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How China still controls the global supply chains

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China’s exports surged 32.3 per cent over a year in April as global consumer demand strengthened. Exports reached USD 263.9 billion, riding on a stupendous 60.6 per cent rise in the first two months of 2021. Over the last year, China had become part of the largest trade bloc in history covering 30% of world GDP, by signing the Regional Comprehensive Economic Partnership (RCEP) along with 14 other Asia-Pacific countries and finalised a major trade deal with Iran. Despite the trade war and the pandemic, China is flexing its economic muscle yet again.

Immediately after the Covid-19 outbreak, China faced global isolation and was squarely blamed for the coverup of the initial spread. The supply shocks which started in February 2020, have led many global firms and nations to rethink their overdependence on China. Global supply chain networks were expected to diversify themselves and move out of China, decelerating Chinese manufacturing. South-East Asian nations and India were touted as viable alternatives. Although a few companies have moved out, the prominence of China as the global manufacturing hub stays intact and a major reorganization in the global supply chains as the world comes out of the pandemic seems unlikely.


Trade war and the pandemic

Talks on the diversification of supply chains had started much before the pandemic. The US-China trade war which kicked off in 2018, led the investors to contemplate reducing their dependency on China. The high trade barriers imposed by both the countries on each other affected economies around the world and exposed the vulnerabilities of investments concentrated in China. Many companies have already adopted the “China plus one” manufacturing hub strategy to hedge their risk. In 2019, Taiwan passed a law to encourage its firms to build a “non-red supply chain” outside of China and offered cheap finance, tax breaks, and simpler administration to invest in its territory. A study by Japanese investment bank Nomura found that 56 companies had shifted their bases out of China from April 2018 to August 2019.

The onset of the pandemic had further intensified the discourse. In April 2020, Japan had earmarked USD 2.2 billion to fund its firms to move out of China. This policy shift came on the backdrop of Chinese imports to Japan dipping by half in February 2020 due to the pandemic, putting Japanese manufacturers in dire need of components. Despite these challenges, China still holds its ground, because global supply networks tend to play by the rules of the market rather than bowing to geopolitical compulsions.

How China holds its steam

Global investors can hardly ignore the fast-growing Chinese domestic market and its vast consumer base. Moreover, shifting companies across boundaries when businesses are suffering from record-low cash flows is highly unlikely. With governments already bailing out companies by raising billions of dollars, it would be unwise to raise further funds for supply chain readjustments.

The overseas trade infrastructure in China is fairly matured and time-tested. Unlike China, India and the South-East Asian nations (except for Singapore) lack efficient and high-capacity ports that can handle large container ships and direct marine liner services connecting major markets. This means the trade will require transhipments through Singapore or Hong Kong which consumes more time and money. These constraints will affect the economic feasibility of investments outside of China, at least in the near future.

There are certain political and social advantages that China alone can offer which lures investors. The political climate is extremely favourable with no periodic governmental transitions. The one-party rule ensures that companies are provided with a relatively stable and investor-friendly policy framework. The Chinese establishment is well-positioned to give continuous thrust and reliable infrastructure to the manufacturers. An abundant pool of skilled workers along with the availability of matured and deep supply networks further provides China with a much greater comparative advantage.

What future holds

China has acquired the position of global manufacturing hub only after focussed and rigorous work spanning over 30 years. It is expected to see a gradual decline in its low-end production activities in the future, which might shift to other developing nations. In high-end areas, it is still expanding its export market share. China has now put its strategic focus on sectors like energy, mining, and infrastructure development, through its ambitious Belt and Road initiative (BRI), designed to absorb its excessive manufacturing potential.

The “Economic Prosperity Network” mooted during the Trump presidency to move supply chains out of China has lost steam due to a lack of effective financial incentives. The present administration, led by President Biden, has already initiated bilateral trade talks with China. The success of the recently launched Supply Chain Resilience Initiative (SCRI) by India, Japan and Australia to reduce their reliance on China is yet to be seen.

Trade deals like RCEP had cemented China’s position as a global economic superpower. The aversion of the Trump administration to multilateralism had greatly diminished the US prospects and provided ample space for China to push its global ambitions. As the pandemic still ravages various parts of the globe, the Chinese economy is displaying its resilience. The global supply chains, at least for the time being, seems stable and grounded well in favour of China.

Masters student in public policy at Chinmaya Vishwavidyapeeth in Kerala, India, specializing in finance and international relations.

