What explains the stark inconsistency between what the people say they want and what the Republicans and Democrats, and especially those who wear those party labels in elected and appointed office in Washington, seem determined to give them?

According to the national survey, 66 percent of Americans believe global trade is good for the American economy; 64 percent believe it has increased material abundance in their own lives by increasing the variety of the products they can buy; 58 percent say it has improved their standard of living; 63 percent want to increase trade with other nations; 57 percent say doing so is good for their communities; and 53 percent have a favorable view of free trade.

Seventy-five percent of Americans worry that tariffs are raising consumer prices. Two-thirds of them, 66 percent, would oppose paying even $10 more for a pair of blue jeans due to tariffs—even if those tariffs are meant to help US blue jean manufacturing. In addition, three-fourths, 75 percent, worry that special interest groups are lobbying the government to impose tariffs or other restrictions on trade.

Virtually none of this is reflected in the current trade policies of our major political parties. Under the thrall of Donald Trump, Republicans have largely abandoned their longstanding historical support of free trade. Likewise, the decades-long struggle between free traders and protectionists for ascendancy in the Democratic Party has apparently ended in triumph for anti-trade protectionists. Although some Democrats are hoping Kamala Harris would step back as president from the most trade-restrictive and trade rule-scoffing of the policies of President Joe Biden—which are basically the same as those followed while in office by former President Trump—these wistful hopes seem mainly to be founded on wishful thinking.

Instead of pursuing the generally pro-trade sentiments of most of the American people, as demonstrated in the Cato survey, Republicans and Democrats alike are headed in the opposite direction. Trump is doubling and tripling down as “Tariff Man” with ever-evolving proposals for higher and higher tariffs on worldwide imports. The Democrats have had a hard time keeping up with his tariff-happy tweets, but they, too, are imposing and promising more regressive taxes on the American people in the form of tariffs.

Neither party seems to think trade is good for the American economy, neither appears to want to increase trade, and neither is trying to conclude or is committed to concluding more international trade agreements. Worst of all, Republicans and Democrats are united in ignoring international laws on trade and in impeding and undermining the World Trade Organization and its rule-based trade dispute settlement system.

Why this disjunction between the two parties and most of the people on trade? Put simply, both parties have been captured by minorities with minority views. Neither party is representing the broadest measure of their membership or the broadest extent of the American people. Both are responding mostly to their political “base,” which ignores a lot of other Americans—more moderate and centrist members of both parties and the independent voters who comprise a growing portion of the American electorate and are likely to be more favorable to more trade.

The Pew Research Center has found that only six percent of Americans and 12 percent of Democrats are of the “progressive left,” which is leading the charge against trade within the Democratic Party. The Republican Party has been captured by Trump and other anti-trade tribunes of economic nationalism, but there remain millions of traditional Republicans who, though exiled from Republican decision-making, nevertheless are still within the American electorate. Moreover, Gallup polling shows that a record 49 percent of Americans “see themselves as politically independent—the same as the two parties put together.” These many millions of Americans have been pushed aside in the policymaking of American politics.

In all their policymaking, both parties are now pulled by their “base” to the extremes. Republicans are pulled to their political right, where trade protectionism and other manifestations of the economic nationalism of Donald Trump prevail. Democrats are pulled to their political left, where progressivism is increasingly equated with protectionism and other forms of economic nationalism. The embrace by both parties of different versions of an interventionist and trade-discriminatory industrial policy by the federal government is one consequence of this pull to the extremes. With trade and numerous other issues, the center is not holding in American politics because, except in periodic general elections, it is not present and so is not heard in policymaking.

In the US House of Representatives and in many state legislatures, this hollowing out of the American political center is a result of gerrymandering in drawing the lines of congressional and legislative districts, which empowers the political extremes at the expense of the political middle in the electorate. This gerrymandering by both parties diminishes the political legitimacy of our democratic republic while advancing minority views that are translated into policy, including in international trade. Meanwhile, the vast center of the American electorate is increasingly left unrepresented. Where both parties once competed to be responsive to the political center in the country, now they often seem to ignore it, especially in their legislative and executive decision-making.

Instead, as the voters surveyed by Cato rightly fear, policymakers and decision-makers who should be pursuing the public interest increasingly hear and heed the voices and the views of self-seeking private interests. In trade, this includes those labor unions with workers in trade-challenged declining industries in politically pivotal states, and threatened businesses in those industries in those states that cannot—or will not—meet the challenge of global competition and thus seek to be sheltered from such competition behind protectionist trade barriers. Because these key states, such as Pennsylvania, Michigan, and Wisconsin, are crucial to the outcome of presidential elections and to control of Congress, popular calls for more openness to trade from other sectors in other states go unanswered.

Among the quibbles and qualifications to the overall desire of most Americans for more trade, as evidenced by the Cato survey, is the fact that most Americans want to make certain that trade policy benefits Americans. A majority of Americans, 56 percent, support putting tariffs on goods from foreign countries if those countries impose restrictions on goods from the United States.

This support plummets, however, if these retaliatory tariffs increase domestic prices, decrease innovation and US business growth, or decrease jobs in other American companies that rely on the imports affected by the tariffs. Overall, 61 percent of Americans believe US businesses must “learn how to become strong and compete globally without any government handouts or taxpayer subsidies”. Despite this, both parties are increasingly addicted to subsidies and other handouts, including protectionist tariffs.

Another qualification to the support of most Americans for more trade is the question of trade with China. Few Americans—only 15 percent—think that China has acted fairly in trade with the United States. Not surprisingly, both parties have “get tougher” policies on trade with China. However, 81 percent of Americans surveyed by Cato overestimated the share of imports the United States receives from China. (The correct answer is about 15 to 16 percent.) If the broad middle of the American electorate were better heard in American policymaking, a more temperate—and less bellicose—view might be evidenced in policymaking on China trade, perhaps leading to mutually beneficial solutions that have eluded the two trading partners thus far.

Like the overall support of most Americans for trade, these and other nuances in this majority support are blurred in the broad brush of pure protectionism that is manifested more and more in the trade policies of both parties. Hence the widening gap between what the American government, and the politicians who populate it, are saying and doing on trade and what most Americans seek in trade.

On trade policy, those who are leading us, and those who would lead us, are not giving voice to the views of the majority of the American people who generally support trade. Unless this changes, the result will be an American economy and an American future smaller than what they would be if the majority views were heard and reflected in US trade policy.

To read the blog as it was published on the CATO Institute webpage, click here.

To view Cato Institute 2024 Trade and Globalization National Survey as posted by CATO 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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“The dangerous divergence in economic prospects across countries remains a major concern.”

