Welcome to Trade Secrets. The annual IMF and World Bank meetings finished over the weekend, and it’s safe to say there was a lot more gloom around than for a long time. IMF managing director Kristalina Georgieva was on hand to stamp out any trace of optimism: “Shock upon shock upon shock,” she said.
The rest of today’s newsletter looks at the global response to energy, currency and interest rate shocks, and then separately tees up a discussion of the idea a lot of people have suddenly woken up to, weaponised interdependence. Charted Waters looks at the causes of inflation.
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Same global shock, different national reactions
It’s during a generalised economic shock — the previous one, before Covid, being the global financial crisis (GFC) — that hands get wrung about the general lack of effective world governance.
The hand-wringers have a point, obviously. The Fed is raising rates and driving up the exchange rate according to US economic conditions. It’s not that bothered about central banks elsewhere having either to follow suit or see their currencies crash, nor the travails of middle-income governments that have borrowed heavily in dollars.
Meanwhile, the multilateral institutions don’t have enough power to solve global problems. The IMF has rescue lending for individual countries but can’t exactly tell the US how to set monetary policy, still less orchestrate a Plaza-style accord to weaken the dollar. The World Bank remains underpowered, with a constructive plan to increase its firepower still fighting to get adopted. The WTO had a surprisingly productive ministerial meeting this year but still plays a mainly exhortatory role in keeping trade open. Nor, as I’ve written before, is there a predictable global system for sovereign debt restructurings.
This doom-laden tale of uncoordination is neither wrong nor unusual. The world’s central banks made a show of unity by cutting rates together in October 2008, but only a few months later governments were arguing about the right amount of fiscal stimulus.
But nor should it be a counsel of despair. Governments did varyingly well coping with the global financial crisis: those with strong financial regulation such as Canada were largely unscathed by the contagion; those like the UK that were vulnerable but reacted swiftly were over the worst within a couple of years; those that entirely mistook the nature of the crisis-related debt build-up like the eurozone saw the shock reverberate for years.
This time round, there were plenty of worried finance ministers at last week’s meetings, but only one (the UK’s Kwasi Kwarteng) who was summoned home by his head of government to be fired. As I’ve also written before, the shocks are common but the responses are not, and errors such as the UK’s recent taxcutpalooza are unforced.
Sorry, folks, but the global governance lifeboat isn’t coming. The Fed isn’t there to think about the rest of the world, and there isn’t a big currency realignment on the way. Everyone’s facing the same stormy seas, but some are sailing it better than others.
‘Weaponised interdependence’: it’s here
Some people (by which I inevitably mean the twin gurus of the subject, Henry Farrell and Abraham Newman, whose work I’ve mentioned before) have been warning for a while about how governments can exploit trade and financial links with potentially hostile countries to coerce them into submission.
Well, suddenly there are a bunch of examples of weaponised interdependence for everyone to look at, most obviously the US’s strikingly far-reaching export bans on semiconductors to China as announced recently. See Farrell’s Twitter thread here for more examples, including the battle between Opec and the US/EU over price caps and production quotas, the EU’s growing realisation that it needs to improve its geoeconomic instruments and the lessons China is learning from the tools used against Russia over Ukraine.
I’m going to be coming back to this issue in more detail later in the week, but will today just give some Trade Secrets context. You may be thinking that this newsletter’s author has long been sceptical of the idea that globalisation is hitting a wall, and indeed of the belief that the world is breaking into geopolitical blocs. Have I been wrong? (It happens.)
Here’s what I’d say: I’ve always thought that shocks not specifically designed deliberately to cut economic ties (food and energy shocks, the global financial crisis, a big ship being stuck in the Suez Canal, Covid et al) wouldn’t bring globalisation to a halt. I still think that. I’ve said deliberate attempts to do so, particularly for geopolitical reasons, have the potential to do it. But that’s only if governments try really really hard, certainly harder than Trump did with his China tariffs.
Biden, depending on how this latest announcement gets implemented, certainly looks like he’s prepared to do more than I had expected. What impact that has, and what kind of retaliation the US sees from China, is going to depend on very precise detail about the semiconductor supply chain. And we’re only going to find that out once the policy has been put in place. We’ll all be watching closely.
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Two charts today. The first shows us the state we are in with regards to inflation — it has risen fast in many countries and is even taking hold in Asia, a region that until recently had largely been an exception to the worldwide pattern.
The second chart gives some pause for thought. Fuel price increases are one of the key factors behind the current inflationary spike. But it is worth noting — as the second chart shows — that these were rising before Russia invaded Ukraine.
The conflict has, however, made matters much worse, leaving Europe fearing for its gas supply over the coming quarters. Inflation has now also spread into other household items — including the basics of food and housing — making the problem a much bigger and more concerning issue. You can read more about this in our excellent inflation analysis. (Jonathan Moules)
In an interview, French president Emmanuel Macron goes all-out for US-style (perhaps even China-style) industrial policy in a strikingly aggressive way even by French standards, and focuses on electric cars being made specifically in France rather than just in the EU.
Colombia has become the first country to use the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), the dispute settlement workaround invented after the US paralysed the WTO’s Appellate Body. Colombia appealed against an initial ruling in a case brought by the EU regarding Colombian antidumping duties on imports of frozen frites from Germany, the Netherlands and — where else — Belgium.
The Trade Talks podcast examines whether Donald Trump’s trade war made China more protectionist.
The FT reports on how ministers are trying to persuade the IMF and World Bank to increase their support for governments struggling to cope with the effects of climate change.
Trade Secrets is edited by Jonathan Moules