Marc Levinson

Tag: Trade

  • A Different Forecast

    Those who follow international trade pay close attention to forecasts of economic growth, consumer spending, and business investment. No surprises there: it seems obvious that if consumers are spending freely, imports will be in greater demand, while if a country’s economy is headed downward, its appetite for foreign goods will wane.

    A new report from the United Nations Conference on Trade and Development, released in early December, requires a rethinking of the forces driving trade in goods. Since the global financial crisis struck in 2008, UNCTAD finds, the volume of trade has generally moved in tandem with the global financial cycle, except during the COVID-19 pandemic.

    UNCTAD’s findings draw a measure of the global financial cycle developed by economists Silvia Miranda-Agrippino and Hélène Rey. Their measure incorporates hundreds of time series covering things like interest rates, cross-border capital flows, and leverage of major banks. UNCTAD finds it to be highly correlated with the volume of trade, showing that “Global financial conditions and world trade are heavily interlinked.” It adds, “many economic textbooks do not consider this dimension when they discuss the determinants of trade flows.”

    This work yields some surprises. It shows, contrary to conventional wisdom, that when the U.S. dollar strengthens against other currencies, the impact on U.S. imports is negative, not positive. It also finds that a rise in the VIX index of U.S. share-price volatility triggers an immediate global decline in trade as firms hunker down in the face of unstable economic policies. While trade in commodities and energy products doesn’t move with the financial cycle, trade in containerized freight and motor vehicles is highly correlated — suggesting a relationship between financial markets and freight rates that trade watchers might want to examine more closely.

  • Cross-purposes

    President Trump, as he has made clear, wants to shrink the U.S. trade deficit. For that reason alone, it’s mystifying that his administration is attacking a sector of the economy in which the United States enjoys a substantial trade surplus.

    I’m talking about education. The administration has decided to crack down on foreign students in the United States by making it harder to get student visas, scouring social media to identify scholars it thinks should be excluded, and revoking thousands of visas of students who’ve been in the country for years. “A visa is not a right. It is a privilege,” Secretary of State Rubio pronounced on May 20.

    Of course no student has a right to a visa. But in addition to other undesirable effects, such as driving away talented scholars who could contribute to U.S. prosperity, clamping down on foreign students directly conflicts with another Trump priority: reducing the U.S. trade deficit. In 2023, the United States ran a $41 billion surplus in education-related trade, most of it due to foreign students’ living expenses and tuition payments at U.S. universities. If fewer foreign students come, either because they can’t get visas or because they choose friendlier destinations, U.S. educational exports will shrink, eliminating jobs in the process.

    As I argue in Outside the Box, the next phase of globalization will have more to do with trading ideas and services than with transporting goods in container ships. By discouraging trade in educational services, the U.S. risks missing the boat.

  • The Population Bust

    The notion that demographic change will slow the flow of trade in manufactured goods met some resistance when I suggested it a few years ago in Outside the Box. Some countries, notably South Korea, China, and Mexico, are heavily dependent on manufacturing, and the idea that making stuff and exporting it will lose importance doesn’t go down easily. In the United States, the political imperative of adding factory jobs is somewhat at odds with the reality of weak demand for many of the things factories produce, not least motor vehicles.

    In many countries, consumer spending on services is outpacing spending on goods by a considerable margin, due in good part to the declining the number of new families and the increasing number of older people, whose consumption tends more to services than to goods. “The EU’s population is shrinking faster than expected,” according to a report in the Financial Times. The same is true in China, Japan, and Korea. In all these countries, and some others, population stagnation or shrinkage is discouraging home building, which in turn is holding down demand for imported refrigerators, carpets, and the other sorts of things people put in their new homes.

    I don’t mean to suggest that stuff is going extinct, but these factors imply that goods trade will not be robust in many parts of the world. They also point to a shift in trade patterns that is already underway, with Africa and South Asia, where the number of new households is still growing, playing more prominent roles. These trends are likely to have major impacts on ocean shipping and on ports in Europe, North America, and East Asia that are under continuing pressure to expand. It’s curious that we don’t hear much about this.

