April 28, 2023: Global News Roundup
Goodbye globalization, hello mercantilism—Protectionism, economic warfare, and a return to business as usual
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.
Last week’s post left off with data on the global arms trade, and I want to pick up from the same place, with weaponry, but the economic kind. Lately, governments are rushing to implement new kinds of economic policies, ones that involve heavier regulation of global trade and finance and that benefit themselves and their allies at the expense of their rivals and enemies. In the history of global capitalism, this kind of system—called a “mercantilist” global economy—is the rule, not the exception. Over the past 500+ years, there are really only two brief periods economic historians characterize as having mostly free trade and open global markets, from roughly 1840-1880 and again from roughly 1990-2008, as the British and American empires, respectively, cajoled, coerced, and forced global markets open. In other words, the hyper-globalized economy that we’re used to is historically pretty rare, while mercantilism is ‘business as usual’.
For most of the modern period, rival states not only invaded, occupied, colonized, and engaged in wars over trade routes, territory, and resources but they also deployed tariffs, quotas, trade bans, subsidies, capital and currency controls, taxation, nationalization, expropriation, and other “protectionist” and interventionist policies to help them industrialize and grow, attempting to increase their share of the world market and reduce that of their competitors. For these reasons, mercantilist economies are often likened to a “zero-sum” game—like checkers or chess—referring to a game in which one player wins only if the other loses. The image below depicts a scene from the First Opium War (1839-1842), waged by Great Britain against China to protect Britain’s lucrative “triangle” trade between colonized India, China, and the British home market. The war greatly weakened the Chinese empire, permitting the British and eventually other Western powers to make trade and other economic inroads across China.
(Image: “The taking of the Island of Chusan by the British, 5th July 1840”, Lithograph after Lieutenant-Colonel Sir Harry Darell (1814-1853), 7th Dragoon Guards, published by Day and Son, London, 1852. No 2 in the series 'China India Cape of Good Hope and Vicinity a Series of Thirteen Treble-Tinted Views'. Courtesy of the UK’s National Army Museum, here).
As this week’s news illustrates well, mercantilist, wartime economies work differently than more open, peacetime economies. Governments intervene in markets more frequently and with a heavier hand to direct trade, support critical industries, stabilize prices, and ensure adequate supplies. Supply chain disruptions and logistical challenges proliferate owing to hardened borders and dangers on the roads, rails, and seas. And warring states use economic weapons alongside traditional arms to disadvantage and injure their enemies. We’ve gotten a taste of this over the past year or so, for example, with supply chain disruptions stemming from the Ukraine war, US bans on exports of high-end computer chips and chip components to China, and Western sanctions on Russia cleaving the global oil market in two. Global news this week showed an acceleration of mercantilist policy trends, with international tensions and military conflicts intensifying in the background.
Starting with the Chip Wars, China’s recent moves against US semiconductor manufacturer Micron demonstrate how trade wars can spiral out of control as each party to the conflict retaliates, tit-for-tat, against the economic policies of the other. According to the Financial Times, “Beijing finally went on the offensive earlier this month, with the Cyberspace Administration of China announcing an investigation on national security grounds into Idaho-based memory chip manufacturer Micron Technology.” Micron earns more than 10% of its revenues via sales to mainland China, with experts noting that memory chips were an obvious target for retaliatory measures given that they are more easily replaced by competing suppliers from other countries should China ultimately ban Micron imports on “security” grounds. Among other accusations, China claims that Micron lobbied US officials in Washington to impose sanctions on China.
Then, earlier this week, news surfaced that the US Government asked officials in South Korea to prohibit Korean chip manufacturers from filling the supply gap left by Micron in the event that China rules against the US company. The unprecedented request came as South Korea’s president was preparing to visit Washington DC, and the Korea Herald reported that President Yoon Suk Yeol was “hoping to find a breakthrough in business uncertainties surrounding increasingly protectionist policies in the all-important market.” The article went on to explain the bind in which Korea now finds itself, with massive uncertainty across the chip sector owing to the growing US-China rivalry:
“South Korea's chip industry, led by the world's top memory chip makers, Samsung Electronics and SK hynix, has been feeling the pressure caused by the US' CHIPS Act, which was initially intended to attract foreign investment to boost the US’ semiconductor industry. Introducing a chips support program, the US has required global chipmakers to share with them sensitive business information and excess profit in order to receive the subsidies deemed critical for operation on US soil. With the intention to foster competitive edge in the chips industry, especially against its strategic rival China, the support program also limits the subsidy recipients from expanding production volume and investment in any "country of concern" – among which China is included -- for a decade, posing burdens for chipmakers that have production facilities in China.”
Not only would the Micron case mark the first instance in which China went on the offensive against the US in the Chip Wars, but this is also “first known occasion that [the US] has asked an ally [in the Pacific] to enlist its companies to play a role”. China is, by far, Korea’s largest trade partner, and Chinese state media this week referred to the US as a “bully” that was “full of arrogance”, trying to “force South Korean chipmakers to share the losses American companies suffered in the Chinese market”.
Korean officials weren’t the only ones trying to navigate the rising tide of protectionism amidst growing US-China tensions. The South China Morning Post reported this week that Italian Prime Minister Georgia Meloni was “leaning toward pulling out of an agreement to join China’s controversial Belt and Road Initiative, which has funded US$900 billion in infrastructure projects globally, according to people familiar with the government’s thinking.” Italy broke with the G7 in 2019, becoming the first member to sign a memorandum with China about joining the Belt and Road Initiative. The recent shift in thinking and policy followed a meeting with Taiwanese officials that apparently persuaded Italy to strengthen economic ties with the contested island. Asia Times noted that Italy “yielded” to Taiwan on the matter in the hopes of attracting local investment from TSMC, Taiwan’s largest semiconductor manufacturer. A story in the Taipei Times, simply entitled “chips can be beneficial for diplomacy”, characterized Italy’s recent moves to support Taiwan as part of the European backlash to French President Macron’s more ambiguous comments on Taiwan earlier this month.
