RUSI concluded that “third-country transshipment hubs and clandestine networks operated by Russia’s special services are now working to build new routes to secure access to Western microelectronics.”

A leader in low-end microchip manufacturing and the world’s top chip importer, China is now the foremost supplier of semiconductors to Russia. In 2022, as Western countries restricted technology supply, Russia’s semiconductor imports from China skyrocketed, jumping from $200 million in 2021 to well over $500 million in 2022, according to Russian customs data analyzed by the Free Russia Foundation. Importantly, the Sino-Russian technology trade involves not only Chinese-made components but also products manufactured by top U.S. chipmakers such as Intel, Advanced Micro Devices, and Texas Instruments. Nikkei Asia recently reported that exports of U.S. chips from Hong Kong and China to Russia increased tenfold between 2021 and 2022, reaching about $570 million worth. By one figure, China and Hong Kong together accounted for nearly 90 percent of global chip exports to Russia in the period between March and December 2022.

China’s support to Russia’s war effort is unsurprising. The two countries are aligned in their ambition to undermine the U.S.-led international order. Before the war, Beijing and Moscow declared that the countries’ friendship had “no limits,” and a Chinese top diplomat has recently reaffirmed that Sino-Russian relations are “reaching new milestones.” The summit between Chinese President Xi Jinping and Russian President Vladimir Putin in Moscow, held in March 2023, further consolidated the importance of this strategic partnership. Less examined is Hong Kong’s role in Russia’s technology supply chain.

While most countries have begun to recognize Hong Kong’s loss of autonomy following the passage of the Hong Kong national security law in 2020, the city is still often treated as separate from China in economic and trade data. This is as much a matter of convention as an acknowledgement of Hong Kong’s unique function to China: the former British colony is highly integrated into the global economy, serving as China’s window to the world. Hong Kong’s connectivity with the world has allowed unscrupulous actors to hide their footprints amid the busy international flows. Its prominence in Russia’s technology supply chain exemplifies this point. Researchers and journalists have found that some Hong Kong–based companies have diverted significant quantities of Western-made electronic components to Russia since its invasion of Ukraine. Macro-level data bear out Hong Kong’s importance to Russia’s defense-industrial base (although export statistics vary depending on the source). The Free Russia Foundation found that Hong Kong doubled its semiconductors and integrated circuits exports to around $400 million in 2022, putting it second only to China’s $500-million-plus exports. China and Hong Kong far exceed any third country in the volume of microchips trade with Russia.

BEIJING PULLING THE STRINGS

What explains Hong Kong’s prominence in Russia’s effort to sustain war in Ukraine? The most immediate factor is Beijing’s increased control over all aspects of the governance of Hong Kong. Historically, Western countries treated Hong Kong’s exports as sufficiently autonomous from China’s strategic objectives. In 1992, the United States and other former Coordinating Committee for Multilateral Export Controls (COCOM) members designated Hong Kong a “cooperating country,” affirming that it possessed the necessary elements of an effective licensing and enforcement system.

The transfer of sovereignty to China in 1997 prompted fears that Hong Kong would become a hub for technology diversion into China and other so-called rogue states like North Korea. The principle of “one country, two systems” was designed to assuage such anxiety by promising that Hong Kong would continue to exercise independent authority over export controls, which the government interprets as a trade matter, meaning that it falls under the legal bounds of Hong Kong’s autonomy. Under the United States-Hong Kong Policy Act of 1992, after China took over Hong Kong’s sovereignty in 1997, the “United States should continue to support access by Hong Kong to sensitive technologies controlled under [COCOM] for so long as the United States is satisfied that such technologies are protected from improper use or export.” As a result, Hong Kong was eligible to import, without license, extensive categories of U.S.-controlled dual-use items and was eligible for license exceptions for some categories. In contrast, China was required to obtain a license to procure items controlled for U.S. national security and was eligible for a license exception only when the destination was verified as civil end users. A 1997 report by the U.S. General Accounting Office (now Government Accountability Office) characterized Hong Kong favorably for having demonstrated “excellent cooperation with the United States on export enforcement activities, including sharing of information and cooperation on investigations, searches, and seizures of suspected illegal shipments.”

However, as Hong Kong’s autonomy has steadily eroded, so has its willingness to comply with Western export control regimes, especially when they contradict China’s strategic interests. Today’s Hong Kong scorns Western sanctions against Russia. After Russia invaded Ukraine in February 2022, Western governments launched a frantic campaign to seize the assets of Russian oligarchs, hoping to deter elites from aiding Russian war efforts. In sharp contrast, Hong Kong’s Chief Executive John Lee, himself sanctioned by the United States for suppressing the 2019 protests, said that the government would not recognize U.S. sanctions against Russia, asserting that Hong Kong has no legal obligation to enforce “unilateral sanctions” after a Russian oligarch’s yacht was spotted in Hong Kong in October 2022. Furthermore, Hong Kong has become a top alternative for Russian companies shut out of Western financial capitals like New York and London. As Bloomberg reported in October 2022, a number of major Russian companies, including state-owned enterprises, have sought to engage with Hong Kong law firms to help anchor them in a “friendlier jurisdiction.” A local research group later found that between February and October 2022, the number of Russia-affiliated businesses registered in Hong Kong reached thirty-five, more than doubled from the same period in 2021.

DOES THE CHINA FACTOR REALLY MATTER?

It is no coincidence that Hong Kong’s noncompliance with Western sanctions has been simultaneous with Hong Kong’s deteriorating political autonomy. Xi is determined to exploit Hong Kong’s advantages to further his strategic ambitions, even if it means tarnishing Hong Kong’s international reputation.

Some might argue that Beijing’s increased grip on Hong Kong has had little effect on the city’s attitude toward Western sanctions. After all, Hong Kong was already a major transshipment hub, even prior to signs of serious deterioration of its autonomy. The volume of dual-use items transshipped through Hong Kong has contributed to conflict and terrorist activities that had less strategic salience to China than the war in Ukraine has. For example, transshipped U.S. electronics components and devices were used to build improvised explosive devices that were deployed against coalition forces in the Iraq war, a conflict for which China largely stayed on the sidelines.

Additionally, Hong Kong’s status as a busy transshipment port to locations around the world naturally increases the risks of illicit technology diversion. Transshipment is notoriously hard to detect from trade data because it requires visibility throughout multiple stages in the supply chain. Due to the sheer volume of transshipment occurring via Hong Kong, it is hard for export control officials to conduct preshipment screening or postshipment checks. It is particularly easy to set up front companies in jurisdictions like Hong Kong. As a manager at a leading U.S. semiconductor distributor explains, “there are many formless shell companies and small trading companies in Hong Kong that serve as receptacles for secondary sales. . . . If you spot one illegal trade, they can just change their name or use their other trading companies’ names.”

It becomes even more challenging to distinguish between transshipment to sanctioned entities and transshipment to legitimate importers if the importing country has a large existing market for dual-use goods. According to trade data compiled by the Observatory of Economic Complexity, Hong Kong has consistently been the world’s top importer of electrical machinery and electronics since 2004. In the global trade of integrated circuits, for instance, Hong Kong imported 24.3 percent (or $162 billion) of the world’s trade in 2020, exceeding even China’s $114 billion imports.

But this line of argument fails to account for the big picture. While the problem of illicit trade has historically bedeviled Hong Kong, the government’bodog online casino s open defiance against Western sanctions since the Ukraine war signals its commitment to a deliberately lax approach to export controls. The sizeable flow of technology from Hong Kong to Russia is the result of an active political choice. The reactions from other major transshipment hubs, such as Singapore and the United Arab Emirates (UAE), illustrate that it is possible to stem the flow of technology to Russia if there is political will to do so. U.S. authorities have long recognized the prominence of Hong Kong, Singapore, and the UAE in illicit trade networks. The three major transshipment ports reacted to Western sanctions regimes against Russia differently according to their geopolitical interests.