  • More than Cheap Labor

    It’s been no secret that Chinese companies have been building factories in Mexico to protect their access to the United States market in the face of high U.S. tariffs on many Chinese exports. The Financial Times has now put numbers on this: using figures from Xeneta, a data analytics company, and Container Trades Statistics, a data supplier, the FT estimates that the number of containers from China imported into Mexico rose 28 percent in the first three quarters of 2023, compared with the same period of 2022.

    This needs to be kept in perspective: Mexico’s containerized imports from China over those nine months, the equivalent of 881,000 twenty-foot containers, are about what the United States imports directly from China in a single month. Nonetheless, it’s obvious that many Chinese companies see Mexico as a ticket to the United States. Many Mexican exports enter the United States duty-free under the U.S.-Mexico-Canada Agreement. The remainder typically face very low tariffs. While the punitive duties the United States has imposed on many Chinese products since 2018 generally apply to Chinese-made goods shipped to the United States through Mexico, they may not apply to goods that are in some way transformed in Mexico, such as Chinese-made components used to make other products in Mexican factories. Several Chinese vehicle manufacturers are reportedly scouting sites for Mexican assembly plants from which they could export to the United States with low or zero tariffs, causing considerable distress in Washington.

    Predictably, a blowback is underway, with talk about rewriting the rules of origin that determine what is a Mexican product for purposes of U.S. Customs. If done right, this could actually benefit Mexico.

    At present, there is little Mexican value added other than factory labor in most of the manufactured goods that come across the border into the United States. Nearly half the value in Mexican exports originates in other countries. If Chinese-owned factories in Mexico must incorporate more North American value added in order to receive U.S. trade preferences, they will likely need to undertake more sophisticated activities in Mexico, such as making more of their own inputs there and engaging more Mexican engineers, designers, and programmers. That could help the Mexican economy become more than a cheap labor play, which the 30-year-old free-trade arrangement among Mexico, Canada, and the United States has distinctly failed to do.

  • Misguided Missiles

    I’ve received several inquiries from journalists asking my thoughts about how the attacks on commercial ships off the coast of Yemen are likely to affect trade and shipping. There’s no question that the unfriendly fire of the Houthis and their Iranian sponsors since November 19, when black-clad fighters carrying automatic weapons dropped from a helicopter onto the deck of a car-carrying vessel in the Red Sea, is outrageous. But for the world economy, the disruption of shipping as carriers avoid the Red Sea and the Suez Canal is an inconvenience, not a catastrophe.

    Some people seem to associate the current goings-on with the supply-chain chaos during the COVID-19 pandemic. Then, port closures, crew shortages, and delays moving cargo into and out of container terminals led to hundreds of sailings being cancelled at a time when demand for manufactured goods was unexpectedly strong. At one point, more than 500 container ships were queuing outside harbors on three continents to load or discharge. Freight rates reached the stratosphere. Manufacturers and retailers had no idea where their goods were or when they might be delivered.

    Conditions today are quite different. Before November 19, the cost of shipping a 40-foot box had tumbled to the lowest level in four years and a record level of shipbuilding portended excess capacity well into the future. The Houthis’ attacks have led many carriers to sail around Africa, lengthening the trip between Shanghai and Rotterdam by eight days to three weeks, depending on how fast the carrier wants to steam. The longer voyage times have sopped up excess capacity, restoring the pricing power container carriers lost with the end of the pandemic. They must pay more for fuel, wages, and mortgage or lease payments on each trip, but save by avoiding Suez Canal tolls. Higher ocean freight costs will likely be reflected modestly in consumer prices, but they are not likely to turbocharge inflation.

    Although ocean transport is taking longer than it did before the Houthis took aim at merchant shipping, the impact of those delays is related mainly to private companies’ decisions about how to structure their supply chains. That’s why I find it troubling that the United States and several other countries claim to be attacking Houthi fighters and weapons systems “to defend lives and the free flow of commerce.” When we read that shipping delays have led to retailers lacking goods to sell and an auto assembly line closing for want of parts, we should remember that companies, not governments, determine where to obtain inputs and how much inventory to hold in the warehouse. Some companies work harder than others to make their supply chains resilient. Protecting those that have chosen to accept greater risk of supply-chain disruption is not a good reason to shoot missiles at Yemen.

