The US is about to launch an open attack on global trade stability. Can China defend the existing order?
Dec 21, 2024
The threat by president-elect Trump to place 100% tariffs on any country that backs any other currency to replace the US dollar is an open attack on global trade stability.
“Snap, crackle, pop.” No, its not the sound of an American breakfast cereal. It’s the sound of global trade and supply chain stability under strain and it’s suddenly become a pressing issue.
The pressures tending towards instability bring escalating costs, increased geopolitical tensions and rising protectionism, all of which add fuel to global inflation.
China is a strong defender of trade stability, countering destabilising forces with support for global mechanisms and innovative domestic policy changes.
The COVID period identified unexpected vulnerabilities in supply chain dependency. This triggered a move towards diversifying supply chains and product providers, representing a change in emphasis rather than a major disruption to global trade.
Near-shoring and friend-shoring reflected a change in emphasis but this became a greater threat to global trade when it was combined with trade protectionist policies, often based around tariffs and unilateral sanctions imposed outside of global trade agreements.
The political weaponisation of trade relationships, and the consequent potential for trade instability, has accelerated in recent weeks and added urgency to the quest for ways to stabilise the operation of global trade and ensure that trade settlement can be achieved without interference. These objectives are not achieved by threats of imposing 100% tariffs. These objectives are achieved by global co-operation and support for the international platforms that enable and enhance global trade.
Speaking at the China International Supply Chain Expo in Beijing, Vice-President Han Zheng said that China is willing to work with all countries to promote the establishment of an open world economic system and ensure the stability and smooth operation of global industrial and supply chains.
At a high level, these open trade organisations include APEC, G20, WTO, RCEP and other trade agreements operating within the framework that supports global trade. China’s support for these global free trade objectives is very important because it stands in contrast to the policies implemented by President Biden and fore-shadowed by President-elect Trump.
At an operational level the challenges are more practical and solutions increasingly rest on the productivity gains and cost reductions that flow from increased digitalisation of logistics chains. China is committed to clearing these obstacles, particularly through the advanced application of blockchain technologies for both the domestic economy and the global trade economy.
Zhang Shixin, deputy secretary general of the National Development and Reform Commission, said recently that in the domestic economy “Overall, there is still relatively large room to lower logistics costs across society.”
Three main features of the planning in this area involve highlighting areas of reform and innovation; clearing bottlenecks; and systematic planning and promotion efforts. These policy initiatives will help China reduce its per-unit logistics cost by 6.3% in three years by improving logistics efficiencies in its domestic market and by boosting offshore competitiveness despite the increase in protectionist trade policies.
Efficiency improvements in port-storage facilities are required to service the new export area of electric vehicles, lithium batteries and solar panels. The plan also targets reforms in the rail and road freight sectors, calling for an open logistics data-sharing mechanism across transport and customs departments. Achieving these objectives relies on advancing digital transformations by making better use of technologies such as big data, 5G, and the BeiDou satellite navigation system.
Gaining the same efficiencies in the global trade environment starts with maintaining the stability of global supply chains. The challenges confronting businesses worldwide include escalating costs, geopolitical tensions and rising protectionism.
China will “ address chokepoints in international logistics … and enhance the service and security of international supply-chain logistics,” Meng Xiaoyu, deputy director of transport services at the Ministry of Transport, said recently.
Often these chokepoints are created by poor supply chain scheduling combined with archaic customs and border clearance processes. This type of process productivity is an underrated area when it comes to tackling cost reduction and supply chain efficiency.
The adoption of distributed ledger technologies, often known as blockchain, is a key element in process efficiency achieved by the effective digitalisation of supply chains.
Hand in hand with digital efficiencies in the logistics of the supply chain comes the requirement for smooth settlement of international trade obligations.
The foundation of global trade stability is the ability to settle trade in a currency of choice. Historically this has often been the US dollar and this has enabled the recent manipulation of the cross border trade settlement system to reflect political objectives.
In response to this risk, an increasing number of countries are exploring alternative currency settlement methods, particularly now that the petro-dollar link has been broken. Global trade stability is improved when countries are able to settle trade in yuan, in dollars, in yen or some other digital currency of their choice.
The speed of alternative trade settlement mechanisms supported by blockchain technology reduces counterparty risk and the risk of adverse currency movement by shortening the trade settlement period from days to minutes.
The threat by president-elect Trump to place 100% tariffs on any country that backs any other currency to replace the US dollar is an open attack on global trade stability.
It also has the unintended consequence of undermining the US economy. Those countries will stop buying the US debt treasuries that currently fund the extravagant US lifestyle based on accessing never-ending debt. The result of un-funded debt is hyper-inflation which further undermines global trade stability.
Maintaining the stability of global supply chains is essential for addressing challenges confronting businesses worldwide and it rests on three pillars. The first pillar is to implement efficiencies in the domestic market logistic and supply chains.
The second is to apply digitalisation efficiencies to global supply chains to ensure stability and security.
The third pillar is support for smooth and rapid trade settlement achieved through the use of enhanced block-chain solutions which do not rest exclusively on the use of the US dollar.
China is a leading supporter of an open world economy which enhances global trade and rejects protectionism. China aims to foster a group of internationally competitive modern logistics enterprises to enhance the resilience and security of industrial and supply chains.
Daryl Guppy
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". He is a former national board member of the Australia China Business Council. The views expressed here are his own.
Contributions to Pearls and Irritations
Your contribution will fund quality independent comment and analysis in Pearls and Irritations
Contribute
