July 1, 2022: Global News Roundup
New economic geographies emerging as broken supply chains are rewoven
The Global News Roundup collects news stories from entirely international (non-US) media sources on a wide variety of pressing global political and economic issues and events.
For decades, we have relied on complex global networks to produce and transport the things we need and want. Beginning in the 1970s, global production became increasingly fragmented geographically, with a single commodity often produced using resources, labor, and production facilities from dozens of countries. Relatively cheap energy combined with permissive public policy and innovations in finance, transport, and communication facilitated rapid movement of raw materials, parts and components, and finished goods to consumer markets all over the world. This globalized system has been unwinding since the 2008 Great Recession and has fractured irreparably since 2020, with pandemic-related lockdowns and closures, labor shortages, commodity price hyperinflation, rising trade protectionism, the Ukraine-Russia war, and US sanctions against Russia taking a serious toll on the capacity of the international community to sustain the long, fragile chains that previously linked the world together (see here, here, here, and here for examples).
New geographies of production, trade, and finance are emerging to replace the older ones. Russia is re-routing its oil exports to new markets, with strong emphasis on relations with the BRICS nations: “China’s crude oil imports from Russia were up 55 per cent from a year earlier to a record level in May, displacing Saudi Arabia as China’s top supplier, as refiners cashed in on discounted supplies.” “In the first three months of this year, trade between the Russian Federation and the BRICS countries increased by 38 per cent – and reached USD 45 billion”, said Russian President Putin in recent remarks. Russia is also battling Ukraine for control of Black Sea grain shipping routes, with big implications for international trade patterns.
As the US slowly realizes the extent of Russia-China strategic cooperation, and the likelihood of ongoing future economic (and military?) conflict with China, it is also starting to carve out new trade and production networks that reduce dependence on its economic rivals (part of a process of “economic decoupling”, though Russia and China are far ahead of the US in this respect). This week, Australian company Lynas Rare Earths was awarded a Pentagon contract to start construction of a rare earths processing plant in Texas: “It will reduce America's reliance on China for strategic minerals used to make missiles and other high-tech equipment.” Europe is also scrambling to shore up trading relationships amidst the rapidly-shifting global economic landscape: “In a letter to EU Trade Commissioner Valdis Dombrovskis seen by Reuters, 15 economy, foreign and trade ministers said the Ukraine war and the COVID-19 pandemic underscored the need for resilient supply chains, strategic partnerships and open trade. With different powers vying for leadership and new alliances, the EU needed to accelerate its own trade push. One in seven EU jobs depend on trade, the ministers said.”
In Latin America, regional trade linkages are strengthening, with Chile and Argentina striking a new trade deal this week. Crucially, this agreement is seen to pave the way for greater trade between Mercosur (Argentina, Brazil, Paraguay, Uruguay) and the Pacific Alliance (Chile, Colombia, Mexico, Peru): “With this new tool not only can we promote the deepening and broadening of exchange between Argentina and Chile, but we can also fulfil an important step in the objective to strengthen ties with the countries in the Pacific Alliance”, stated the Argentine Chancellery.
In related financial news, India’s largest cement company just completed its first trade for Russian coal using the Chinese yuan, frontrunning what will undoubtedly be a growing trend with major implications for US dollar dominance. Also this week, China signed an agreement with the Bank of International Settlements (BIS) “as part of Beijing's plans to establish a yuan pooling scheme starting with Indonesia, Malaysia, Hong Kong, Singapore and Chile to counter the dominance of the US dollar.” The pooling scheme will provide emergency liquidity to participating central banks as US interests rates rise and place pressure on foreign exchange reserves and currency values abroad.
What I’m keeping an eye on: The impact of China ending lockdowns on global commodity prices, global currency market movements (especially dollar-ruble-yuan dynamics), rising trade protectionism in food and energy, BRICS collaboration, and US foreign policy vis a vis Russia and Ukraine.