Despite being a U.S. security partner, the UAE has joined other Middle Eastern states in refusing to participate in Western sanctions regimes. It has abstained from voting in favor of a United Nations Security Council (UNSC) draft resolution condemning Russian aggression in Ukraine, allowed Russian oligarchs to launder money through its ports, spurned Washington’s request that it pump more oil to diminish Russian oil revenue by reducing global oil price, and refused to crack down on the reexporting of electronic components to Russia. Data show that exports of electronic parts from the UAE to Russia increased sevenfold within a year to almost $283 million in 2022, while microchip exports rose by fifteen times to $24.3 million from $1.6 million in 2021. The Gulf country also sold 158 drones worth a total of $600,000 to Russia.

If the UAE has allowed tech trade with Russia to flourish out of self-interest, Singaporean leaders have pursued a different calculus—choosing to align themselves more closely with the U.S. position. In a statement made on February 28, 2022, Singapore’s foreign minister said, “Russia’s invasion of Ukraine is a clear and gross violation of the international norms and a completely unacceptable precedent. This is an existential issue for us.” In a rare move, the city-state announced sanctions against Russia that included “four banks and an export ban on electronics, computers and military items,” becoming the only Southeast Asian country to impose sanctions against Russia in the absence of binding UNSC approval. According to the Free Russia Foundation, Singapore is among the countries that have most dramatically curtailed trade with Russia. In terms of semiconductors and integrated circuits, Singapore was the ninth-biggest exporter to Russia in 2021. A prominent node in the global supply chain, Singapore accounts for 19 percent of the global share of semiconductor equipment, providing Russia in 2019 with approximately $10.6 million worth of semiconductor devices. This has shifted since Russia’s full-scale invasion of Ukraine, when Singapore chose to side with Western sanctions regimes. In 2022, exports of semiconductors from Singapore to Russia collapsed dramatically down to a negligible level.

Geopolitical interests explain both the UAE’s spike and Singapore’s plummet in exports to Russia. These cases illustrate that changes in economic and technology ties with Russia are largely driven by the countries’ stances on the Ukraine war, which are in turn motivated by their geostrategic calculus. Similarly, Hong Kong’s permissive stance toward trading technology with Russia is a product of Beijing’s geopolitical calculations. Repeatedly, Hong Kong officials have demonstrated that they have no ability to defy Beijing’s will and no interest in doing so, even if it means alienating the international community. If China is determined to help Russia wage war against Ukraine by extending a technology lifeline, Hong Kong will follow suit.

STILL ASIA’S WORLD CITY?

In July 2020, recognizing Hong Kong’s loss of autonomy, former U.S. president Donald Trump announced that Hong Kong “is no longer sufficiently autonomous to justify differential treatment in relation to the People’s Republic of China.” The United States would “suspend or eliminate different and preferential treatment for Hong Kong.” Shortly after, the Commerce Department began rescinding Hong Kong’s export licensing privileges, such as by equalizing the availability of license exceptions for Hong Kong and China. In December, the department declared that it would treat exports to Hong Kong as destined for China, effectively ending Hong Kong’s preferential status in the U.S. export control system. Some of the United States’ closest partners have implemented similar changes.

Stripping away Hong Kong’s preferential trading status is a good first step in stopping the leakage of sensitive goods to China and its autocratic allies. But unilateral action from the United States is not enough. While these restrictions have slowed the movement of export-controlled goods in and out of Hong Kong—for example, the Commerce Department detected a 17.4 percent decline in shipments under a Bureau of Industry and Security license exception between 2020 and 2021—Hong Kong on the whole remains relatively interconnected with the global economy.

Russia’s permanent seat on the UNSC has guaranteed the failure of any efforts to push for comprehensive UN sanctions and continues to provide political cover for jurisdictions like Hong Kong and the UAE to resist pressure to cooperate with Western countries. This, combined with Hong Kong’s posture as a busy shipping port that is inherently difficult to monitor, has given the Hong Kong government plausible deniability when accused of supporting Russia’s war machine. There is no clear answer to how Western countries should deal with nonaligned countries in the Global South that wish to stay out of what they perceive as a great power competition, but one thing should be clear: Hong Kong falls outside the nonalignment camp, since it has taken the side of the emerging China-Russia axis.

A wider recognition of Hong Kong as a geostrategic asset of Chinese statecraft is in order. Hong Kong’s government is investing large sums in a charm offensive to rehabilitate its international image and attract international business. In a promotional video for the government’s $2 billion HKD “Hello Hong Kong” campaign, Lee claimed, “Hong Kong is now seamlessly connected to the mainland of China and the whole international world.” But the findings presented in this article show that a portrayal of Hong Kong as a neutral trading hub connecting East and West no longer holds up. Western leaders should be aware of the geopolitical costs of Hong Kong’s position as a major center of global trade and the advantages that subsequently accrue to Beijing.

Correction: This piece has been edited to reflect that Chief Executive John Lee said Hong Kong would disregard U.S. sanctions on Russia, not those on China.

Brian (Chun Hey) Kot is a research assistant in Carnegie’s Democracy, Conflict, and Governance Program.

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Here are Trade Data Monitor’s top 10 ongoing trade trends at the start of 2022:

1.   The Post-Covid Trade Bump is Over

In 2022, global trade recovered from the Covid-19 slump. When all the numbers are tallied, it’s expected to increase 3.5% over 2021, according to the WTO. Governments handed out stimulus payments to their citizens that they used to buy consumer goods. Now that money is spent and inflation is biting into their budgets, causing a sharp shrinking in spending that’s deflating global trade. The WTO notes that imports will decline in different parts of the world for different reasons. In Europe, higher energy prices due to the war in Ukraine. In the United States, “monetary policy tightening will hit interest-sensitive spending in areas such as housing, motor vehicles and fixed investment.” China “continues to grapple with COVID-19 outbreaks and production disruptions paired with weak external demand.” And for developing countries, “growing import bills for fuels, food and fertilizers could lead to food insecurity and debt distress.” Rising energy bills will cause consumers to spend large percentages of their paychecks driving their cars and heating their homes, and less money on shoes, toys and gadgets.

2.   U.S. is Exporting More Gas to Europe

Energy will dominate global commodities markets. Russia’s invasion of Ukraine and subsequent geopolitical maneuvering have remade energy supply chains. Russian oil and gas now flow to China, India and Turkey, instead of Europe, which is discovering its appetite for U.S. liquid natural gas from Texas and Appalachian fracking wells. Thanks to new infrastructure on the East Coast and the Gulf of Mexico, the U.S. has steadily been increasing its gas export capacity, and sending more LNG tankers to Le Havre, Antwerp, and Rotterdam. U.S. gas exports to France, for example, increased 518% to $6.8 billion in the first 10 months of 2022, up from $1.1 billion over the same time period in 2021. By quantity, they rose 282.6% to 26.4 million cube meters, from 6.9 million cube meters. The energy trade across the Atlantic will reinforce the U.S.-EU relationship, reorient global markets, and provide investment to further boost production in the U.S.

3.   Russia is Selling its Oil and Gas to China and India

Europe’s ban on importing energy from Russia has forced Moscow to look elsewhere to customers. Although Russia has stopped disclosing its trade statistics, TDM’s dataset of other countries allows us to see where Russian oil and gas are going.

China’s imports of oil and gas from Russia increased 62% year-on-year to $77.8 billion in the first 11 months of 2022, from $48 billion over the same time period in 2021. India ramped up its energy imports from Russia 592% year-on-year to $22.9 billion from $3.3 billion over the first 10 months of 2022. China has also started processing and exporting oil. Chinese exports of petroleum products, mainly fuels, rose 46.6% by volume in November to 6.1 million tons. Because of price increases, by value they increased 98% to $5.4 billion.