Compared to our July forecast, the global growth projection for 2021 has been revised down marginally to 5.9 percent and is unchanged for 2022 at 4.9 percent. However, this modest headline revision masks large downgrades for some countries. The outlook for the low-income developing country group has darkened considerably due to worsening pandemic dynamics. The downgrade also reflects more difficult near-term prospects for the advanced economy group, in part due to supply disruptions. Partially offsetting these changes, projections for some commodity exporters have been upgraded on the back of rising commodity prices. Pandemic-related disruptions to contact-intensive sectors have caused the labor market recovery to significantly lag the output recovery in most countries.

The dangerous divergence in economic prospects across countries remains a major concern. Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 percent in 2024. By contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 percent below the pre-pandemic forecast in 2024, resulting in a larger setback to improvements in their living standards.

These divergences are a consequence of the “great vaccine divide” and large disparities in policy support. While almost 60 percent of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96 percent of the population in low-income countries remain unvaccinated. Furthermore, many emerging market and developing economies, faced with tighter financing conditions and a greater risk of de-anchoring inflation expectations, are withdrawing policy support more quickly despite larger shortfalls in output.

Supply disruptions pose another policy challenge. On the one hand, pandemic outbreaks and climate disruptions have resulted in shortages of key inputs and lowered manufacturing activity in several countries. On the other hand, these supply shortages, alongside the release of pent-up demand and the rebound in commodity prices, have caused consumer price inflation to increase rapidly in, for example, the United States, Germany, and many emerging market and developing economies. Food prices have increased the most in low-income countries where food insecurity is most acute, adding to the burdens of poorer households and raising the risk of social unrest.

The October 2021 Global Financial Stability Report highlights another challenge to monetary policy from increased risk-taking in financial markets and rising fragilities in the nonbank financial institutions sector.

Policy priorities

A principal common factor behind these complex challenges is the continued grip of the pandemic on global society. The foremost policy priority is therefore to vaccinate at least 40 percent of the population in every country by end-2021 and 70 percent by mid-2022. This will require high-income countries to fulfill existing vaccine dose donation pledges, coordinate with manufacturers to prioritize deliveries to COVAX in the near-term and remove trade restrictions on the flow of vaccines and their inputs. At the same time, closing the $20 billion residual grant funding gap for testing, therapeutics and genomic surveillance will save lives now and keep vaccines fit for purpose. Looking ahead, vaccine manufacturers and high-income countries should support the expansion of regional production of COVID-19 vaccines in developing countries through financing and technology transfers.

Another urgent global priority is the need to slow the rise in global temperatures and contain the growing adverse effects of climate change. This will require more ambitious commitments to reduce greenhouse gas emissions at the upcoming United Nations Climate Change Conference (COP26). A policy strategy that includes an international carbon price floor adjusted to country circumstances, a green public investment and research subsidy push, and compensatory, targeted transfers to households can help advance the energy transition in an equitable way. Just as importantly, advanced countries need to deliver on their earlier promises of mobilizing $100 billion of annual climate financing for developing countries.

In addition, concerted multilateral efforts to ensure adequate international liquidity for constrained economies, and faster implementation of the G20 common framework to restructure unsustainable debt, would help limit divergences across countries. Building on the historic $650 billion Special Drawing Right (SDR) allocation, the IMF is calling on countries with strong external positions to voluntarily channel their SDRs into the Poverty Reduction and Growth Trust. Furthermore, it is exploring the establishment of a Resilience and Sustainability Trust, which would provide long-term funding to support countries’ investment in sustainable growth.

At the national level, the overall policy mix should be calibrated to local pandemic and economic conditions, aiming for maximum sustainable employment while protecting the credibility of policy frameworks. With fiscal space becoming more limited in many economies, health care spending should continue to be prioritized, while lifelines and transfers will need to become increasingly targeted, reinforced by retraining and support for reallocation. As health outcomes improve, policy emphasis should increasingly focus on long-term structural goals.

With public debt levels at record highs, all initiatives should be rooted in credible medium-term frameworks, backed by feasible revenue and spending measures. The October 2021 Fiscal Monitor demonstrates that such credibility can lower financing costs for countries and increase fiscal space in the near-term.

Monetary policy will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery. We project, amidst high uncertainty, that headline inflation will likely return to pre-pandemic levels by mid-2022 for the group of advanced economies and emerging and developing economies. There is, however, considerable heterogeneity across countries with upside risks for some, like the United States, United Kingdom, and some emerging market and developing economies. While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery. Central banks should chart contingent actions, announce clear triggers, and act in line with that communication.

More generally, clarity and consistent actions can go a long way toward avoiding unnecessary policy accidents that roil financial markets and set back the global recovery—ranging from a failure to lift the US debt ceiling in a timely fashion to disorderly debt restructurings in China’s property sector to escalating cross-border trade and technology tensions.

Recent developments have made it abundantly clear that we are all in this together and the pandemic is not over anywhere until it is over everywhere. If COVID-19 were to have a prolonged impact—into the medium-term—it could reduce global GDP by a cumulative $5.3 trillion over the next five years relative to our current projection. It does not have to be this way. The global community must step up efforts to ensure equitable vaccine access for every country, overcome vaccine hesitancy where there is adequate supply, and secure better economic prospects for all.

Gita Gopinath is the Economic Counsellor and Director of the Research Department at the International Monetary Fund (IMF). She is on leave of public service from Harvard University’s Economics department where she is the John Zwaanstra Professor of International Studies and of Economics.

To read the full commentary from the International Monetary Fund, please click here.

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Rare earths are the key elements that make up those metals and alloys necessary for the decarbonisation process of developed economies. Once processed and refined, these 17 elements are indispensable not only for the production of industrial catalysts, but also for the permanent magnets used in the production of wind turbines and electric vehicles. Thus, rare earths play a strategic role in the development of those industrial sectors that will power the green transition of the next three or four decades.

Precisely for this reason, Chinese companies’ quasi-monopoly over the production and processing of rare earths is a fundamental, strategic dilemma for Western countries’ industrial policies. Before the Covid-19 pandemic, China accounted for no less than 62.8% of all rare earths mined globally. However, mining is only the first step of the elaborate value chain that cuts across the rare earth industry. In the downstream processing and related industrial production sectors (such as permanent magnets), Chinese companies’ shares increases up to 85-90%.