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Build Back Better World: An Alternative to the Belt and Road Initiative?

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The G7 Summit is all the hype on the global diplomatic canvas. While the Biden-Putin talk is another awaited juncture of the Summit, the announcement of an initiative has wowed just as many whilst irked a few. The Group of Seven (G7) partners: the US, France, the UK, Canada, Italy, Japan, and Germany, launched a global infrastructure initiative to meet the colossal infrastructural needs of the low and middle-income countries. The Project – Build Back Better World (B3W) – is aimed to be a partnership between the most developed economies, namely the G7 members, to help narrow the estimated $40 trillion worth of infrastructure needed in the developing world. However, the project seems to be directed as a rival to China’s Belt and Road Initiative (BRI). Amidst sharp criticism posed against the People’s Republic during the Summit, the B3W initiative appears to be an alternative multi-lateral funding program to the BRI. Yet, the developing world is the least of the concerns for the optimistic model challenging the Asian giant.

While the B3W claims to be a highly cohesive initiative, the BRI has expanded beyond comprehension and would be extremely difficult to dethrone, even when some of the most lucrative economies of the world are joining heads to compete over the largely untapped potential of the region. Now let’s be fair and contest that neither the G7 nor China intends the welfare of the region over profiteering. However, China enjoys a headstart. The BRI was unveiled back in 2013 by president Xi Jinping. The initiative was projected as a transcontinental long-term policy and investment program aimed to consolidate infrastructural development and gear economic integration of the developing countries falling along the route of the historic Silk Road. 

The highly sophisticated project is a long-envisioned dream of China’s Communist Party; operating on the premise of dominating the networks between the continents to establish unarguable sovereignty over the regional economic and policy decision-making. Referring to the official outline of the BRI issued by China’s National Development and Reform Commission (NDRC), the BRI drives to: “Promote the connectivity of Asian, European, and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road [Silk Road], set up all-dimensional, multi-tiered and composite connectivity networks and realize diversified, independent, balanced, and sustainable development in these countries”. The excerpt clearly amplifies the thought process and the main agenda of the BRI. On the other hand, the B3W simply stands as a superfluous rival to an already outgrowing program.

Initially known as One Belt One Road (OBOR), the BRI has since expanded in the infrastructural niche of the region, primarily including emerging markets like Pakistan, Bangladesh, and Sri Lanka. The standout feature of the BRI has been the mutually inclusive nature of the projects, that is, the BRI has been commandeering projects in many of the rival countries in the region yet the initiative manages to keep the projects running in parallel without any interference or impediment. With a loose hold on the governance whilst giving a free hand to the political and social realities of each specific country, the BRI program presents a perfect opportunity to jump the bandwagon and obtain funding for development projects without undergoing scrutiny and complications. With such attractive nature of the BRI, the program has significantly grown over the past decade, now hosting 71 countries as partners in the initiative. The BRI currently represents a third of the world’s GDP and approximately two-thirds of the world’s entire population.

Similar to BRI, the B3W aims to congregate cross-national and regional cooperation between the countries involved whilst facilitating the implementation of large-scale projects in the developing world. However, unlike China, the G7 has an array of problems that seem to override the overly optimistic assumption of B3W being the alternate stream to the BRI. 

One major contention in the B3W model is the facile assumption that all 7 democracies have an identical policy with respect to China and would therefore react similarly to China’s policies and actions. While the perspective matches the objective of BRI to promote intergovernmental cooperation, the G7 economies are much more polar than the democracies partnered with China. It is rather simplistic to assume that the US and Japan would have a similar stance towards China’s policies, especially when the US has been in a tense trade war with China recently while Japan enjoyed a healthy economic relation with Xi’s regime. It would be a bold statement to conclude that the US and the UK would be more cohesively adjoined towards the B3W relative to the China-Pakistan cooperation towards the BRI. Even when we disregard the years-long partnership between the Asian duo, the newfound initiative would demand more out of the US than the rest of the countries since each country is aware of the tense relations and the underlying desperation that resulted in the B3W program to shape its way in the Summit.