4.   China is Losing Export Markets to Other Asian Countries

Political tensions with China have spooked manufacturers who have been moving production to other Asian countries. In November, Chinese exports of high-tech products, for example, declined 23.6% to $74.8 billion. Exports of mobile phones were down 33.3% to $11 billion. Exports of toys declined 21.7% to $3.6 billion, and shipments of textiles fell 14.8% to $11.3 billion. There was a notable exception: Exports of motor vehicles, a burgeoning industry in China, including the production of electric cars, surged 113.3% to $7.7 billion. Meanwhile, countries, like Vietnam, Singapore and Malaysia are grabbing markets China is ceding. Vietnamese exports, for example, rose 23% year-on-year to $185 billion over the first six months of 2022. Malaysia’s outward shipments increased 21% to $294.5 billion over the first 10 months of 2022.  

5.   China is Importing Fewer Commodities

As China’s manufacturing export economy loses some steam, its appetite for iron ore, nickel, copper and other industrial metals is slackening, and supply chains are migrating toward other big Asian economies like Vietnam, Malaysia and Singapore.

Chinese imports of iron ore fell 2.1% to 1.02 million tons over the first 11 months of 2022. Nickel imports shrank 10.1% to 37.4 million tons.

There were a few exceptions for commodities essential to the kind of mature industrial economy China has become. Copper imports, for example, rose 8.7% to 23.2 million tons. 

6.   Nearshoring is Changing Trade Flows

Companies are manufacturing closer to home, boosted by domestic subsidies and spooked by rising geopolitical risk which has led to import tariffs, export controls on computer chips and other strategic goods, and other forms of protectionism.

For example, U.S. total trade with Canada increased 23% to $668.6 billion over the first 10 months of 2022, while trade with Mexico rose 20.3% to $656 billion. Total trade with China, meanwhile, increased bodog casino only 10.9% to 7 billion. The Biden administration’s subsidies for domestic manufacturers of semiconductors and electric-vehicle batteries is expected to lead to more trade with neighboring trade partners.

7.   The Rise of High-Tech Local Supply Chains

This nearshoring trend is especially prevalent in the U.S., where trade is increasingly unpopular. In August, the U.S. imposed export controls on shipments of computer chips to China. Apple has moved to diversify its manufacturing process to rely less on China and more on the U.S. These moves are already having an impact. In the first 9 months of 2022, for example, U.S exports of processors and integrated circuits to China fell 34.2% to $5.1 billion, while shipments of those products to Mexico increased 11.8% to $6.9 billion. The U.S.’s top market for overall high-tech exports was Mexico, where shipments rose 16.5% to $36.7 billion.

8.   Trade in Renewables is Thriving

There is a silver lining to a worsening overall picture. Global trade in electric vehicles, solar panels, windmills, and batteries and their ingredients is thriving. The world’s efforts to decarbonize economies combined with developments in battery technology are boosting global trade in electric vehicles. Germany is emerging as the dominant player on the global market for electric vehicles. Its EV exports rose 55.4% to $16.4 billion in the first nine months of 2022. China is number two, with shipments increasing 115.4% to $11.8 billion. U.S. exports declined 1.9% to $3.8 billion. That boom in electric vehicle trade has boosted shipments of materials related to making batteries needed for electric cars and trucks. Exports of lithium batteries by their top supplier, China, increased 83.4% to $34.9 billion in the first nine months of 2022 from $19 billion over the same time in 2021.

9.   Latin America and Africa are Diversifying Exports  

Although free trade has taken a hit, there are still plenty of countries and people benefiting, and even emerging out of poverty, thanks to free trade. The Middle East is expected to record the strongest export growth in 2023, at 14.6%, followed by Africa, at 6%. And countries that have been traditionally been prisoners of their dependence on resources have been mixing it up. Chile, for example, has been diversifying away from its staple exports of commodities, especially copper. The South American country exported $6.1 billion of fish in the first 10 months of 2022, up 32.5% from 2021. It increased shipments of edible fruits and nuts 35.2% to $7.6 billion. 

10.   The U.S. Will Export More

A year ago, we suggested that the U.S. might be about to lose its place as the world’s top importer to China. That didn’t happen. In the first 10 months of 2022, the U.S. imported $1.6 trillion worth of goods, up 21.6%, compared to China importing $1.3 trillion, up 5.8%. But it’s on export markets that we expect the U.S. to make an even bigger comeback. The biggest part of this will be in energy. In the first 10 months of 2022, the U.S. increased fuel exports 73.6% to $183.2 billion. But investments in high-tech production, tensions with China, and nearshoring will boost U.S. high-tech trade with trade partners. In the first 10 months of 2022, the U.S. increased high-tech exports 8.2% to $153.5 billion.

John W. Miller is Trade Data Monitor’s Chief Economic Analyst, in charge of writing TDM Insights, a newsletter analyzing key issues through trade statistics. John is an award-winning journalist who’s reported from 45 countries for the Wall Street Journal, Time Magazine, and NPR.

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Russia’s invasion of Ukraine and the subsequent disruption of agricultural exports from both countries has had an unwelcome corollary: a surge in export restrictions on agricultural commodities around the world. This casts dark clouds over future food price developments and food supply in net-food-importing countries, especially in a context of global food prices that were at a record high already in the wake of COVID-19. Fear of famine and social unrest is starting to grip the most immediately affected economies in the Middle East, Africa and beyond.

These fears are not unfounded. Together, Russia and Ukraine annually exported 12% of the calories traded globally. The food price shock induced by Russia’s invasion of Ukraine has already resulted in export restrictions covering more than 16% of internationally traded calories, having surpassed the highest level of restrictions adopted during the food price crisis of 2007-2008 in March of this year already.

Examples of this bulk of new export measures include, for instance, India’s ban on wheat exports and a government proposal in Slovakia to implement a national export authorisation scheme for cereals and oilseeds. The Indian ban resulted in a wheat world market price increase of 6% within 24 hours of its announcement, despite India being only the eighth largest wheat exporter globally. It is an indication of the severity of the current supply crunch and market volatility.

Slovakia’s proposal, meanwhile, could spark a chain reaction involving export restrictions from other EU countries, that may disrupt EU internal market trade flows and, in turn, EU exports to third countries.

The logic behind, and pitfalls of, agricultural export restrictions

As in the food crises of 2007-2008 and 2011, governments have political incentives to restrict food and fertiliser exports to insulate domestic food prices from international price shocks. The short-term strategy is to prevent high global food prices from reaching the vulnerable, in order to avoid hunger, social unrest and political instability.

Empirical evidence suggests that these policies are effective in achieving such national objectives. During the 2007-2008 food crisis, governments that imposed export duties or bans were significantly more successful than non-intervening governments in preventing domestic prices from rising.

But food and fertiliser export bans, quotas, taxes or licenses function as beggar-thy-neighbour policies: the more effective the instrument is in shielding domestic consumers, the more it will further increase world market and consumer prices in third countries, and the more similar policies will be triggered. From 2006-2008, changes in countries export restrictions caused international prices to be 40% higher for rice, 19% for wheat and 10% for maize – transforming critical contingencies into a full-scale crisis.

World Trade Organization rules on agricultural export restrictions

Effective international disciplines limiting the use of export restrictions would, all things being equal, drive international commodity prices down and increase trade volumes. Current WTO rules, however, tend to disadvantage net food-importing countries. Export restrictions remain vastly underregulated at the global level.