Meanwhile, the US this week publicly floated to other G7 members the idea of a “near-total” ban on exports to Russia, in advance of G7 meetings scheduled next month in Hiroshima, Japan. The initial response from other members appeared lukewarm, and Japan's Chief Cabinet Secretary Hirokazu Matsuno stated that “what is important for ending Russian aggression as soon as possible is that G7 remains united for severe sanctions against Russia and strong support for Ukraine.” A couple of days later, the FT reported that European and Japanese officials, while the acknowledging the US’s “frustration” with sanctions loopholes that allowed Russia to continue importing Western technology, told the US that the proposal was “simply not do-able”.
In spite of US frustration with some parts of the sanctions regime, Russia’s finances took a hit during the first quarter of 2023, down by about a third as the US-EU oil price cap throttled export revenues (the cap kicks in when prices rise over US$60/barrel). In response to sanctions, since last year Russia has been forging agreements with non-Western countries to conduct oil and gas trading in alternative currencies, so that transactions can’t be monitored and controlled by the US and EU. Russian Deputy Prime Minister Alexander Novak said this past weekend “that Russia will continue to accept more payments for energy exports in the country's rouble currency and China's yuan as Moscow works to ditch U.S. dollars and euros”. Russia further announced this week the establishment of a system for settling international trade payments based in cryptocurrency, one that will be “unrestricted” and thus secure participants against the threat of Western sanctions.
As these examples suggest, Russia, like China, is starting to retaliate against the West with its own economic weapons. Russia also moved this week to seize control of two subsidiaries of European energy companies, with President Putin signing a decree on Tuesday that provided for temporary Russian control of subsidiaries of Germany’s Uniper and Finland’s Fortum Oyi, both of which operate in Russia. According to Al Jazeera, “The decree said Russia needed to take urgent measures to respond to unspecified actions from the United States and others it said were “unfriendly and contrary to international law”.” Observers indicated that Russia is likely responding to last October’s suggestion from European Council President Charles Michel that frozen Russian assets be seized and used to rebuild Ukraine (the US and EU sanctions involve freezing Russian central bank and corporate assets held in Western banks): “This initiative mirrors the attitude of Western governments towards foreign assets of Russian companies”, stated Kremlin spokesperson Dmitri Peskov. Reuters speculated that Russia was also retaliating against the suggestion of a G7 export ban.
In related news, China is pushing hard to be admitted to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a regional trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The SCMP noted that the renewed effort is occurring as “US-initiated decoupling efforts are increasingly damaging bilateral trade and threatening the latter’s industrial chains”.
European Commission President Ursula von der Leyen announced a new plan to make Europe more “autonomous” and “shore up European interests against foreign pressure and competition”: “After decades of championing the dissolution of barriers and borders, Europe is battening down the hatches,” reported Politico Europe.
Kemi Badenoch, head of the UK’s Department of Business and Trade, criticized US “protectionism” this week, citing subsidies to US automakers in the Inflation Reduction Act as a matter of serious concern for trade officials in the UK, EU, Japan, and Korea.
And, following the imposition of bans on imports from Ukraine last week by 5 EU member states, Turkey this week imposed a 130% tariff on wheat, corn, and other grain imports and Russia signaled that it is unlikely to renew the Black Sea Grain deal when it expires next month.
Things I’m keeping an eye on:
1. The US economy: First Republic Bank’s share prices tanked this week after it was revealed that they suffered over $100 billion in deposit outflows in March. European Central Bank head Christine Lagarde said last week that the dollar’s and euro’s reserve status shouldn’t “be taken for granted”, which struck me as especially ominous coming from an ally and trade partner. And US macroeconomic data released yesterday showed slower than usual GDP growth combined with higher than expected inflation data, indicating the stagflation-recession possibility I’ve discussed previously, e.g., here and here, with rising prices accompanied by financial crisis and negative economic growth).
2. The Ukraine war and the Chinese peace plan: Ukrainian President Zelensky took a call with Chinese President Xi Jinping this week to discuss resolution of the Ukraine conflict. The call took close to an hour and was reported to be “long and meaningful”. French President Macron is also trying to build support for the plan, proposing what Le Monde called an “unlikely” peace summit. (See also last month’s article on the Western pivot away from Ukraine and toward China). And Ukraine continued to prepare for its planned spring counteroffensive to try to retake parts of eastern Ukraine and Crimea.
3. US military buildup in the Pacific: “A US nuclear missile submarine will visit South Korea for the first time in decades as part of a reinforced nuclear shield set to be announced at the White House by presidents Joe Biden and Yoon Suk Yeol,” reported Al Arabiya News, “In addition to submarines, there will be a “regular cadence” of other major platforms, “including bombers or aircraft carriers…”. The article notes that the deployment resembles the US’s Cold War-era deterrence strategies. Starting today, the US is conducting its largest-ever joint military drills with the Philippines (with some participants from Australia, too), to “showcase” its “warships, fighter jets, as well as its Patriot missiles, HIMARS rocket launchers, and anti-tank Javelins…”.
4. Sudan conflict: There’s a lot of news out there this week about whether, how, and to what extent the US and Russia, as well as regional powers like Egypt, are involved in the Sudan conflict, much of it indicating that the conflict is complicated, the US and Russia are indeed involved, but that it should not be seen merely as a proxy war (e.g. here and here).