Moreover, the B3W is timed in an era when Europe has seen its history being botched over the past year. Post-Brexit, Europe is exactly the polar opposite of the unified policy-making glorified in the B3W initiate. The European Union (EU), despite US reservations, recently signed an investment deal with China. A symbolic gesture against the role played by former US President Donald J. Trump to bolster the UK’s exit from the Union. As London tumbles into peril, it would rather join hands with China as opposed to the democrat-regime of the US to prevent isolation in the region. Despite US opposition, Germany – Europe’s largest economy – continues to place China as a key market for its Automobile industry. Such a divided partnership holds no threat to the BRI, especially when the partners are highly dependent on China’s market and couldn’t afford an affront to China’s long envisaged initiative.

Even if we assume a unified plan of action shared between the G7 countries, the B3W would fall short in attracting the key developing countries of the region. The main targets of the initiative would naturally be the most promising economies of Asia, namely India, Pakistan, or Bangladesh. However, the BRI has already encapsulated these countries: China-Pakistan Economic Corridor (CPEC) and Bangladesh-China-India-Myanmar Economic Corridor (BCIMEC) being two of the core 6 developmental corridors of BRI. 

While both the participatory as well as the targeted democracies would be highly cautious in supporting the B3W over BRI, the newfound initiate lacks the basic tenets of a lasting project let alone standing rival to the likes of BRI. The B3W is aimed to be domestically funded through USAID, EXIM, and other similar programs. However, a project of such complex nature involves investments from diverse funding channels. The BRI, for example, tallies a total volume of roughly USD 4 to 8 trillion. However, the BRI is state-funded and therefore enjoys a variety of funding routes including BRI bond flotation. The B3W, however, simply falls short as up until recently, the large domestic firms and banks in the US have been pushed against by the Biden regime. An accurate example is the recent adjustment of the global corporate tax rate to a minimum of 15% to undercut the power of giants like Google and Amazon. Such strategies would make it impossible for the United States and its G7 counterparts to gain multiple channels of funding compared to the highly leveraged state-backed companies in China.

Furthermore, the B3W’s competitiveness dampens when conditionalities are brought into the picture. On paper, the B3W presents humane conditions including Human Rights preservation, Climate Change, Rule of Law, and Corruption prevention. In reality, however, the targeted countries are riddled with problems in all 4 categories. A straightforward question would be that why would the developing countries, already hard-pressed on funds, invest to improve on the 4 conditions posed by the B3W when they could easily continue to seek benefits from a no-strings-attached funding through BRI?

The B3W, despite being a highly lucrative and prosperous model, is idealistic if presented as a competition to the BRI. Simply because the G7, majorly the United States, elides the ground realities and averts its gaze from the labyrinth of complex relations shared with China. The only good that could be achieved is if the B3W manages to find its own unique identity in the region, separate from BRI in nature and not rivaling the scale of operation. While Biden has remained vocal to assuage the concerns regarding the B3W’s aim to target the trajectory of the BRI, the leaders have remained silent over the detailed operations of the model in the near future. For now, the B3W would await bipartisan approval in the United States as the remaining partners would develop their plan of action. Safe to say, for now, that the B3W won’t hold a candle to the BRI in the long-run but could create problems for the G7 members if it manages to irk China in the Short-run.

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COVID-19: New Dynamics to the World’s Politico-Economic Structure

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How ironic it is that a virus invisible from a naked human eye can manage to topple down the world and its dynamics. Breaking out of CoronaVirus, its spread across the globe and the diversity of consequences faced by the individual states all make it evident how the dynamics of the world could be reversed in months. Starting from the blame games regarding coronavirus to its geostrategic implications and the entire enigma between COVID-19 and politics, COVID-19 and economies have shaken the world. Whether it is the acclaimed super power, struggling powers or third world states or even individuals, the pandemic has unveiled the capability and credibility of all, especially in political and economic domains. Wearing masks in public, avoiding hand shake and maintaining distance from one another have emerged as ‘new normal’ in the social world of interaction.

Since the pandemic has locked its eyes upon the globe, world politics has taken an unfortunate drift. From the opportunities for leaders to abuse power during state of emergency (which is imposed in different states to limit the spread of novel Coronavirus) to the likelihood of rise of far-right nationalists to the emergence of ‘travel bubbles’ between states (such as New Zealand and Australia) and the increased chances of regionalism in post-pandemic world to the new terrorist strategies to gain support and many others, all are result of the pandemic’s impact on the political world, one way or the other. Since the end of WWII, the United States has taken the role of global leadership and after the Cold War, it became more prominent as it was the sole superpower of the world. Talking ideally, pandemics are perceived to bring up global cooperation but in the COVID-19 scenario it has started a whole new set of debates, sparkled nativism versus globalization and the sharp divide in global politics has drifted the focus from overcoming the global pandemic through global response to inward looking policies of leaders.