The WTO’s General Agreement on Tariffs and Trade (GATT) contains a general prohibition of quantitative restrictions on imports and exports (Article XI:1 GATT 1994). However, it does not apply to “export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting” member country (Article XI:2(a) GATT). Given the broad and vague scope of this exemption, it appears impracticable from the outset to challenge its invocation. In any case, exporting countries remain free to impose export duties and charges that are high enough to render exports economically unviable. The WTO Agreement on Agriculture (AoA) includes a consultation and notification requirement for WTO members that impose new export prohibitions or restrictions on foodstuffs. The imposing government, moreover, must give “due consideration to the effects of such prohibition or restriction on importing members’ food security” (Article 12 AoA). These obligations, however, do not apply to developing countries unless they are net exporters of the commodity concerned.

Export restrictions within the EU market

The EU single market is the most integrated transnational market in the world. Yet, as the moves in Slovakia suggest, EU countries have a degree of freedom to restrict exports individually. Analogous to the world market, a food or fertiliser export restriction in an EU country could trigger similar restrictions by other EU countries. As a result, supply dries up in the internal market, and, in turn, decreases EU exports to third countries.

The Treaty on the Functioning of the EU (TFEU) generally prohibits import and export restrictions among EU countries (Articles 34 and 35 TFEU). However, an exception is made for various non-economic objectives, including public security and health protection. Export bans and other restrictions pursuing such objectives must not “constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States” (Article 36 TFEU).

At the beginning of the pandemic in 2020, for instance, several EU countries imposed and justified export bans on protective personal equipment (PPE) with reference with Article 36 TFEU, temporarily jeopardising trade flows and supply within the internal market, as well as EU exports to third countries.

The Court of Justice of the EU (CJEU) has interpreted Article 36 TFEU narrowly. A member state imposing a restriction on EU-internal cross-border trade must limit the measure to what is strictly necessary to achieve the objective of human, animal or plant life protection, and must provide evidence of necessity. The European Commission response to the Slovakian export authorisation scheme proposal, calling for any measure to be “necessary and strictly proportionate”, should be understood in this context.

The criteria can lead to measures being rejected. In March 2020, the Romanian government imposed restrictions on EU-external exports of wheat and corn. The Commission objected, stating that the measures “appear to be not proportionate”, and it had not received “any information, which indicates that Romania is facing or will soon face shortages of agricultural products intended for human consumption”. In mid-April 2020, Romania’s government announced it had removed the restrictions.

Export restrictions at the EU customs border

The EU’s exclusive competence for common commercial policy (Article 207 TFEU) – the EU term for external trade and investment policy – includes export policy. The Common Rules for Exports regulation (Regulation (EU) 2015/479) stipulates that exports to third countries shall not be subject to quantitative restrictions unless otherwise permitted by the regulation (Article 1). The regulation empowers the Commission to make exports subject to authorisation in order “to prevent a critical situation from arising on account of a shortage of essential products, or to remedy such a situation” (Article 5.1). The Commission may also give EU countries the right to impose export authorisation requirements to protect human health or life (Article 5.3). As with Article 36 TFEU, however, such measures must be proportionate: a lack of evidence of an imminent or current shortage of agricultural products intended for human consumption would violate the proportionality requirement (Article 10).

To counter the detrimental dynamics of export restrictions in the area of PPE trade, in response to (legally justified, because proportional) restrictions imposed by EU countries in early 2020, the Commission decided to impose a monitoring and authorisation scheme applicable to EU exports to third countries. This was to reassure member states that the Commission would intervene in case of critical supply shortages within the single market. It convinced the governments of France, Germany, and others to dismantle their own export restrictions. The scheme effectively prevented EU internal trade and supply disruptions and, as a result, de facto led to virtually no reduction of EU external trade in PPE, once the EU authorisation measure came into force. A similar second-best solution may be suitable and in fact necessary to calm EU internal political and internal market dynamics in regard of food and fertiliser trade, too, in case member states face critical shortages and start acting upon them at the national level. To be sure, such an EU measure should remain a last resort.

Conclusions

The dangerous dynamic threatened by food and fertiliser export restrictions around the globe will be met with little to no legal disciplines from WTO rules and litigation. EU law, however, can prevent member state and EU governance failures induced by the prisoner’s dilemma logic of agricultural export restrictions. Monitoring and export authorisation requirements at EU level, Bodog Poker as a last resort, can help maintain internal market functionality and EU export flows to third countries. In addition, export restrictions should be monitored, and governments that impose them should be named and shamed to raise awareness of the magnitude of the problem. Important transparency work in this field is done by the Global Trade Alert initiative and IFPRI’s food and fertiliser export restrictions tracker. From the trade policy toolkit, unilateral food tariff reduction and elimination can be highly conducive to decreasing prices for domestic consumers and enhance market functionality.

The current global food price crisis, however, will likely only be brought under control if the roots of the problem are targeted, including by taking on the herculean task of facilitating millions of tons of Ukrainian wheat exports through a large-scale and internationally coordinated operation as well as by unblocking Ukrainian ports. Logistical and infrastructural export facilitation, and supply chain and stock monitoring and surveillance initiatives have been commenced at EU level, through cooperation via the Transatlantic Trade & Technology Council (TTC) and the G7. Time will tell if these measures will provide much needed relief.

David Kleimann (PhD) is a trade expert with 15 years of experience in law, policy, and institutions governing EU and international trade. His current work focuses on the climate and trade policy nexus as well as legal and diplomatic challenges arising from transatlantic and international climate and trade cooperation.

To read the full commentary from Bruegel, please click here.

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The global economy avoided a meltdown 2020-2022 due to the Covid-19 pandemic because governments around the world, led by the U.S., printed trillions of dollars for their own citizens, oiling consumer demand and goosing merchandise trade around the world.

That steroid is now wearing off, as consumers have spent most of the money they were given, and because their spending fueled inflation, making it harder to buy as much stuff, and that’s denting Chinese exports, according to an analysis by Trade Data Monitor, the world’s premier source of trade statistics.

In April, exports rose only 3.9% over the previous year, to $273.6 billion. That’s the lowest rate in two years, and far below a 14.7% improvement in March. Imports were flat at $222.5 billion, and would have declined precipitously without broad inflation in the prices of key commodities.

Much of the economic analysis has focused on the impact of Russia’s invasion of Ukraine, and the pandemic locking down ports in China, but the bigger picture is that the world is now having to adjust to consumers no longer having huge stacks of free cash in their pockets to spend on retail goods made in China.

The upshot: Chinese shipments of high-tech products in April declined 4.9% year-on-year to $72.3 billion from $76 billion. Exports of LCD panels declined 0.5% to $2.3 billion. Exports of mobile phones fell 7.3% to $10.3 billion. Exports of household appliances declined 5.3% to $7.9 billion. Exports of furniture fell 2.9% to $6 billion.

There were some exceptions to this bleak picture, mainly due to people being outside and on the move again. Shipments of cars and trucks rose 8.9% to $2.8 billion. Shipments of footwear rose 28.2% to $3.8 billion. Exports of toys, which includes a lot of outdoor athletic gear, increased 18.1% to $3.6 billion.

And battery-related industries are still expanding, requiring a strong supply chain. Rare earth exports doubled to $109.4 million from $54 million. (Contrary to popular assumption, rare earths remain a small, niche market.)

To be sure, Chinese exports are still increasing, partly because of inflation and partly because the world is still recovering from the Covid-19 pandemic. Exports to the EU increased 8.1% to $43.1 billion. Shipments to the U.S. rose 9.6% to $46 billion. Exports to ASEAN countries rose 7.7% to $44.2 billion.

Officially, Chinese imports were basically flat, but that was only because of price inflation in essential commodities. It was only those rising prices which kept Chinese imports from freefalling. Natural gas imports, for example, rose 32% by value, to $4.3 billion from $3.2 billion, but fell 19.6% by quantity, to 8.1 million tons from 10.1 million tons. Iron ore imports fell 12.6% to $86 million tons. Copper imports declined 1.9% to 1.9 million tons. It’s clear that Chinese industry is slowing down.