Whilst global concentration in Chinese hands has long been an accepted reality in the rare earths industry, Beijing’s inclination to weaponize this dependency has raised the alarm in all Western countries. In 2010, in the aftermath of an incident involving the Japanese coast guard and a Chinese fishing vessel in the contested waters of the Senkaku-Diaoyu islands, Beijing restricted the export of rare earths towards Japan for several months. Then, at the height of the US-China techno-commercial tensions when the Trump administration announced the Huawei ban in 2019, President Xi Jinping visited a rare earths processing plant alongside Liu He, the Chinese chief negotiator in the trade dispute with the US. In addition to the thinly veiled threat of retaliation, Xi also declared that China needed to embark on a new “Long March” in its economic confrontation against the US.

Facing the risk of overdependence on China, several Western countries have considered diversifying their supplies over the last decade, though most of them have only started making strides in the last few years. Japan was the first one in dealing with such a situation: in 2010, when Beijing partially blocked its exports, Tokyo relied on China for 90% of its imports. Also, the Chinese government’s drastic reduction of rare earths export quotas generated a strong pressure on Japanese processing and refining companies (which, at that time, dominated the sector) to relocate to China due to the induced gap between national and international commodity prices.

Over the years, Japan remained a key consumer of rare earths, yet it also managed to reduce its dependence on Chinese supplies. On the one hand, geological explorations led to the discovery of new, untapped reserves of rare earths, and the government is currently considering a reform allowing more financial support towards exploration activities. On the other hand, Japanese companies have also found alternative solutions: Honda, for instance, announced it had invented a motor that didn’t contain heavy rare earths a couple of years ago. The centrepiece in this quest, though, was the diversification of supplies. The leader in this process was JOGMEC (Japan Oil Gas and Metals National Corporation), a state-owned enterprise, which invested heavily in several resource-rich countries like Namibia and Australia in order to support an alternative network of rare earths suppliers. As of now, the share of Chinese imports has indeed declined to 58%, and Tokyo aims to push that figure below 50%.

One of the first companies JOGMEC decided to bet on was the Australian Lynas Corp. Thanks to an initial $250 mln investment carried out in partnership with Sojitz Corp in 2011 —  and with further injections of capital in the following years — Lynas currently provides a third of  Japanese demand for rare earths. It is also the only non-Chinese company with the expertise and the infrastructure necessary to operate in the downstream sector of rare earths processing. Over the last two years, Lynas has sought to expand its network of processing infrastructure: this effort has been supported by the US in its effort to build a new supply chain independent from Chinese companies. As such, the Department of Defence (DOD) allocated $30m for the construction of a processing plant in Texas last February.

This initiative underlines Washington’s growing attention towards this matter, which has become apparent in the last few years. The reopening of California’s Mountain Pass mine in 2018 – once the world’s biggest before its decline and closure in 2000 – marked the return of the US on the rare earths mining market, despite Beijing’s quasi-monopoly on processing. By the same token, the Trump administration declared rare earths as essential for national defence in 2019 and thus channelled DOD resources towards the reconstruction of a national rare earths processing capacity. From Colorado to California, new feasibility studies and pilot projects have been carried out to rebuild industrial infrastructure. Governmental support for this endeavour, albeit in new forms, has continued despite the transition: Joe Biden’s infrastructure plan envisions conspicuous funds for research and innovation as well as the development of a market for renewable energy and electric vehicles, two sectors wherein rare earths industrial processing capacity will be key.

The most evident gear-change operated by the Biden administration took place at the international level with the engagement of Indo-Pacific partners for the construction of a supply chain less reliant on China. The Quad, for instance, has provided a venue for its members – US, Japan, Australia, and India – to articulate their intention to develop a mining and refining capacity of their own. To that end, JOGMEC is considering the possibility of providing financial support to the early-stage projects currently underway in Texas and California.

Some obstacles are yet to be overcome, however. First, the rare earths industry requires specific technical knowledge and capacity to manage burdensome externalities: as a matter of fact, mining and processing entail serious risks for the local population both in terms of health and environmental degradation. Lynas’ processing plant in Malaysia, for instance, has been accused of failing to properly inform local authorities about the risks concerning the disposal of radioactive waste material derived from the production process.

Another factor is the fierce competition of big Chinese state-owned enterprises, whose production quotas were raised by almost 30% in the first semester of 2021, while Chinese exports of rare earths over the first six months of this year have surpassed pre-pandemic levels (16.5% above the first half of 2019). In addition, the issue of Chinese companies’ quasi-monopolistic market presence also applies to the integrity of Washington’s own alternative supply chain, since the international consortium that allowed the reopening of the Mountain Pass mine includes Shenghe Resources Holding, a big Chinese player in the sector.

However, the most important issue revolves around the financial sustainability of an alternative to the Chinese supply chain. Lynas, the most experienced rare earths company outside China, reported profits for only two years between 2014 and 2020, and had to be bailed out by JOGMEC in 2016. According to experts, finding a market-based solution for the creation of an alternative supply chain will prove difficult: a generous, consistent, and durable financial commitment by public authorities is indeed critical for the success of the initiative, as highlighted by the Japanese experience. However, US and Australian authorities are upgrading their commitment and have been issuing grants and funds to support the domestic development and commercialisation of processing plants, whose main beneficiary has been Lynas, with the aim of setting up complementary facilities in Kalgoorlie, Australia, and Texas.

There’s another, more important silver lining though. The green technologies market is expected to grow in parallel with the decarbonisation of the global economy: demand for rare earths should thus increase, not only in the West, but in China, too. Beijing — albeit dominant in the production market — has been the first rare earths importer since 2018, and some estimates suggest it may become a net importer at some point throughout this decade. Globally, demand is set to increase and drive up sales of existing rare earths companies. As a possible sign of this trend, Lynas reported its record quarterly revenue last month. Therefore, the global expansion in the demand for rare earths is an opportunity Indo-Pacific democracies cannot afford to pass up if they really intend to create their own supply chain independent from China.

Guido Alberto Casanova is a research assistant and editorial assistant at ISPI.

To read the full commentary from The Italian Institute for International Political Studies, please click here.

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Exceptional policy support prevented a global economic depression, even as the pandemic took a heavy toll on lives and livelihoods. The global reaction, as seen in major shifts in travel, consumption, and trade, also made the world a more economically imbalanced place as reflected in current account balances—a record of a country’s transactions with the rest of the world.

In our latest External Sector Report we found that the global reaction to the pandemic further widened global current account balances—the sum of absolute deficits and surpluses among all countries—from 2.8 percent of world GDP in 2019 to 3.2 percent of GDP in 2020. Those balances are set to widen further as the pandemic continues to rage in much of the world.

If not for the crisis, global current account balances would have continued to decline. While external deficits and surpluses are not necessarily a cause for concern, excessive imbalances—larger than warranted by the economy’s fundamentals and appropriate economic policies—can have destabilizing effects on economies by fueling trade tensions and increasing the likelihood of disruptive asset price adjustments.