  • China’s Intangible Future

    China, as everyone knows, is a manufacturing powerhouse: it accounted for nearly one third of manufacturing globally in 2022, according to United Nations data. Factories were responsible for 28 percent of China’s economic output (compared to around 10 percent for the United States). So it’s understandable that on a recent visit to talk about my book Outside the Box, my hosts were particularly eager to discuss my assertion that in the future, globalization will have more to do with spreading ideas than with moving stuff.

    How does one support such a claim? Normally, one would bring data to bear, perhaps creating a simple chart showing a rising line. In this case, though, the data aren’t worth much. Even people who specialize in tracking international trade at places like the World Trade Organization and the United Nations Conference on Trade and Development admit that they don’t have a handle on the exchange of intangibles across borders. If an American tourist buys a ticket on Lufthansa or rents a hotel room in Tokyo, statisticians can tally a U.S. import of services because a monetary transaction occurs. But if engineers in France and Korea collaborate on the design of a video game, their sharing of code may not register as trade. Some of the value of digits moving internationally shows up in economic statistics as a return on investment, but much of it doesn’t show up at all.

    While we don’t know the quantity of intangibles flowing across borders, there are some relevant things we do know. One is that services, from research and development to after-sales maintenance and repair, account for a growing proportion of the value of manufactured goods. Another is that consumers in the world’s wealthy countries, and even in some middle-income countries, are devoting increasing shares of their spending to services and diminishing shares to goods.

    My hosts in China, I suspect, are concerned that if goods trade grows slowly, China’s vast factories and gigantic container ports won’t be fully utilized. They may be right. That’s a good reason for Chinese firms and their workers to focus more on creating intangible value, such as by inventing products and selling services, and focus less on stamping or weaving or assembling goods. But the government’s crackdown on data flows shows that it may not be ready for Chinese firms to export intangibles as vigorously as they export stuff.

  • The Supply-Chain Bureaucracy

    Back before the covid-19 pandemic — it seems decades ago, not a mere four years — nobody in Washington gave much thought to supply chains. Queues of container ships outside ports, rate increases of 500 percent or more for ocean shipping, long delays in shipments of imports and exports, and factory closures due to lack of critical components changed all that. President Biden appointed a supply-chain “czar” to straighten it all out, and claimed victory when port congestion cleared and freight rates returned to normal (although the end of the pandemic had far more to do with that than federal action). Transportation Secretary Pete Buttigieg even asserted this week that “part of what’s led to disinflation is the attention we paid to shipping costs,” although there’s not much evidence that Biden’s criticism of “foreign-owned shipping companies” is responsible for bringing inflation down.

    Now, the Biden Administration has named a White House Council on Supply Chain Resilience, whose 27 or more members — the membership list includes unspecified “other senior officials” in addition to a bunch of cabinet secretaries — are supposed to advance a “long-term government-wide strategy to build enduring supply chain resilience.” What does this mean? According to the press release, the plan includes funding to “strengthen our domestic food supply chains and create more opportunity for farmers and entrepreneurs in 37 states and Puerto Rico”; “to develop a nationwide plan for smart manufacturing”; “investment in clean energy supply chains” in communities affected by closures of coal power plants; and so on.

    It’s all interesting stuff. But you wouldn’t know from the Administration’s announcement that most supply chains are organized by private companies to meet their business needs. Many of those companies are currently trying to figure out how to make their supply chains more resilient in the face of disruption without raising costs so much that they sacrifice market share. This is a problem they must resolve in cooperation with their suppliers, freight forwarders, transportation carriers, and customers. They don’t particularly need the help of an expanding federal supply-chain bureaucracy.

    It’s not that the federal government has no useful role here. The Administration has done a lot to provide better data about the flow of freight into and within the United States. The Bureau of Transportation Statistics’ supply chain and freight indicators, first published during the pandemic, are particularly valuable. And defense supply chains are a legitimate federal concern. But the United States would be better served by pursuing international arrangements to smooth trade through supply chains, such as the 14-country Indo-Pacific Economic Framework it negotiated in 2022 but has since turned its back on, than by an all-of-government effort to manage the flow of goods in a $25 trillion economy.