It’s the high-tech supply chains that appear most affected by the current slowdown. Exports to Vietnam, a key component of China’s supply chain, fell 0.2% to $12.8 billion. Imports from Vietnam declined 4.7% to $6.5 billion.

Imports from the EU fell 12.5% to $23.4 billion. Imports from the U.S. declined 1.4% to $13.8 billion. Imports from ASEAN countries rose 3.7% to $32.8 billion.

China is one of the only economies still buying huge quantities of Russian exports. It hiked shipments, mostly gas and oil, 53.2% to $8.9 billion in April. However, Russian consumers, beset by a painful war economy, are having an even more difficult time than those in the U.S. and Europe. Chinese exports to Russia fell 25.8% to $3.8 billion.

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While many WTO Members are urging the WTO membership to avoid imposition of export restraints at the present time to reduce food insecurity, a number of countries have shut down exports to protect their domestic consumers. India, which is the world’s second largest producer of wheat and had been looked to to help reduce the challenges in Africa and Asia from Ukraine’s inability to get grain harvested or exported, has faced very high temperatures this spring. In the last days, it has reversed its position of increasing exports to help countries in need to the position of shutting off exports immediately with the exception of volumes under contract and with a possible willingness to work with countries with food security issues. See Reuters, India bans wheat exports as heat wave hurts crop, domestic prices soar, May 15, 2022, https://www.reuters.com/markets/commodities/india-prohibits-wheat-exports-with-immediate-effect-2022-05-14/ (“India banned wheat exports on Saturday days after saying it was targeting record shipments this year, as a scorching heat wave curtailed output and domestic prices hit a record high. The government said it would still allow exports backed by already issued letters of credit and to countries that request supplies ‘to meet their food security needs’.”); Washington Post, India bans wheat exports amid soaring global prices, May 14, 2022, https://www.washingtonpost.com/world/2022/05/14/india-wheat-banukraine/ (“In a Commerce Ministry order, Indian officials said they made the decision after considering India’s own needs and those of neighboring countries. India’s food security was ‘at risk’ because of surging international prices, the ministry said. The announcement was an abrupt reversal weeks after Indian officials and international analysts talked up the possibility of India’s significantly ratcheting up exports to fill the gap created partly by the war in Ukraine. International food prices have soared to record highs in recent months, putting pressure on billions of people, particularly the world’s poorest, officials at the United Nations have warned.”); ABC News, India open to exporting wheat to needy nations despite ban, May
15, 2022, https://abcnews.go.com/International/wireStory/india-open-exporting-wheat-needy-nations-ban84728532  (“India on Sunday said it would keep a window open to export wheat to food-deficit countries at the government level despite restrictions announced two days earlier. India’s Commerce Secretary B.V.R. Subrahmanyam told reporters the government will also allow private companies to meet previous commitments to export nearly 4.3 million tons of wheat until July. India exported 1 million tons of wheat in April.”); The Times of India, Explained: Why India has banned wheat exports despite big trade plans, May 14, 2022, https://timesofindia.indiatimes.com/business/india-business/explained-why-did-india-ban-wheat-exportsdespite-big-trade-plans/articleshow/91565703.cms; Hindustan Times, G7 criticises India decision to stop wheat exports: Germany, May 14, 2022, https://www.hindustantimes.com/world-news/g7-criticises-india-decision-to-stop-wheat-exports-germany101652533657311.html (“‘If everyone starts to impose export restrictions or to close markets, that would worsen the crisis,’ German agriculture minister Cem Ozdemir said at a press conference in Stuttgart.”). 

Press accounts indicate that China’s wheat production for this year is uncertain because of weather considerations as well. See New York Times, War and Weather Sent Food Prices Soaring. Now, China’s Harvest Is Uncertain, May 12, 2022, https://www.nytimes.com/2022/05/11/business/china-wheat-food-pricesinflation.html  (“Ukraine’s wheat exports have been mostly halted since Russia’s invasion, while drought has damaged crops in India and the United States. China’s upcoming harvest is another concern.”).

The U.S. Department of Agriculture develops periodic forecasts for production and consumption of major agricultural crops. USDA released its latest global forecast for various crops for 2022-2023 including wheat on May 12, 2022. See USDA, World Agricultural Supply and Demand Estimates, May 12, 2022, https://www.usda.gov/oce/commodity/wasde/wasde0522.pdf. The description of wheat supply and demand is copied below.

“WHEAT: The outlook for 2022/23 U.S. wheat is for reduced supplies, exports, domestic use stocks, and higher prices. U.S. 2022/23 wheat supplies are projected down 3 percent, as lower beginning stocks more than offset a larger harvest. All wheat production for 2022/23 is projected at 1,729 million bushels, up 83 million from last year, as higher yields more than offset a slight decrease in harvested area. The all wheat yield, projected at 46.6 bushels per acre, is up 2.3 bushels from last year. The first survey-based forecast for 2022/23 winter wheat production is down 8 percent from last year as lower Hard Red Winter and Soft Red Winter production more than offset an increase in White Wheat production. Abandonment for Winter Wheat is the highest since 2002 with the highest levels in Texas and Oklahoma. Spring Wheat production for 2022/23 is projected to rebound significantly from last year’s drought-reduced Hard Red Spring and Durum crops primarily on return-to-trend yields.

“Total 2022/23 domestic use is projected down 1 percent on lower feed and residual use more than offsetting higher food use. Exports are projected at 775 million bushels, down from revised 2021/22 exports and would be the lowest since 1971/72. Projected 2022/23 ending stocks are 6 percent lower than last year at 619 million bushels, the lowest level in nine years. The projected 2022/23 season-average farm price (SAFP) is a record $10.75 per bushel, up $3.05 from last year’s revised SAFP. Wheat cash and futures prices are expected to remain sharply elevated through the first part of the marketing year when the largest proportion of U.S. wheat is marketed.

“The global wheat outlook for 2022/23 is for lower supplies and consumption, increased trade, and lower ending stocks. Global production is forecast at 774.8 million tons, 4.5 million lower than in 2021/22. Reduced production in Ukraine, Australia, and Morocco is only partly offset by increases in Canada, Russia, and the United States. Production in Ukraine is forecast bodog poker review at 21.5 million tons in 2022/23, 11.5 million lower than 2021/22 due to the ongoing war. Canada’s production is forecast to rebound to 33.0 million tons in 2022/23, up significantly from last year’s drought-affected crop.

“Projected 2022/23 world use is slightly lower at 787.5 million tons, as increases for food use are more than offset by declining feed and residual use. The largest feed and residual use reductions are in China, the European Union, and Australia as well as a sizeable decline in food use in India. Projected 2022/23 global trade is a record 204.9 million tons, up 5.0 million from last year. Imports are projected to rise on increased exportable supplies from Russia and Canada more than offsetting reductions for Ukraine and Australia. Russia is projected as the leading 2022/23 wheat exporter at 39.0 million tons, followed by the European Union, Australia, Canada, and the United States. Ukraine’s 2022/23 export forecast is 10.0 million tons, down sharply from last year on reduced production and significant logistical constraints for exports. India is expected to remain a significant wheat exporter in 2022/23. Projected 2022/23 world ending stocks are reduced 5 percent to 267.0 million tons and would be the lowest level in six years. The largest change is for India, where stocks are forecast to decline to 16.4 million tons, a five-year low.” 