A year like no other

The dramatic fluctuations in current account deficits and surpluses in 2020 were driven by four major pandemic-fueled trends:

• Travel declined: The pandemic led to a sharp decrease in tourism and travel. This had a significant negative impact on the account balances of countries that rely on tourism revenue, such as Spain, Thailand, Turkey, and even larger consequences for smaller tourism-dependent economies.
• Oil demand collapsed: The collapse in oil demand and energy prices was relatively short lived, with oil prices recovering in the second half of 2020. However, oil-exporting economies, such as Saudi Arabia and Russia, saw current account balances decline sharply in 2020. Oil-importing countries saw corresponding increases to their oil trade balances.
• Medical products trade boomed: Demand surged by about 30 percent for medical supplies critical for fighting the pandemic, such as personal protective equipment, as well as the inputs and materials to make them, with implications for importers and exporters of these items.
• Household consumption shifted: As people were forced to stay home, households shifted their consumption away from services toward consumer goods. This happened most in advanced economies where there was an increase in the purchase of durable goods like electrical appliances used to accommodate teleworking and virtual learning.

All of these factors contributed to some countries seeing a wider current account deficit, meaning they bought more than they sold, or a larger current account surplus, meaning they sold more than they bought. Favorable global financial conditions, with the unprecedented monetary policy support from major central banks, made it easier for countries to finance wider current account deficits. In contrast, during past crises where financial conditions sharply tightened, running current account deficits was harder, pushing countries further into recession.

On top of these external factors, the pandemic led to massive government borrowing to finance health care and provide economic support to households and firms, creating large uneven effects on trade balances.

The outlook

Global current account balances are set to widen even further in 2021 but this trend is not expected to last. The latest IMF staff forecasts indicate that global current account balances will narrow in the coming years, as China’s surplus and the US’ deficit falls, reaching 2.5 percent of world GDP by 2026.

A reduction in balances could be delayed if large deficit economies like the US undertake additional fiscal expansions or there is a faster-than-expected fiscal adjustment in current account surplus countries, like Germany. A resurgence of the pandemic and a tightening of global financial conditions that disrupt the flow of capital to emerging markets and developing economies could also affect balances.

Despite the shock of the crisis and possibly due to its worldwide impact, excessive current account deficits and surpluses were broadly unchanged in 2020, representing about 1.2 percent of world GDP. Most of the drivers of excess external imbalances pre-date the pandemic and include fiscal imbalances as well as structural and competitiveness distortions.

Rebalancing the world economy

Ending the pandemic for everyone in the world is the only way to ensure a global economic recovery that prevents further divergence. This will require a global effort to help countries secure financing for vaccinations and maintain healthcare.

A synchronized global investment push or a synchronized health spending push to end the pandemic and support the recovery could have large effects on world growth without raising global balances.

Governments should step up efforts to resolve trade and technology tensions and modernize international taxation. A top priority should be the phasing out of tariff and non-tariff barriers, especially on medical products.

Countries with excess current account deficits should, where appropriate, seek to reduce budget deficits over the medium term and make competitiveness-raising reforms, including in education and innovation policies. In economies with excess current account surpluses and remaining fiscal space, policies should support the recovery and medium-term growth, including through greater public investment.

In the years to come, countries will need to simultaneously rebalance, while ensuring that the recovery is built on a solid and durable foundation.

To read the full commentary from IMF Blogs, please click here. 

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• Calls to ban wildlife trade to prevent future zoonotic pandemics have proven to be ineffective and difficult to enforce
• Measures also risk impacting the food security, livelihoods, and cultural rights of millions of people around the world
• Policy action is needed that centres sustainable food systems rather than absolute bans on wildlife trade and continuing support for status quo industrial food systems
• Action should include support for practices that minimise the risk of zoonotic disease transmission, such as agroecology and indigenous and community conserved areas

COVID-19 ignited calls to ban wildlife trade

Zoonotic diseases are diseases transmitted from wild and domestic animals to humans. 60% of infectious diseases affecting humans are zoonotic in origin, including malaria, HIV, and various types of influenza. Over the last decade, there have been numerous zoonotic disease outbreaks, including Ebola, Zika, Severe Acute Respiratory Syndrome (SARS), and Middle East Respiratory Syndrome (MERS). However, the unprecedented health and economic impact and rapid global spread of COVID-19 has drawn far more attention to zoonoses prevention than previous zoonotic disease outbreaks.

Early reports linked the emergence of COVID-19 to a market in China where wild animals and meat were sold, the wildlife trade has been front-and-centre in discussions on controlling COVID-19 and preventing future zoonotic spillover events. Proposals have ranged from extreme, total bans of wildlife trade, to the moderate, managing wildlife trade carefully. For example, by better regulating sanitation and hygiene at wildlife trade markets, to focusing on restricting trade in high-risk species and more diligence about illegal, unsustainable forms of trade.

These calls have been met by policy action. In February 2020, the Chinese government imposed a ban on trade and consumption of wild meat. The Vietnamese government and the Government of Thailand took similar steps, banning wildlife imports, closing wildlife markets and enacting greater enforcement against illegal wildlife trade. The United Kingdom is also discussing wildlife trade bans in response to COVID-19. In 2020, an Early Day Motion was submitted for debate in the House of Commons to ban the international commercial trade in wild animals and wild animal products, and to play a leadership role in the end of the global wildlife trade.

Why wildlife trade bans are not the answer

The focus on banning wildlife trade to solve future pandemics is worrying, as the ineffectiveness and negative consequences of wildlife trade bans are well documented in existing research. During the Ebola outbreak in 2013 and 2016, bans placed on wild meat trade not only proved to be ineffective in halting disease transmission, but also pushed trade underground making it even more difficult to monitor and regulate, and thus potentially more risky. Similar impacts were seen during other Ebola outbreaks in Guinea and Nigeria as well.

In addition to undermining local economies and food security, wildlife trade bans can have negative consequences on wildlife conservation. Wildlife trade bans can harm legal, sustainable wildlife economies that give people motivation to conserve species and their surrounding habitats. Wildlife trade bans erode people’s trust in public health and environmental authorities as affected populations often observe ulterior motives behind bans, like preventing hunting and restricting access to natural resources.

Finally, as a key driver of hunting in both developing and developed countries is food preference and food security, new bans on wild meat consumption could increase in domestic livestock consumption. Large-scale deforestation and habitat destruction associated with commercial scale livestock farming and agriculture is a primary risk factor in zoonotic disease spillover. If the intension of banning wildlife trade is to reduce pandemic risks, any measures that could increase industrial livestock production are counterintuitive.