Covid-19 has impacted every sphere of life, be it social, political, health or economic. The pandemic itself being the result of a globalized world has affected globalization badly. It is the best illustration of the interrelation of politics and economics and how the steps in one sector impact the other in this interdependent, globalized world. Political actions such as restricting travel had drastic economic impacts especially to the countries whose economy is largely dependent on tourism, foreign investment etc. Similarly, economic actions such as limiting foreign products’ access had political implications in the form of sudden unemployment and downturn in living standards of people.

For the first time in history, oil prices became negative when its demand suddenly dropped when industries were shut down almost everywhere. Russia and Saudi Arabia’s oil clash which led to increased oil production by Saudi Arabia further complicated the situation. This unprecedented drop in oil demand and consequently its price would only help in the economic recovery of countries. Covid-19 has impacted three sectors badly. First of all, it affected production as global manufacturing has declined due to decrease in demand. Secondly, it has created supply chain and market disruption. Finally, lockdowns affected local businesses everywhere. Bad impact aside, pandemic has led to the change in demand of products. Instead of investment and foreign trade, states having strong medical and textiles industries have got the opportunity of increasing exports. This is because there are requirements of face masks everywhere to avoid contagion. Need for medical instruments have also increased such as ventilators in developing countries specially. 

The only positive impact of Coronavirus is that it fostered environmental cleanliness. It is said that it can avert a climate emergency but the fact is that, as soon as the lockdown will be eased and businesses will begin returning into functioning, economic growth and prosperity will be prioritized over sustainability and we might even witness, more than ever, carbon emissions into the atmosphere.

Novel coronavirus has brought new dynamics to the world’s politico-economic structure. While the world has the opportunity to come close for cooperation and consensus to fight it, we might witness increased regionalism in the post-pandemic world as a cautious measure and alternative where crisis management would be more cooperative and quick. There is a likelihood of the emergence of an international treaty or regime to ban bio-weapons. While the prevalence of political optimism is not assured in the post-pandemic world, we are likely to see the interdependent economic world, as before, to overcome the economic slump and revive the global economy. 

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The free trade vision and its fallacies: The case of the African Continental Free Trade Area

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The notion of free trade consists of the idea of a trade policy where no restrictions will be implemented on imports or exports in the respected countries that have signed such an agreement. Some economists argue that free trade is understood through the idea of the free market being forced through international trade. The African Continental Free Trade Area (AfCFTA) is a trade area that was founded in 2018, and it is the most ambiguous project in the history of the continent. This project has plenty of potential successes, as well as fallacies. Particular African nations are either in favor or against this project, and it is a matter of time before the world understands if this project will reflect the true notion behind the idea of a free trade policy.

The African Continental Free Trade Area: The European Union Vision in Africa?

The African Continental Free Trade Area was founded in 2018 in Kigali, Rwanda. It is believed to be the most prestigious project ever created on the continent. It was created by the African Continental Free Trade Agreement and it was signed by 44 countries. Some of the general objectives of this agreement include: The creation of a single economic market, the establishment of a liberalized market, the allowance of free movement of capital and people, diversification of the industrial development in the continent, e.t.c. In some ways, this project can be compared with the European Union and the vision that it represents for a single market and free movement of goods and people. However, due to the size and the geopolitical tensions of the African continent, there are a few obstacles to the achievement of this project. The European Union itself was a project that took more than half a century to be established in its current form, and still, we can see some problems that remain. With that being said, among the 27 member states, there seems to be more or less a coherent economic and political stability. In the case of the African Union, there are far more obstacles, ranging from huge economic differences, political and religious turmoils, and in general a neglected infrastructure; that might not be able to support a mammoth project like this. Any sort of optimism should be also approached with a realistic perspective when it comes to its implementation, which might not be happening anytime soon, certainly not before 2030.

The Relevance of the Free Trade Notion in Africa

It is important to remember that this project deals with the concept of free trade, and free trade itself is something that economists still argue about. Generally speaking, most economists seem to be in favor of free trade. There is an argument that supports the idea of free trade and any kind of reduction in government-induced restrictions on free trade which will be beneficial to economic growth and stability. On the other hand, some economists suggest that the policy of protectionism could be a more lucrative alternative for an economic policy. There is a suggestion that the liberalization of trade will result in an unequal distribution of losses and profit gains while economically dislocating a large number of workers in import-competing sectors.