With likely reduced availability of product globally and with reduced stocks of wheat on hand, the G7, led by the EU and US, are working to find ways to help Ukraine move its wheat production to export despite Russia’s closure of the Black Sea. Such efforts if successful will reduce the global damage done on food security on products like wheat. As reviewed in my last post,

“The EU is working to facilitate movement of Ukrainian agricultural products by land through EU member states. But the main challenges are the blockage of Black Sea ports by Russia and the reported theft of agricultural products and equipment from Ukrainian farms and depots. See, e.g., CNN, Russians steal vast amounts of Ukrainian grain and equipment, threatening this year’s harvest, May 5, 2022, https://www.cnn.com/2022/05/05/europe/russia-ukraine-grain-theft-cmd-intl/index.html; Voice of America, Russian Blockade of Ukrainian Sea Ports Sends Food Prices Soaring, May 7, 2022, https://www.voanews.com/a/russian-blockade-of-ukrainian-sea-ports-sends-food-pricessoaring/6561914.html; Politico, EU plans to help Ukraine’s food exports dodge Black Sea blockade, EU farm chief warns Russia wants to portray itself as feeding the poor, while it destroys Ukraine’s farmland. May 10, 2022, https://www.politico.eu/article/eu-plans-to-boost-ukraines-food-exports-black-sea-blockade/.”

May 11, 2022: Less than five weeks to the WTO’s 12th Ministerial Conference — what are likely deliverables?, https://currentthoughtsontrade.com/2022/05/11/less-than-five-weeks-to-the-wtos-12th-ministerialconference-what-are-likely-deliverables/.

Hopefully, India will in fact work to facilitate exports to many of the nations dependent on wheat from Ukraine in the coming months to help reduce the food insecurity flowing from Russia’s war in Ukraine. But the announcement on Friday of banning exports is a concerning signal and will likely lead to even higher prices for wheat in the coming weeks and months.

Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, Current Thoughts on Trade.

To read the full commentary from Current Thoughts on Trade, please click here.

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In the end, China bought only 57 percent of the US exports it had committed to purchase under the agreement, not even enough to reach its import levels from before the trade war. Put differently, China bought none of the additional $200 billion of exports Trump’s deal had promised.

Trump’s “phase one” agreement with his “very, very good friend” President Xi Jinping was not a total washout. The deal did halt his spiraling trade war. And several of its elements should be kept, notably China’s commitments to remove technical barriers to US farm exports, respect intellectual property, and open up its financial services sector.

However, signing something that was problematic, if not unrealistic, from the start, shows some degree of bad faith on both sides. After two years of escalating tariffs and rhetoric about economic decoupling, the deal did little to reduce the uncertainty discouraging the business investment needed to restart US exports. Most of Trump’s tariffs remained in effect, especially on inputs, raising costs to US companies. And by failing to negotiate the removal of China’s retaliatory tariffs, the agreement may have funneled any Chinese demand for US exports away from China’s private sector toward its state-owned enterprises.

The emergence of the COVID-19 pandemic undermined any chance of success. Public health–related lockdowns and a short economic recession were accompanied by a temporary collapse in goods trade globally, even if China’s imports were mostly spared. Restrictions on mobility also decimated US services exports like tourism and business travel.

But the pandemic was only one factor. Major American manufacturing sectors, for example, could not reverse their poor export performance in 2020–21. When confronted with trade war tariffs in 2018, some automakers moved their production out of the United States in order to maintain access to Chinese consumers. US aircraft sales plummeted in 2019, following crashes of Boeing’s airplanes. In both sectors and despite the phase one agreement, US exports did not resume.

Trump set the US–China trade relationship on a new path, beginning with his trade war in 2018. Nearly four years later, the main lesson of the phase one agreement is that different terms for the trade relationship are still needed.

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The phase one agreement committed China to increases its purchases of certain US goods and services in 2020 and 2021 by at least $200 billion over 2017 levels (figure 1). China agreed to buy at least $227.9 billion of US exports in 2020 and $274.5 billion in 2021, for a total of $502.4 billion over the two years. The agreement also established legal commitments for a defined set of manufacturing, services, agricultural, and energy products, as examined below.

Ultimately, China bought only 57 percent of the US exports it committed to purchase over 2020–21. US exports of covered goods and services to China over the two years were $288.8 billion.

The Biden administration was not to blame, as China was never on pace to meet its purchase commitments (figure 2). Trump’s deal was agreed on December 13, 2019 and signed on January 15, 2020. By the end of June 2020, China’s purchases were at only 54 percent of the pro-rated target; they reached 59 percent of the year-end commitment for 2020. China was never able to catch up, as the agreement was back-loaded, with additional purchase commitments for 2021 that were more than 60 percent higher than 2020.

In addition to the unrealistic $200 billion target, 18 months of trade war tariff escalation designed to decouple the two economies meant US goods exporters started from a hole. They would first have to reestablish connections with Chinese buyers to climb out of the 2019 trough—$13.6 billion lower than the agreement’s 2017 baseline level—before chipping away at the additional $200 billion.

China ended up buying none of that extra $200 billion of US exports it had promised to purchase. (In Davos, only a week after it was signed, Trump boasted that the deal “could be closer to $300 billion when it finishes.”) In 2020–21, China fell $13.6 billion short of reaching even the baseline level of purchases.

MANUFACTURING EXPORTS SUFFERED IN THE TRADE WAR AND DID NOT RECOVER

China purchased only 59 percent of the full commitment of US manufactured products in 2020–21 (figure 3). Manufacturing was the most economically significant part of the deal, making up 44 percent of covered US exports in 2017 (appendix table 1). Of that, autos and aircraft dominated US exports before the trade war. Both did poorly in 2020–21.

US auto exports reached only 39 percent of the target over 2020–21. The sector’s suffering is a trade war cautionary tale. In July 2018, Trump’s tariffs on imports from China included auto parts; China’s tariff retaliation hit US vehicle exports. US auto exports dropped sharply in 2018, as companies like Tesla and BMW reacted to the higher costs by moving production destined for the Chinese market out of the United States. (Ford, another major exporter, including through its Lincoln brand, complained in 2018 that Trump’s separate steel and aluminum tariffs raised the cost of its US-based manufacturing by $1 billion.) Even when China lifted the retaliatory tariffs, in early 2019, US exports did not recover.

Sales of US aircraft, engines, and parts to China did even worse, reaching just 18 percent of the 2020–21 target. Though the industry was less directly impacted by trade war tariffs, US sales to China plummeted in 2019 following two crashes of the Boeing 737 MAX. Between March 2019 and late 2020, the model was grounded, with Boeing shutting down production in early 2020. China canceled orders in April 2020, and though the legal text allows credit for aircraft “orders and deliveries” (emphasis added), additional orders had not been publicly announced by the end of 2021, despite complaints by the Biden administration that Chinese policy was holding back sales. (Exports of the 737 MAX may eventually resume, as Chinese regulators instructed airlines in December 2021 to implement the changes needed to allow the model to fly again in China.)

Not all manufactured exports performed poorly in 2020–21. Medical supplies needed to treat COVID-19 boomed. US exports of semiconductors and manufacturing equipment also accelerated—thanks to a combination of stockpiling by Chinese firms as US export controls in 2019–20 threatened to cut off companies like Huawei and SMIC as well as increased demand for chips needed for consumer electronics and data servers brought on by the pandemic shift to remote work, schooling, and leisure.

COVID-19 DEVASTATED EXPORTS OF SERVICES

Services were the second-largest part of the deal, comprising another 37 percent of US exports to China. When the phase one agreement was signed, in early 2020, China’s services purchase commitments were arguably the most reasonable. The buying ask was relatively modest. Trade war tariffs had not directly hit US services exports; their phase one starting point was therefore actually above 2017 baseline levels. Finally, China took on additional commitments in the agreement expected to benefit services exports. It promised to open its market to foreign providers of financial services (Chapter 4) and agreed to improve protection of intellectual property rights (Chapter 1) and curtail the forcible transfer of foreign technology (chapter 2), potentially benefiting US services exports recorded as “charges for intellectual property.”  