• Supporting sustainable, biodiversity-friendly food production systems:COVID-19 and problems created by wildlife trade bans point to the shortcomings of existing food systems. There are initiatives and movements around the world pushing for alternative food systems that could minimise the chance of future zoonotic pandemics. For example, there is scientific evidence that improving support for agroecology – agricultural practices that rely on natural synergies and harness biological diversity for food production – can contribute to improved food security and the protection of wildlife habitats while acting as buffers against zoonotic viral spillover events.

• Respecting tenure regimes that minimise the risk of zoonotic disease transmission by conserving biodiversity without impeding on the rights and wellbeing of Indigenous Peoples and Local Communities (IPLCs): conserving biodiversity reduces the risk of zoonotic diseases. Various tenure regimes contribute to preventing biodiversity loss, reducing the risk of future pandemics. Problematically, many tenure regimes (e.g. ‘Fortress Conservation’) also violate IPLC rights. ICCAs, which are formally recognised territories and areas conserved by indigenous peoples and local communities, are unique as they restore and respect IPLC rights while protecting biodiversity and creating a buffer between zoonotic disease pools and people. Support for ICCAs should be made a global priority, particularly amidst ongoing debates about the post-2020 Global Biodiversity Framework.

• Promotion of just, sustainable wildlife trade governance: in place of wildlife trade bans, improved governance of legal and sustainable wildlife trade is needed. This could include directing trade regulation and enforcement to target types of trade and species that pose serious risks for zoonotic transmission. However, calls to centralise and elevate the governance of wildlife trade risk violating IPLC rights and ignoring the often highly biodiverse and ecologically balanced nature of IPLC territories. Global institutions and governments have an opportunity to learn from IPLCs about sustainable wildlife use and consumption and improve or create new wildlife trade laws and policies that are inclusive of IPLC rights and territories.

Charis Enns is a Presidential Fellow in Socio-Environmental Systems at the Global Development Institute at the University of Manchester. She is currently working on a project titled ‘Identifying and mitigating the impacts of COVID-19 on legal and sustainable wildlife trade in Low- and Middle-Income Countries (LMICs)’.

To read the original commentary from The University of Manchester, please visit here

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Tragically, the COVID-19 pandemic hit the United States hard. More than 600,000 Americans have died and average life expectancy has fallen. However, diligent work over the past year to develop vaccines and the rollout of vaccination programs over the past several months have begun to bring the pandemic under control. By mid-June, over one-half of the eligible population has been fully vaccinated and both new cases and the test positivity rate have fallen markedly.

The unprecedented fiscal and monetary support, combined with the receding COVID-19 case numbers, should provide a substantial boost to activity in the coming months. Savings will be drawn down, demand will return for in-person services, and depleted inventories will be rebuilt. Growth in 2021 is expected to be around 7 percent, the fastest pace in a generation, with modest risks to the upside. This strong economic performance should continue into 2022, with growth of around 5 percent. It is worth noting that these forecasts are based upon an assumption that the American Jobs Plan and American Families Plan will be legislated during the course of 2021 with a size and composition that is similar to that proposed by the administration. The U.S. external position is judged to be modestly weaker than the level implied by medium-term fundamentals and desirable policies.

Indicators suggest significant labor market slack remains which should serve as a safety valve to dampen underlying wage and price pressures. Inflation expectations are also expected to remain well-anchored. However, underlying inflation trends will be obscured in the coming months by significant, transitory movements in relative prices which could lead core personal consumption expenditure (PCE) inflation to temporarily peak later in the year at close to 4 percent. Once these temporary price realignments have passed through the system, PCE inflation is forecasted at around 2½ percent by end-2022.

United States: Selected Economic Indicators

Source: IMF staff forecasts

Fiscal Policies

The changes being proposed to federal tax and spending are aligned with past IMF policy advice. Multi‑year investments in power, transportation, telecommunications, and water will all help remove bottlenecks and increase productivity. There is solid empirical evidence also of the societal payoffs—in the form of lower poverty, better health and education outcomes, reduced crime, increased labor force participation, and better productivity—from providing high-quality childcare, creating a national paid family leave program, investing in pre-school, expanding access to college for low income students, increasing healthcare coverage, and improving college retention. Instituting a permanent increase in taxes on corporate profits and on high income households is warranted as a means to finance the permanent increase in spending obligations. Proposals helpfully include:

· A globally coordinated minimum corporate tax, applied on a country-by-country basis, which will be a crucial step forward in countering the incentives for profit shifting and base erosion.

· The elimination of loopholes that allow high income individuals to recharacterize labor income and escape tax on capital gains.

· A permanent expansion of the Earned Income Tax Credit to childless workers and an extension of the higher, refundable child tax credit which together will be instrumental in reducing poverty.

· Increased funding for the Internal Revenue Service which will have potentially large payoffs both in terms of revenues and in increasing the equity of the U.S. tax system.

It is worth highlighting that many of these tax and spending changes will directly support working mothers (who have long made up a large share of the poor and were hard hit by the pandemic ) and disproportionately help black and Hispanic families.

The size and ambition of the proposed fiscal packages is admirable. However, a better targeting of policies would further strengthen their impact on macroeconomic and distributional outcomes. Specifically, as the appropriations process moves ahead, more could be done to:

· Phase out tax credits at lower levels of household income.

· Prioritize spending toward programs that have the biggest impact on productivity, labor force participation, reducing poverty, and facilitating the shift to a low-carbon economy.

· Fully eliminate step-up basis, lower the threshold for paying the estate tax, eliminate the 199A passthrough deduction, and reformulate the business tax as a cashflow tax.

Reorienting the administration’s tax and spending proposals in this way would likely imply a slower (but more sustained) demand impulse, create a bigger boost to aggregate supply, and, in so doing, lessen the near-term risks posed by a sustained upswing in inflation. In this regard, the administration’s commitment not to raise taxes on households earning under US$400,000 per year represents an important constraint (98 percent of households are below this level of income). Without this limitation, further policy changes could be considered including:

· Increasing the U.S. reliance on indirect taxes by introducing a carbon tax and/or raising federal fuel taxes.

· Scaling back poorly targeted tax expenditures such as the income tax exemption for employer-provided health care, the capital gains tax exemptions for individuals selling their principal residence, and the deductibility of mortgage interest and state and local taxes.

· Aligning the combined (i.e., corporate plus personal) top statutory rate on capital income with the top marginal rate on labor income (which would imply taxing dividends and capital gains received by taxable entities at around 20–25 percent). Doing so would also help lessen the extent to which pass-through entities face a preferential tax rate.