  • Sustainability and Trade

    The cost of mitigating climate change is hard to put a finger on. That’s one conclusion from a recent conference on climate change and macroeconomics at the Peterson Institute for International Economics in Washington. Many of the economists who spoke argued that there is no conflict between sustainability and prosperity; in their view, keeping global temperatures at 1.5 degrees Celsius above pre-industrial levels, as urged by the Intergovernmental Panel on Climate Change, will require minimal economic sacrifice, at least in most countries. Others forecast that higher temperatures and more frequent severe weather events will make output and prices more volatile, or that the cost of renewable energy will retard economic growth. At this point, you can pick whichever conclusion you prefer.

    What I found most notable about this meeting was that international trade wasn’t on the table. To me, it seems likely that concerns about climate change will depress trade. Measures like the European Union’s Carbon Border Adjustment Mechanism and proposed U.S. legislation requiring studies of the emissions intensity of many imports will erode some of the cost advantage of foreign products. In addition, shipping powered by sustainable fuels may be far more expensive than shipping is today. For trade in liquor and tablet computers, higher freight costs may not matter, but shipping low-value goods long distances — the United States exported 4 million metric tons of hay last year — may become prohibitively costly.

    The importance of international trade in stimulating innovation, increasing competition, and making economies more dynamic is no secret. If measures to control climate change prove to be a drag on trade, they are likely to be a macroeconomic drag as well. That’s a possibility economists concerned with sustainability should not ignore.

  • The Container Crunch

    When a pandemic is raging, what do you do with your money?

    This is a question which has never much preoccupied economists, but we now know the answer: when you can’t fly off on holiday, take in a concert, go out to dinner, or send your toddler to child care, you spend your money on stuff. Especially in Europe and North America, we’ve seen a surge in spending on consumer goods, many of which are imported from Asia.

    That’s one reason ocean shipping costs are soaring. A year ago, sending a truck-size 40-foot container from Qingdao to Long Beach cost $1,500 or so; these days, unless there’s a long-term contract that locks in a lower rate, the price is three times that. Some shipments from Asia to Europe are said to have cost more than $10,000 per box, four times as much as last summer. On average, ships are much larger than they were just a few years ago, complicating loading and unloading and often leading to delays even on short-haul routes. Many sailings are being cancelled due to ships being out of position, which makes capacity even more scarce and allows carriers to hike prices.

    But that’s not the whole story. The stunning increases in freight rates are the consequence of a prolonged shake-out in container shipping that has left about 85% of global capacity in the hands of three alliances of ship lines. The carriers have scrapped older ships while curbing orders for new ones, so the overcapacity that plagued the industry as recently as last summer, when more than 6% of the global fleet was idle, has pretty much vanished. Although the companies in each alliance remain independent, the alliance structure allows the industry to maintain a certain discipline when it comes to building new ships. There are still 20 or more companies outside the alliance system, but they collectively control so little capacity that they don’t much interfere with the dominant players.

    For the moment, everybody in the industry is making real money for the first time in a dozen years. Once the pandemic-driven boom is over, though, the growth of international trade will likely turn sluggish as consumers in upper-income and middle-income countries up their outlays on services, including education and healthcare. If the world economy grows 4% to 5% per year, as the International Monetary Fund expects, the number of containers moved by sea might rise 2% to 3% annually, on average. That is well below what shipowners were expecting when, a decade ago, they started ordering vessels each able to carry more cargo than 10,000 trucks.

    Equally problematic, most of the growth in container shipments will come on routes from East Asia’s factory hubs to South Asia and Africa. These routes are relatively short, which means that over the course of a year, a vessel can carry twice as many containers between Shanghai and Mumbai as between Shanghai and Rotterdam. The industry will probably require less tonnage as trade patterns shift. My guess is that profits will be harder for ship lines to come by, and old timers will fondly recall the days when it unexpectedly cost more to ship a metal box from East Asia to Europe than to fly there first class.