Yet, US services exports to China plummeted in 2020–21, reaching only 52 percent of the commitment (figure 4). Travel made up more than half of US services exports to China in the years before 2019. Both tourism and business travel fell 90 percent in 2020, as a result of the pandemic. US exports of educational services—Chinese students studying at American colleges and universities—also dropped.

China’s other phase one commitments affecting services exports also showed no immediate returns, although they could potentially be beneficial over the long term. Both financial services exports and charges for intellectual property, for example, declined slightly in 2020; combined, they made up 20 percent of US services exports to China in 2017.

AGRICULTURE EXPORTS SUFFERED IN THE TRADE WAR, RECEIVED SUBSIDIES, AND THEN RECOVERED

To the Trump administration, agriculture was the most politically important part of the deal, despite accounting for only 14 percent of covered exports. When China’s retaliatory tariffs hurt US farm exports in 2018–19, Trump awarded the sector tens of billions of dollars in federal subsidies. In the days leading up to the 2020 election, the administration released a report touting resumed farm sales to bodog online casino China—ignoring the continued troubles facing US manufacturing, energy, and services exports. US farm exports did get back to 2017 levels and ultimately reached 83 percent of the 2020–21 commitment (figure 5).

Soybeans made up roughly 60 percent of US agricultural exports to China in 2017. They were devastated by the trade war, falling from $12 billion to only $3 billion in 2018, when China imposed retaliatory tariffs. Though soybean exports managed to reach their pre–trade war levels over 2020–21, they still fell over 30 percent short of their target.

Products like pork, corn, wheat, and sorghum exceeded expectations, though not necessarily because of the agreement. A local outbreak of African swine fever led China to increase pork imports from the United States in 2019 before the deal was agreed. (In 2020–21, China’s pigmeat imports from the rest of the world also averaged about five times 2017 levels.) Corn and wheat imports increased after China began to comply with a 2019 World Trade Organization (WTO) dispute settlement ruling against its unfilled tariff rate quotas.[13] (Compared with 2017, China’s imports from the rest of the world in 2020–21 were roughly 350 percent higher for corn and 200 percent higher for wheat, on average.) Some farm exports also benefited less from the purchase commitments but from the agreement’s Chapter 3, which removed some Chinese nonscientific regulatory barriers affecting trade.

Other seafood and farm products did not rebound from the effects of the trade war. After being hit with Chinese tariffs, US lobster exports, for example, re-achieved about half of their target in 2020–21. US exports of raw hides and skins ended up at less than one-third.

CARBON-INTENSIVE ENERGY EXPORTS HAD UNREALISTIC TARGETS BUT GREW STEADILY

Historically, the United States has not been a large energy exporter to China. Trump tried to change that by establishing a large commitment for carbon-intensive energy products (figure 6). US energy exports in 2021 were more than double pre-trade war levels, even though China’s purchases reached only 37 percent of the commitment over 2020–21. Coal, crude oil, and liquefied natural gas all contributed to the increase.

A number of factors affected energy sales. Energy was one sector where failing to meet the obligations may be partially explained by (knowable) capacity constraints. According to Bloomberg, for example, in January 2020, the US industry informed the Trump administration that it lacked the capacity to fulfill the commitments. (The returns to export capacity expansion may also have been uncertain, if long-term US policy involves pressuring China to decarbonize by cutting reliance on coal-fired power plants.) The fact that the commitments were written in value (dollars) and not volume (e.g., barrels of oil) terms also meant that they were not immune from price shocks. Crude oil prices briefly turned negative in April 2020, depressing the value of sales; by the fall of 2021, they had doubled from one year earlier, over-inflating the value of sales.

NEW MACROECONOMIC CHALLENGES AFFECTED SUPPLY CHAINS AND FUELED INFLATION

The US, Chinese, and global economies experienced several shocks in 2020–21 affecting China’s purchases of US exports. Some increased the value of recorded purchases, others dampened it.

The onset of COVID-19 in early 2020 led to a short but sharp US recession in April and May; US gross domestic product contracted for the year. China’s economic growth in 2020 was lower than expectations, at only 2.2 percent. While global trade collapsed briefly in April 2020, China’s imports finished flat in 2020. US exports of goods and services to the world did worse, finishing 16 percent lower than in 2019.

The global economy recovered in 2021, with China’s economic growth rebounding to 8.1 percent and the United States growing 5.7 percent. Chinese goods imports from the world were 31 percent higher in 2021, and US goods and services exports to the world finished up 18 percent.

Global goods trade rebounded in the second half of 2020 and boomed in 2021, in part because COVID-19 shifted consumer demand toward goods and away from services. The supercharged demand for imported goods put stress on shipping infrastructure—especially on the route from China to the United States—resulting in shortages of containers, ships, trucks, workers, and more. How much these stresses hurt US goods exports back to China is unknown.

Finally, moderate price inflation might actually have helped China meet purchase commitments, as the agreement was written in value (not volume) terms. According to data from CPB World Trade Monitor, Chinese import and US export prices fell in early 2020 before quickly recovering. By March 2021, Chinese import prices were 10 percent higher than in December 2019; by October 2021, they were 22 percent higher. US export prices were 7 percent higher in March 2021 than December 2019; by October 2021, they were 16 percent higher.

US EXPORTS TO CHINA LIKELY WOULD HAVE BEEN HIGHER WITHOUT A TRADE WAR AND PHASE ONE AGREEMENT

Was the trade war worth it for US exporters? The answer so far is no. Suppose that in 2018–21, US goods exports to China of phase one products had grown at the same pace as China’s imports of those products from the world and that US services exports to China had grown at the rate of US services exports to the world. Cumulative US goods and services exports to China in 2018–21 were about 19 percent lower with the trade war and phase one agreement (figure 7).

These estimates suggest the United States would have avoided trade war export losses of $24 billion (16 percent) in 2018 and $30 billion (20 percent) in 2019. Exports would also have been $26 billion (18 percent) higher in 2020 and $39 billion (23 percent) higher in 2021 than under phase one. Without the export losses in 2018–19, American taxpayers would also not have needed to foot the bill for tens of billions of dollars of farm subsidies.

The trade war was also costly to the US economy through the impact of the US tariffs. Numerous economic studies have documented that the effect of the tariffs was to raise prices and hurt American consumers and companies buying imported inputs, harming American competitiveness by reducing employment and sales. Some sectors and workers may have benefited from the US tariffs, but those gains were more than offset by losses by others, resulting in overall damage to the US economy.

US EXPORTS OF PRODUCTS NOT COVERED BY PURCHASE COMMITMENTS PERFORMED WORSE THAN COVERED PRODUCTS

The purchase commitments in the phase one agreement excluded 27 percent of US goods exports to China in 2017. China had little incentive to buy such goods from the United States in 2020–21, as they would not be credited.

Naturally, US exports to China of products without purchase commitments performed even worse than products covered by the agreement in 2020–21 (see, for example, figure 7). The Trump administration may have deemed such products as unimportant, seeing as 9 of the top 20 uncovered products by value included the words “waste” or “scrap”  or “not elsewhere specified or indicated’ in their descriptions. However, declining exports there simply offset one-for-one any increases in covered products.

AS THE PURCHASE COMMITMENTS END, THE UNITED STATES NEEDS A NEW TRADE STRATEGY WITH CHINA

President Trump’s trade war and phase on agreement did little to change China’s economic policymaking. Beijing seems intent on becoming more state centered and less market oriented. With the December 31, 2021 deadline for the $200 billion of purchase commitments now past, US policymakers are seeking a different approach.

