Chad Bown tackles this query and different trade-related subjects in an interview with Janet Bush of the McKinsey International Institute (January 18, 2023, “Ahead Considering on the sophisticated and contentious state of world commerce with Chad P. Bown“).
If globalization means commerce agreements …
If deglobalization means much less nondiscriminatory commerce insurance policies, most all the main economies of the world are members of the World Commerce Group. And one of many elementary guidelines, pillars, of the World Commerce Group is the most-favored-nation, MFN, rule. You’re supposed to use nondiscriminatory coverage, principally the identical tariffs towards everybody. Nicely, that’s now altering.
We noticed that basically starting to alter in 2018, 2019, within the context of the US–China commerce battle, the place these two international locations went from having tariffs towards one another that had been the nondiscriminatory sorts that they utilized towards buying and selling companions in the remainder of the world. US towards China was about 3 %. China towards the US was about 8 %. Nicely, these days these international locations are making use of tariffs on the order of 20, 21 % towards one another. Towards everybody else they’re nonetheless within the 3 to eight % vary, so nonetheless comparatively low. However they’re very a lot making use of discriminatory commerce insurance policies, tariffs, towards each other.
With the battle, Russia’s invasion of Ukraine, we now have seen not solely monetary sanctions however a variety of international locations, the US, EU, UK, Canada, the G-7, making use of a lot greater tariffs in opposition to Russia. Discriminating, primarily breaking one of many central tenets of the WTO system—now, for good cause, clearly. But when that’s what we imply by deglobalization, which means not making use of nondiscriminatory insurance policies towards one another, attempting to form financial exercise for noneconomic causes, say, I do assume a few of that is occurring. On the finish of all of that, we nonetheless might have simply as a lot commerce as we had earlier than, simply as a lot cross-border motion of products and providers, however the patterns of that will look essentially totally different than the way in which it was earlier than all this new stuff began taking place over the past 4 or 5 years.
The tradeoffs between economies of scale and a wider distribution of world suppliers
Firms, their job is to scale back prices and supply items and providers to customers for as low a worth as attainable. And if governments cut back commerce limitations and make it appear as if commerce relations with buying and selling companions are safe, cut back uncertainty, then it is sensible for corporations to make massive investments and construct provide chains to attempt to cut back these prices. What we now have seen occur is you do, on the finish of the day, have sure kinds of items the place you do have actually geographically concentrated sources of provide. …
One other one which we now have seen is the semiconductor story, and high-end semiconductors specifically. For the US, globally, the primary [sources] of high-end semiconductors, the quickest, fanciest chips, are primarily Taiwan and South Korea. Firms like TSMC and Samsung produce the overwhelming majority of high-end semiconductors. For the US, these usually are not international locations or entities of concern. These are locations which might be associates, allies.
And but it doesn’t make numerous sense in a brand new world the place we now have not simply geopolitical shocks and considerations, however you’ve received pandemics and also you’ve received climate-induced shocks. Whether or not that’s unbelievable storms, floods, droughts, it actually doesn’t make sense to have extremely geographically concentrated sources of provide, regardless that these could also be extremely economically environment friendly and could also be the results of excellent financial insurance policies, which led corporations to attain economies of scale and construct out actually spectacular provide chains. … Extra geographic diversification might in the end be useful.
Now, it could find yourself being extra expensive. There are huge economies of scale of getting all of that manufacturing regionally sourced there in Taiwan or in South Korea. And offered nothing ever goes flawed, then nice. However the concern is, we now stay in a world the place we’re extra more likely to be uncovered to issues that would go flawed, and we now have to plan for that accordingly. And we now have to persuade the businesses to do extra for his or her provide chains, and a few of that seemingly wants to come back about by coverage.
