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Hello and welcome to Trade Secrets. A quietish start to the new year as far as the renewal of trade war or the building of a durable peace is concerned, with only the will-they-won’t-they about a combative EU response to the China-Lithuania situation to keep us entertained. (Answer: they won’t.) India tried and predictably — you might say deliberately — failed in a stunt to demand a virtual ministerial meeting at the World Trade Organization on the subject of Covid-19 patents in an attempt to give that fading issue a bit of a boost. Today’s main piece looks at the supply chain issue, in which the return to normality has been postponed, and how hard it is to work out what’s going on. Charted waters this week focuses on China’s record trade surplus.
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Barometers of bottlenecks
A return to supply chain normality deferred maketh the heart sick, as the Book of Proverbs in the Old Testament has it, almost. As we noted last week, it looked towards the end of last year as if the snarl-ups in ports and logistics across the world were easing somewhat. Freight rates were coming down, delays seemed to have peaked.
Then came Omicron. China’s minimum-tolerance attitude towards Covid has amplified the new variant into big labour shortages in manufacturing, distribution and ports. It’s obviously a negative supply shock rather than the problem of excess demand that we continue to reckon has been the main issue. If we’re right — and assuming the Omicron wave subsides — the variant will delay and complicate but not short-circuit the improvement. But it remains possible that we’re wrong and indefinite supply-side problems will choke world goods trade.
For those (exporters and importers, shipping lines, investors) who don’t have journalists’ luxury of watching and waiting, how will they know where we’re going? As usual, economists in investment banks and consultancies are quickly out of the traps with gauges and indices.
In November the White House created its own “dashboard” of indicators, but it seemed mainly designed to support the narrative that President Joe Biden had saved Christmas by getting ports going. (There’s a detailed rebuttal of that case by the Cato Institute’s Scott Lincicome here.)
The correlation of these indices to actual movements in trade volumes and prices remains unproven. The New York Fed economists promise a future piece relating the index to movements in inflation, which we’ll watch with interest. But data on goods trade arrives with a time lag and is volatile and prone to revision.
You also need to be very careful when looking at narrowly focused and high-frequency data points.
The FT’s Claire Jones explains how Germany’s reliance on manufacturing has made it particularly vulnerable to supply chain disruptions.
China’s trade surplus soared last year as it rode the recovery in global goods demand. Its stadium straddles England’s border with Wales, where lockdown restrictions are tougher.
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