Monetary Policy

The Federal Reserve’s actions have been highly effective both in the depths of the crisis and in supporting the recovery. While there were risks to introducing the new monetary framework in the midst of COVID-related uncertainty, the low neutral rate of interest and the asymmetries posed by the effective lower bound called for a new approach to policy. The Federal Reserve’s new policy framework has helped support a more rapid recovery from the pandemic and rightly commits to a near-term overshooting of the 2 percent longer-run inflation goal (in line with past IMF advice). Given the complexity of the U.S. economy and the uncertainties in implementing the new framework, it is appropriate to eschew closely parameterizing this new policy framework (e.g. by providing a formulaic time horizon over which inflation will be averaged or specific limits on the amount that inflation will be allowed to overshoot). Instead, the size and duration of the intended overshoot should be data dependent.

The combination of the new monetary policy framework and the economic boost from fiscal stimulus should be self-reinforcing. The flexible average inflation targeting helps increase the demand impact of the fiscal support by providing more accommodation. At the same time, the large fiscal boost increases the likelihood that inflation gathers enough momentum to sustainably exceed 2 percent (something that the U.S. and other advanced economies have struggled to achieve in the post-global financial crisis period).

In the coming months, the ongoing rapid pace of recovery and expectations of additional fiscal support will necessitate a shift in monetary policy. As discussed above, the reopening of the economy will create considerable unpredictability in PCE inflation during the next several months, making it very difficult to divine underlying inflationary trends. At the same time, presuming staff’s baseline outlook and fiscal policy assumptions are realized, policy rates would likely need to start rising in late-2022 or early-2023 (with asset purchases starting to be scaled back in the first half of 2022).

Managing this transition—from providing reassurance that monetary policy will continue to deliver powerful support to the economy to preparing for an eventual scaling back of asset purchases and a withdrawal of monetary accommodation—will require deft communications under a potentially tight timeline. Mitigating the risks of market misunderstandings, volatility in market pricing, and/or an unwarranted tightening of financial conditions (with all the negative spillovers to the global economy that such outcomes would entail) will require the Federal Open Market Committee to continue clearly telegraphing its interpretation of incoming data and articulating what those economic developments mean for policies. The Federal Reserve’s commitment—to communicate well in advance its thinking and to ensure that the eventual withdrawal of monetary accommodation is orderly, methodical, and transparent—is very welcome.

Risks to the Outlook

The principal risk facing the U.S. economy continues to emanate from the pandemic. The nature of the pandemic has changed globally, new variants are circulating widely, and there has been a shift in hospitalization and mortality toward younger Americans. Furthermore, while vaccines are widely available in the U.S., individual decisions on whether to take the vaccine have become a more binding constraint. Public health efforts in the U.S. will need to continue being applied rigorously, including by targeting populations where vaccination rates are low and by undertaking robust contingency planning to handle another surge of infections. Consideration should also be given to establishing a “standing army” for public health to create idle capacity in testing and medical supplies as well as build a rapid-response unit that could be deployed for testing, tracking, and treatment of viruses.

The U.S. has an important role to play in helping other countries contend with the public health crises, particularly in the developing world. This is not only for humanitarian reasons. Prompt international assistance—in the form of vaccines, medical supplies, and public health expertise—will pay dividends for the U.S. itself, lessening the COVID-19 risks ahead. In this regard, recent announcements by the administration of their intent to provide significant quantities of vaccines to other countries are highly commendable.

There are downside risks to the outlook from the potential that Congress will legislate a fiscal package that is smaller, or less comprehensive, than the one proposed by the administration. Staff forecasts anticipate an increase in discretionary spending and tax expenditures of US$4.3 trillion over the next decade which translates into a cumulative 5¼ percent increase in GDP during 2022–24. The fiscal plans will also have a meaningful, longer-run effect on aggregate supply. Approval of a smaller and/or less effective package of tax and spending would imply less of a boost to both supply and demand.

A surge in underlying inflation in the U.S. is not a likely outcome. However, it does represent an important risk to both the U.S. recovery and to global prospects. A slower rebound in labor force participation—due to public health concerns, retirements, incentive effects from unemployment benefits, or delays in reopening schools and childcare—could create a larger mismatch in the labor market and push wages and prices higher. Supply chain disruptions could prove to be more persistent. The demand impact of the fiscal stimulus could be larger and more front-loaded than currently assessed (especially given the accommodative monetary stance). The expected supply effects (e.g. on labor force participation, new capital formation, and productivity) could be smaller or slower to materialize. All these possibilities add to the risk that inflation expectations move upwards, creating self-fulfilling wage and price pressures.

In the event that these upside risks to inflation are realized, monetary policy will need to adapt quickly. If realized inflation moves higher but medium-term inflation expectations are well-anchored, the premium will be on communicating clearly that the changing environment calls for a withdrawal of monetary accommodation. However, the anchored inflation expectations will provide room for maneuver, allowing these policy adjustments to take place along an orderly timeline (i.e., similar to that already incorporated into staff’s baseline outlook). While this would imply a somewhat larger, more prolonged inflation overshoot, inflation should still return to the longer-run target relatively quickly. On the other hand, if there are unambiguous signs that inflation expectations have become de-anchored, monetary policy would quickly need to change tack, accelerating the reduction in asset purchases and even having to consider raising policy rates before net purchases have been brought to zero. This would likely create an abrupt shift in financial conditions and risk premia with negative implications at home and abroad. Clearly, it will be difficult to distinguish, in real time, between these two potential out-of-baseline risk scenarios, especially when there is substantial noise from the expected idiosyncratic and transitory shifts in a range of prices.

Spillovers

The impact on global activity from the rapid U.S. rebound is expected to be positive, particularly for Mexico and Canada. Although the Treasury yield curve has moved in anticipation of larger fiscal support, countries are generally benefiting from still-loose global financial conditions. Looking forward, some countries could face greater pressure in the coming months especially if dollar funding costs rise abruptly. This is particularly of concern for leveraged emerging market and developing economies with weak fundamentals, for commodity importers, and/or for those with an exchange rate pegged to the U.S. dollar.

Gaining From Trade

The administration has underscored the need for a “worker-centric” trade agenda that ensures that global trade benefits Americans as workers and wage-earners, not just as consumers. In pursuing these objectives, a removal of the obstacles to free trade would help support U.S. workers and create more and better U.S. jobs (particularly in light of the domestic efforts that are being proposed to increase productivity, labor supply, and the competitiveness of U.S. producers).