One start to the new strategy has involved the United States working with other major economies. The most advanced to date is its effort with the European Union, including through the Trade and Technology Council. Identifying what, specifically, the US and EU find costly about the Chinese approach is needed in order to begin to craft and ultimately negotiate new rules. Even if policymakers agree that multilateral purchase commitments must be part of a long-term solution to China’s trade relationship with the world, they should learn the right lessons from the US experiences under the phase one agreement.

Chad P. Bown, Reginald Jones Senior Fellow since March 2018, joined the Peterson Institute for International Economics as a senior fellow in April 2016.

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

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In a recent paper (Chakraborty et al. 2021), we outline that import competition is also an important driver of outsourcing. While most studies look at foreign outsourcing, we focus on domestic outsourcing – an aspect which has largely been ignored in the literature. Additionally, we propose a novel channel that influences outsourcing of production activities by a firm. We posit that an interaction between stringent labour market regulations and an increase in import competition can incentivise firms to outsource manufacturing tasks. We investigate this channel using unique and new data on domestic outsourcing of manufacturing jobs (including to the informal sector) by Indian firms in the context of increased competition from Chinese imports as a result of China’s accession to the WTO in 2001.

Import competition and outsourcing

Panel A of Figure 1 shows that outsourcing of manufacturing jobs by Indian firms, as a ratio of the firms’ total wage bill, increased by roughly 300% between 1995-2001 and 2002-2007. Panel B shows the meteoric rise in import competition from China in the Indian market after China’s WTO accession in 2001. The share of manufacturing imports from China as a share of total manufacturing imports skyrocketed by about 400%. This trend is mirrored by the Chinese import penetration ratio, defined as the share of Chinese imports in an industry in total domestic consumption, which increased from less than 1% to almost 8% over the same period.

Panel C of Figure 1 plots a simple unconditional correlation between changes in the Chinese import penetration ratio and outsourcing of manufacturing jobs by Indian firms and shows a strong, positive relationship between the two. Our regression estimates show that this relationship is causal and economically meaningful. Greater import competition from China is associated with a significant increase in domestic outsourcing of manufacturing jobs – a ten percentage point increase in the import penetration ratio leads to 11–14% increase in the ratio of outsourcing expenses to the wage bill of a firm. 

Figure 1 Chinese import penetration and outsourcing of manufacturing jobs by Indian manufacturing firms, 1995- 2007

The role of labour regulations

Figure 2 explores the role of labour regulation in shaping the impact of import competition on firm outsourcing. We leverage the substantial heterogeneity in labour market regulations (and their implementation) across Indian states and follow Besley and Burgess (2004), Gupta et al. (2009), and Adhvaryu et al. (2013) to classify Indian states as ‘pro-worker’ or ‘pro-employer’. Figure 2 plots the share of expenditure on outsourcing of manufacturing jobs in the total wage bill of a firm for both states with pro-employer and pro-worker (and neutral) labour laws. The plot shows that there is no clear differential trend in outsourcing between these states before 2001 – the difference in the trend starts to grow significantly along with the increase in import competition from China. Firms located in states with pro-worker labour laws start to outsource substantially more than firms in states with pro-employer labour laws after 2001. For example, the average difference in the ratio before 2001 between pro-worker and pro-employer states is around 38%, which increased to 120% between 2002 and 2007. Indeed, in our paper we show that the positive relationship between import competition and outsourcing of manufacturing jobs is relevant only for firms located in states with pro-worker labour regulations. 

We interpret our results with a model where firms employ in-house labour or outsource input production at a lower wage (for instance, to the informal sector). Firms are forward-looking and recognise that they may incur firing costs to retrench or lay off workers in the next period in case of a negative demand shock. An increase in Chinese import competition results in a pro-competitive effect. In other words, relatively low-cost (productive) firms, which are the only ones with the ability to compete with imports from China, are also the ones that feel that competition and, effectively, lose their monopoly power. Their past monopoly power incentivised those firms to restrict their output and to charge high prices and markups. The loss of their monopoly power pushes them to expand output (using the standard monopoly versus competition argument) and increase outsourcing.² This increase in outsourcing can be greater for firms in pro-worker states, since a given amount of outsourcing saves a larger amount of firing costs in the future in case a negative shock hits and firms have to contract. An implication of the model is that firm-level costs and markups (and hence, the prices charged) also decrease with an increase in outsourcing. We find empirical support for these impacts.

Figure 2 Trends in the ratio of outsourcing expenditure on manufacturing jobs to total wage bill: Pro-worker versus pro-employer states, 1995-2007

Notes: Figure plots the ratio of outsourcing expenses of manufacturing jobs in total wage bill multiplied by 100. ‘States with Pro-employer labour Laws’: Andhra Pradesh, Karnataka, Rajasthan, Tamil Nadu and Uttar Pradesh. ‘States with Pro-worker and Neutral labour Laws’: Assam, Bihar, Gujarat, Haryana, Kerela, Madhya Pradesh, Maharastra, Orissa, Punjab, and West Bengal. 

The informal sector

Finally, we use data on outsourcing activity by micro enterprises in the informal manufacturing sector in India to examine the linkages between the formal and informal sectors. Firms in the informal sector face lower costs per unit of labour because labour laws are not enforced. We find that greater import competition from China is associated with an increase in the likelihood of informal enterprises selling their final output to other enterprises directly, or through a contractor. This relationship is magnified in states with pro-worker labour regulation. Our results also show that firms that are engaged in such contracts experience an increase in their output and employment. Our study thus highlights the implications of international trade for labour market outcomes and informality in developing countries (Goldberg and Pavcnik 2003, Dix-Carneiro et al. 2021).

Conclusion

We propose outsourcing as a new margin of adjustment by firms to import competition, thereby contributing to a large literature examining the impact of import competition, especially from China, on a range of outcomes in the manufacturing sector. This literature largely pertains to developed countries and focuses on the displacement of labour into unemployment, public assistance, or to other geographies. We study the movement of labour to the informal sector, which in developing countries is a means to survive, since unemployment and public assistance may not be options. By probing the role of labour market regulation in mediating the relationship between import competition and outsourcing, we underscore the significance of domestic institutions for how firms adapt to globalisation.

Pavel Chakraborty is an applied micro-economist. His research mainly focuses on the dynamics of firms in developing countries in relation to various issues regarding international trade, innovation, labour economics, organizational economics, and economic development. 

Devashish Mitra is Professor of Economics and Gerald B. and Daphna Cramer Professor of Global Affairs at the Maxwell School of Citizenship and Public Affairs, Syracuse University.

Asha Sundaram is a Senior Lecturer at the Department of Economics, University of Auckland.  She has an M.Phil in Economics from the University of Oxford, UK and a PhD from Syracuse University, USA.

To read the full commentary from Vox EU, please click here.

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Much has been written about the individual building blocks of each of these points. Our aim is to consider the cumulative impact of the initiatives, the risks they may entail, and how these can best be managed, on a single industry that is often at the nexus of climate, trade and industry policy debates.

While individual policy areas will be scrutinised, they must also be considered as a package in terms of their combined impacts. The EU car industry is the most important manufacturing sector in terms of export revenues, and it is not clear whether those revenue streams will be ‘sustainable’ in both meanings of the word.

Current objections to openness will likely be supercharged by the overarching objective of carbon net zero in the medium term at very high costs, where the necessary private and public investments in infrastructure and the energy transition is still missing.[1] Meanwhile, there are worries about post-pandemic recovery in the short term. This leads to the question: How can the EU auto industry remain Europe’s most important source of export revenues in the long term?

The rest of this study is structured as follows. Section 2 discusses the EU car sector, and its importance to the EU; Section 3 summarises the risks to its future including key current EU initiatives affecting the sector; Section 4 concludes by considering how these risks can best be managed.

To view the full policy brief, please click here.

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