In the case of the AfCFTA however, the opinion of Ha-Joon Chang, a South Korean economist, might be more relevant. He suggested that if there is going to be any kind of free trade liberalization in the African continent, some prior steps should be taken. For example, the improvement of the institutions in those developing African nations must be achieved to have sustainable economic growth and development. In addition, the idea of demanding from the developing nations to achieve institutional standards that we see in the developed nations such as the U.S or Great Britain, but have never before been achieved in those countries, will only hurt these nations since they might not need or even afford the implementation of these institutions that we see in the West. There is a valid point in the argument because the concept of the AfCFTA might indeed benefit some nations in Africa, but still, it will not develop to its full potential to benefit all 44 countries that have signed the agreement. This is because this project involves countries with different views and needs. Some of them see the AfCFTA as a blessing for the liberalization of the African economy, while other nations are more skeptical about it, thinking that this project will result in African states “biting off, more than they can chew”. This dichotomy is visually striking when we compare some African nations and examine the true reasons why they are in favor or against the AfCFTA.

The African Dichotomy

Rwanda is a small nation in East Africa, having at least 12.5 million people, with a total estimate of its GDP being close to $33.45 billion. A very impressive number, if someone considers the fact that in 1980 its GDP was barely $2.1 billion. It is also the nation that is strongly in favor of the ambitious free trade project in the continent. It is estimated that from 1994 until 2010, Rwanda’s economy grew an average of 6.6%. This is mostly based on the fact that the president of the country, Paul Kagame, led a strong campaign towards the liberalization of the country’s agricultural sector. His reforms allowed the producers to benefit from this liberalization boom while boosting productivity through capital investments. It is clear by now that any sort of project that aims to liberalize the economies of other African nations will be beneficial to Rwanda that aims, as President Paul Kagame mentioned before, to make Rwanda the “Singapore of Africa”.

However, some countries pose some key arguments that need to be addressed for the AfCFTA. There are concerns regarding the massive difference between populations in many African states, as well as the potential of the markets to sustain such a project. With that being said, there is still optimism from some experts that view this project as a win-win situation for Africa since it will allow a trade-led diversification away from Africa’s commodity dependence and focus towards industrial development. On the other hand, this optimism is being taken with a “pinch of salt” from certain African nations, like Nigeria. Nigeria is a nation of at least 205 million people with a total GDP of $1.087 trillion. Nigeria was one of the last nations to sign the agreement, but not before firmly opposing the deal. The strongest argument that Nigeria had against the deal, was the fact that Nigeria could do nothing to undermine the local Nigerian manufactures and entrepreneurs of the country. There was strong domestic opposition to regional trade liberalization and concerns about the government’s ability to implement it effectively. In the same line of thought, Togo’s Foreign Minister Robert Dussey did not hide his concerns. In an interview with Deutsche Welle, Mr. Dussey stressed the fact that many African countries will need to be firstly well-equipped with the right technical tools to meet the challenges of such an enormous project. He shared his views that some rich nations in the West are not so keen to see the potential industrialization of the African continent: “African development is foremost the responsibility of Africans. We have a problem with work for our youth. It is important that we have strong industries to have work for the young”, said Mr. Dussey for Deutsche Welle.

Can we safely say that the AfCFTA project complies with the economic policy of free trade? Theoretically, it does. The project has the potential to change the socio-economic status of all the countries involved. Even if some nations are more industrialized than others, and can take full advantage of the opportunities for manufactured goods, other nations that might not be so privileged can benefit by linking their economies into regional value chains. This can happen again theoretically if there is a reduction in trade costs and facilitating investments. However, one should not overlook the growing challenges of this project. It is not feasible to suggest a 90% tariff cut, a unified digital payments system, and an African trade observatory dashboard that the AU Commission promises in the next five years. For the simple reason that you cannot have this liberalized economic system when most of the African countries are suffering from socio-political instability. How can a system which in some ways is based on the European Union, work when there is such a striking inequality among African nations? There is a lack of industrial infrastructure to support such a project, and it will be more beneficial to address these regional problems before expanding in a global vision. One day Africa will reach its full potential, but not in the next five years and not in the next ten years. Such an agreement is a blessing, but it needs careful examination before being implemented; otherwise, we will talk about a disaster in the African continent that could potentially bring more inequality and regional tensions.

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