It is of significant concern, therefore, that many of the trade distortions introduced over the past four years remain in place. In particular, tariffs have been kept on imported steel and aluminum, washing machines, solar panels, as well as a range of goods imported from China. The administration has also committed to prioritizing U.S. producers in public procurement, strengthening “Buy American” requirements put in place by the previous administration. These policies should be reconsidered. Trade restrictions and tariff increases should be rolled back and “Buy American” provisions should be tightly circumscribed and made consistent with the U.S. international obligations. Doing so would underscore the U.S. traditional commitment to an open, stable, and transparent international trade regime.

The entanglement of trade and currency issues over the last four years—including investigations into currency-based countervailing duties on China and Vietnam and the inclusion of currency provisions in trade agreements—represents a significant risk to the multilateral trade and international monetary systems. Treating currency undervaluation as a subsidy to be countervailed raises concerns both in the finance and trade spheres and risks increased trade tensions and retaliation (with other countries replicating a similar approach, perhaps using their own standards and methodologies). Currency-related trade responses should be avoided. Enforceable provisions on currency policy should not be attached to U.S. trade agreements. Instead, the U.S. should work constructively with its trading partners to better address the underlying macro-structural distortions that are affecting external positions.

Finally, there is a clear need to address longstanding global trade and investment distortions in areas such as tariffs, farm subsidies, industrial subsidies, and services trade. The U.S. should work actively with international partners to strengthen the rules-based multilateral trading system and address these longstanding global trade and investment distortions. Renewed engagement at the World Trade Organization—including restoring the proper functioning of the dispute settlement system—could help facilitate progress on these topics.

Financial Stability Concerns

Systemic financial stability risks appear close to the historical average. However, the very accommodative financial conditions are encouraging continued risk taking and facilitating rising leverage in the nonbanks and corporates. The banking system appears to be in a strong position but leverage in nonbanks has increased and life insurance companies and hedge funds are exposed to lower-rated corporate debt. Fundamental shifts in the U.S. economy are increasing the risks associated with exposures to commercial real estate. There is, therefore, the potential for systemic problems to emerge from, or be propagated by, stresses in corporates or the nonbanks. These concerns are not lessened by recent episodes that highlight the incompleteness of the available information on nonbanks’ risk profile (including for family offices). In the absence of well-targeted macroprudential tools to manage such risks, consideration should be given to building larger buffers in the more regulated part of the financial system as a second-best substitute.

The housing market appears to be on a vigorous upward path which could raise financial stability concerns in the event of a reversal. Mortgage debt, though, has grown by a modest amount (around 5 percent year-on-year) and lending has been concentrated in households with high credit scores. Nonetheless, given the importance of housing for the broader economy, the buoyancy of the residential real estate market bears careful watching.

The unfolding pandemic revealed important shortcomings in the functioning-under-stress of systemically important U.S. markets and institutions (notably the Treasury market). Preventing a recurrence of those vulnerabilities that manifested in March 2020 will require a range of changes across markets and institutions. Possible changes that could be considered include central clearing of Treasury market transactions; the introduction of a standing repo facility to create greater certainty about the availability of market liquidity in times of stress; requiring retail prime and tax-exempt money market funds to move to a floating net asset value structure; subjecting funds to an annual liquidity stress test; and steps to require more liquidity protections from funds (e.g. more binding liquid asset requirements, pre-determined arrangements to lock-in a proportion of an investor’s shares, use of in-kind redemptions, swing pricing, and temporary gates on outflows).

The Challenge of Building Back Better

As the pandemic effects recede, policymakers will have to cope with simultaneous, ongoing transitions that include:

· A pandemic recovery that likely creates lasting shifts (in the U.S. and abroad) in consumer preferences and in the modalities by which the economy operates.

· A move to a low-carbon economy that will necessitate a significant reallocation of labor and capital (e.g. away from fossil fuels and heavy industry and toward renewables) and, potentially, a very different set of skills.

· A demographic transition whereby 22 percent of the population will be over-65 by 2040, the number of Americans over-85 will double by 2035, and the population will be increasingly racially diverse.

· Digitalization and other evolving technologies that will remake both production and consumption in unpredictable ways.

The longstanding flexibility and innovativeness of the U.S. system puts it in a good place to manage these transitions. However, great care should be taken to ensure that these multi-faceted changes do not increase income polarization, further hollow out the middle class, and leave behind a material share of the population (particularly lower-skilled, lower-income workers). It would be a mistake to assume the social and economic impact of these deep-rooted transitions can simply be left to market forces and the hope that a vibrant U.S. economy will lift all boats.

Instead, a multi-dimensional policy approach will need to be developed to support rising living standards for all Americans and prevent workers from becoming disenfranchised or detached from the labor force. A more effective social safety net and broader healthcare coverage will help. So too will increased investments in vocational and academic education. Greater spending on public investment can raise labor productivity and help improve living standards. However, other strategies may well be needed. These could include regional development initiatives to facilitate the transition. There may be a need to subsidize labor mobility (especially if newly created jobs are in areas where the cost of living and housing is higher). Efforts will be needed to ensure schools and colleges are equipped to provide students with the basic technical and critical thinking skills needed for a fast-changing economy. Also, immigration policies will need to be re-examined to ensure there is the right supply of skills needed to meet the demands of the newly created jobs.

A Greener Economy

The administration’s new impetus to reduce greenhouse gases represents a critical, and very positive, change of direction. While many of the steps that will be needed to achieve the administration’s climate goals have yet to be defined, the broad scope of the plans that have already been articulated (and the significant investments that are expected to be made), if realized, will jump-start the transition to a low carbon economy. However, it will be costly and difficult to achieve the administration’s climate objectives without a greater focus on carbon pricing. In particular, a new federal carbon tax would need to be an indispensable component of the administration’s climate strategy. Such a carbon tax could be combined with sectoral-based policies to tilt incentives away from carbon intensive activities. As political support is being built for a carbon tax, regulatory actions could be strengthened to increase disincentives for greenhouse gas emissions.

Announced efforts to reduce implicit subsidies for the fossil fuel industry are important. However, a similar approach is needed for the agro-industrial sector (which accounts for 10 percent of total U.S. emissions, approximately equal to the CO2-equivalent emissions of France and Italy combined). Policies in this area could include a phase-out of agricultural subsidies that incentivize high-emission farming activities, designing tax and subsidy schemes based on farm output and their relative emissions intensity, conditioning crop insurance subsidies to meeting benchmarks for reductions in greenhouse gas emissions, targeting support to fishing and marine farming practices that are compatible with marine biodiversity conservation, and researching lower-carbon agricultural practices.

