Hello from Tokyo, where the weather is beautiful but the Covid-19 situation is not. Japan has maintained a delicate balance until now, controlling the pandemic without closing schools or shops, but the arrival of variant strains is making that more difficult. With less than 1 per cent of the population vaccinated, new “state of emergency” restrictions are expected soon. That will keep the economy subdued in the second quarter.
One person who has been inoculated is Prime Minister Yoshihide Suga, who got his jab early so he could travel to Washington last week for a summit with US president Joe Biden. One of the outcomes of that meeting was a new Competitiveness and Resilience partnership, which includes a series of measures aimed at technology supply chains, and is the subject of today’s note. Charted Waters breaks down the exports affected by the Suez Canal blockage.
A worrying trade threat to global growth
When former US president Donald Trump launched his trade wars in the period between 2016 and 2020, some economists feared it would harm the complex supply chains that bring components from across Asia to assembly lines in China, and turn them into US-designed technology products such as the iPhone. So far, however, those fears have not come to pass.
Speaking at the launch of the IMF’s regional economic outlook last week, Jonathan Ostry, deputy head of its Asia department, said that US-China tariffs had cost about 0.5 per cent of global gross domestic product. But while the tariffs have had the usual effects of trade destruction and diversion, they have not yet split the world into separate economic blocs.
“We don’t see much evidence of this bifurcation, and we do take comfort in that,” said Ostry. “Because the risk of this — these trade tensions morphing into technology tensions and technological decoupling — would inflict a much larger cost on the global economy, maybe an order of magnitude larger in extreme situations, than the ones wrought by the tariff tensions.”
But that decoupling may yet happen. Whereas Trump had his own, idiosyncratic views on trade — focused on the bilateral deficit of the US with other countries — the new Biden administration seems less interested in tariffs and more concerned about technology. Washington took another step in that direction at last week’s US-Japan summit meeting, where the two countries agreed a new Competitiveness and Resilience partnership, which includes $4.5bn to research 5G and 6G mobile technologies, and a pledge to “co-operate on sensitive supply chains, including semiconductors”.
One concern for Washington is how the growing complexity of global supply chains is creating dependencies, with implications for national security. The most obvious example is the reliance of global companies — among them US auto manufacturers — on the Taiwan-based chip manufacturer TSMC, which has struggled to meet demand for its products during the pandemic.
Another, more offensive goal is to exclude Chinese technology from mobile networks and to stop China reaching the cutting edge in chip manufacturing. With Japanese help, the US has a better chance of protecting its manufacturing interests and sidelining China. For example, in semiconductor lithography, the dominant supplier is ASML of the Netherlands. But every ASML machine needs a laser light source, which is such an important part that customers nominate it separately, such as the engines on a passenger jet. There are two suppliers of these lasers: Cymer, a US subsidiary of ASML; and Gigaphoton, a Japanese subsidiary of the construction equipment company Komatsu.
The US has already imposed export controls on China’s top chipmaker, SMIC. The pressure is now on Japan to take similar steps. While Washington’s goal is to maintain the status quo of cheap supply chains and US technological dominance, these policies increase the risk of decoupling, with different standards and parallel supply chains emerging in the US and China. That would cause real economic pain for everyone.
“There would be not only a chilling effect on tech in trade in high-tech products. There would also be a move to much less efficient production across the world,” said Ostry. “These are our recipes for poor productivity and growth performance going forward and we very much hope they can be avoided.”
For Tokyo, tough words at a summit are one thing, but joining a US project to decouple supply chains is a more difficult prospect by far. As if to highlight the risks, Chinese president Xi Jinping has just hit out at Washington’s attempts to decouple. “The rules set by one or several countries should not be imposed on others, and the unilateralism of individual countries should not give the whole world a rhythm,” he said.
Charted waters
Are you a European consumer waiting on the arrival of a fancy exercise bike? Or an Asian building company waiting for an order of construction materials? Then expect delays.
The chart above, from E2open, makers of supply chain software, breaks down the goods held up by the Suez Canal blockage, showing Asian carmakers and builders, along with European households, are particularly exposed. While one might have imagined that Asia-to-Europe trade would be hit hard, we are more surprised about the degree of exposure of flows between India and the US. Data from project44, a logistics data provider, put the total value of goods stuck as a result of the Ever Given’s unexpected berth at more than $80bn.
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