A More Equitable Society

The U.S. has long faced high rates of poverty. Furthermore, the U.S. has long struggled with racial disparities in economic and social outcomes. Data suggests that minority households continue to be more likely to live in poorer neighborhoods, send their children to under-resourced schools, lack basic health care coverage, face lower socio-economic mobility, be more impacted by climate change, and be the victims of violent crime. The pandemic has worsened these disparities in outcomes, increased poverty, and added to wealth inequality.

The U.S. has important scope to strengthen its social safety nets and increase the progressivity of its tax system. Many of the administration’s proposed policies to mitigate poverty and increase social mobility have been argued for in past consultations. In addition to these proposals, greater attention could be paid to simplifying the multitude of federal, state, and local programs to aid the poor and to redesign social programs to remove “cliffs” (i.e., where programs phase-out abruptly as household income rises). To help ensure the benefits of federal tax credits and other assistance are incident on the working poor, there is scope to raise the federal minimum wage. Finally, it will be important for the administration to build into its policy design an increased focus on supporting those communities that have been historically underserved, marginalized, or adversely affected by persistent poverty.

To read the full mission concluding statement from the International Monetary Fund (IMF), please click here. 

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This disruption also came on top of an already brittle logistics system which is currently grappling with several unprecedented challenges, including equipment shortages and decreased schedule reliability, to name a few. Right now, the reliability that the vessel carrying your goods or expected to pick up your goods will show up on time is roughly 5%. At this time last year, it was around 80%+. And, as ocean carriers introduce more blank sailings or skip ports to start improving the reliability percentage, that means the freight that was skipped is now added to the backlog of containers that will flow into the next vessel.

It’s likely we won’t see a large shift in congestion until the demand levels out.  And while this market does not lend itself to a silver-bullet solution, there are things shippers can do to keep their supply chain afloat:

1. Be open to hyper flexibility

While flexibility is important any time global logistics are involved, the phrase ‘now more than ever’ holds true here. Currently, delays at the Port of Yantian are ranging from 10-15 days, which is a large jump from the 2-7 day delays we experienced just few weeks back.

Switching between ports, modes, and trade lanes has been an active strategy to avoid these delays, but shippers can’t rely on only adjusting once or twice since other shippers are also making these shifts as they compete for limited space. A good example of how this plays out is in the case of congestion at the Port of Oakland. Over the last few months, as the delays at the LA port were mounting, carriers started diverting sailings to Oakland. The result? Oakland is now also severely congested and suffering from the same unpredictability.

Fact remains, ocean carriers are deploying the most capacity on the U.S. west coast (USWC) routing, and as complexities in the interior of the U.S. continue to be exacerbated (i.e. lack of chassis and rail congestions), carriers continue to limit options for containers moving inland. Shippers need to continue to be flexible in enabling containers terminating on the USWC and leveraging transloading and trucking inland options.

When considering flexibility across modes, keep in mind air may be the solution for a few shipments, but it’s not a feasible option to shift all your ocean freight to air. Instead, exploring a mix of modes, like LCL + air, may offer a more realistic opportunity for your company in a more cost-competitive way. Having the right partner with a global suite of service and technology offerings coupled with scale and a strong inland network, is going to make the difference for supply chains in the market.

2. Prepare for ultra-prioritization

Prepare to make tough decisions on what freight is most important to move. This can be especially difficult for companies importing seasonal items, like patio furniture or pools since their selling window is limited.

With today’s demand, most shippers would classify all their freight as a top priority but shipping it all at once may not be realistic. It’s important to sit down and have those conversations now so when the opportunity presents itself for portions of your freight to move, like in an LCL shipment, you’re ready to make the call.

3. Don’t dismiss historical data

I’ve been in the business 20 years and never seen anything like this in a global magnitude, impacting almost all core trades. However, a unique situation does not mean historical data no longer lends itself to helping us find solutions.

The market will improve, and things will get better. However, these issues tend to be cyclical as we look at the data. We need to build resiliency around supply chain and continue to have options to navigate. While some of these events are hard to predict and plan, there are things that you can do, such as diversifying distribution center locations, sourcing, etc.

Final Thoughts

Until the high demand subsides, the above points will be crucial moving forward. C.H. Robinson has always been focused on working alongside our customers to help them succeed – and that’s no less true during times of incomparable volatility. It’s important to keep an open line of communication and to be open to creative solutions. 

Sri Laxmana is the vice president of global ocean product at C.H. Robinson. He is currently responsible for driving the global strategy, revenue and ocean freight volumes.

To read this commentary in full, please visit here

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Since its inception, SelectUSA has facilitated more than $84 billion in client-verified investment, supporting more than 106,000 U.S. jobs. Even during the global pandemic, companies across the world continue to target the United States as the launch pad for global growth, with the SelectUSA team supporting them through client services such as assistance navigating the federal regulatory environment, market research, and counseling.

Following a year of adjusting to our new reality in the wake of the global COVID-19 pandemic, this news comes as no surprise, showcasing the United States’ ability to adapt and overcome unprecedented challenges. At SelectUSA, we are celebrating the retention of our #1 spot in the 2021 Confidence Index, as FDI creates jobs and contributes to economic development across the United States. The ranking in the Index is a direct reflection of the appeal of the U.S. economy and how that economy enables businesses of any size to access a massive consumer base, explore working within a culture that welcomes innovation, and employ a world-class, productive workforce.

When looking to invest, investors look for established markets that are safe and stable, possess strong infrastructure, strong governance, macroeconomic stability, and are known for their progress in technology and innovation. These are all attributes the U.S. market is proud to maintain. The United States offers unmatched diversity, a culture of innovation, and the world’s most productive workforce to companies of all sizes, from startups to multinationals, looking to grow and succeed in the U.S. market.

For foreign companies considering investing in the United States and for economic development teams looking to attract job-creating business investment, there is no better place to connect than the virtual 2021 SelectUSA Investment Summit from June 7-11, 2021. This is the United States’ highest profile event dedicated to promoting FDI, and plays a key role in attracting and facilitating business investment and job creation by raising awareness about the wide range of investment opportunities in the United States and enabling vital direct connections between investors and U.S. economic development organizations.

The 2019 SelectUSA Investment Summit was one of its largest, drawing more than 3,100 attendees to Washington, D.C. Several new announcements were made, including nearly $100 million in new investment projects and the release of SelectUSA’s case-study report on reshoring in the United States. In total, 1,200 business investors from a record 79 international markets joined economic developers from 49 states and territories. The Investment Summit has directly affected more than $48.4 billion in new investment projects supporting more than 45,000 U.S. jobs.

I hope you will join us this year to network, learn more about how to expand through investment, and see firsthand why the United States continues to remain top destination for business investment for the ninth year in a row.

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