2024 APRIL ISSUE
GLOBALIZATION
NEEDS REINVIGORATION
PART 12
By : Andrew Sia
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From the Desk of the Publisher
World Trade Organization is used for mitigating any disputes and unfair practices among member nations. But the challenges in these days are far too many, areas like politics, economics. cultures, climate issues, and they are overwhelmed with the global situation.
Since China joined the WTO in 2001, in the matter of 23 years, it wanted to topple the U.S. and created a lot of conflicts. We have seen tensions built on geopolitical and geo-economical areas. On the other hand, China has created its Belt & Road Initiative (BRI) in 2013 with the investment of $1 trillion that covers 140 countries in Asia, Africa, Latin American and some Eastern European countries. It is part of the China-centric of bilateral and regional free trade agreements that promotes direct investments. We also come to know that China has free trade agreements with countries accounted for almost 40% of its export. It is by far the world’s biggest exporter shipping some $3.43 trillion around the world, and its free trade agreement tool $1.3 trillion of the total.
In the forth coming 2004 Group of 20 (G20) summit in Rio de Janeiro in November, the host country Brazil is already calling for a pre-meeting in São Paulo in February to discuss about the “new globalization” to pave the way for the meeting in the later part of the year.
This time we have seen the world is full of crises and challenges and it is almost confirmed the U.S. election would be between Biden and Trump is adding more uncertainties. We have to keep our fingers crossed for the outcome.
Opening Remark
The World Trade Organization have just had its 13th ministerial meeting in Abu Dhabi from February 26 to March 2. During the five days meeting the ministers representing the WTO members discussed topics ranging from food security and e-commerce to fisheries subsidies and reform of the WTO.
2024 Group of 20 (G20) summit will be held at Rio de Janeiro, Brazil from November 18-19, 2024 at the Museum of Modern Art. The G20 is made up of 19 countries and the European Union. Brazil, the host country, is already calling for a “new globalization” to address poverty and climate change during their meeting on February 28 in São Paulo. This is to pave the way for the meeting later this year.
We come to know that it was in 1944 when an economist named John Maynard Keynes advocated a global trading system in Bretton Woods that was used to balance between surplus and deficit nations. That was followed by the International Monetary Fund who would celebrate its 80th anniversary this year. Unfortunately, the long-term imbalances between the surplus and deficit nations are still unsolved. And because of this, it has created unsustainable economics and politics around the world.
Ironically, the deficit countries today, particularly the U.S. and also the UK, Australia and Canada, are all left with no choice but to balance out the loss of manufacturing jobs with excess debt, resulting in more fragile economies.
The surplus countries. most notably is China, a communist regime, and also Taiwan, South Korea and Germany, have created jobs but these countries still facing weak domestic demand.
This persistent imbalance is actually a natural evolution as advanced economies moved away from manufacturing a while ago. They have been taking advantage for cheaper production, especially those coming from Asia, and used it as being the consumers than the producers. And until this can be changed, we can’t see any improvements for them to balance the deficits.
That is what we can see now that earlier on Trump administration call for the higher import tariffs from China and Biden administration started the industrial policies and allowed incentives for certain industries to invest in the U.S.
In is not enough to see that the U.S. is taking a unilateral approach to try to fix the global trade system. We have seen China dumping in the world market their steel and aluminum, and soon to be the electrical vehicles, batteries and other green products. These are unfair trade practices but if you criticize China they would say that it is protectionism.
Lately, Biden administration has decided to spend billions of dollars to replace the cargo cranes because of the fear for being espionage for sensitive data, including commercial transport of military cargo, insight into supply chain vulnerabilities and critical market information. It is already known that many of the international ports, freight carriers and forwarders, as well as some terminals inside the US. are using a Chinese logistics platform called LOGINK. It is known as Chinese digital octopus spreading its tentacles through the world’s shipping ports. It has intensified global supply chain vulnerability. The last we heard that the Pentagon has banned this logistic platform.
It is very unfortunate that the world has intensified its conflict with different nations which have led to the geopolitical threat. If this can’t be handled wisely, this could lead to Cold War.
I can’t see the World Trade Organization and the G20 can do much to overhaul our global trading system. I also can’t see how this can be addressed more effectively as it is already getting out of hand from what we can see.
Huawei, Player of Telecom Is Under Commercial Sanction
Huawei’s founder Ren Zhengfei, served in the People’s Liberation Army, has a very different structure than those different national business champions. Huawei’s unusual employee ownership structure has been the subject for debate because it is indirectly owned. Staff hold shadow units issued by an entity that actually controls the shares. To say the staff own the shares are not very relevant as they have no legality.
Every few years, Huawei employees can go through an elaborate process to elect representatives for the board. It is a system more democratic than any others allowed in China politics. Ren Zhengfei, the founder has some veto powers and doubtlessly the effective control. He claimed publicly that he owns about 10% of the company’s shares. So that we know, Huawei has 200,000 employees.
Huawei is still a private company. It is the world’s largest maker of telecom equipment. The U.S. intelligence viewed it as a military property. It is taken as a national security threat to be placed under sanctions and keep out of international phone networks. But Huawei presented itself as an entrepreneurial, research-driven tech company, built on global business standards, owned by its employees and dedicated to serve the needs of its customers. We can see the contrast here.
In December 2023, Huawei announced its full-year sale would be $99 billion, up 9% from 2022. Its 2023 revenue is still 20% below its 2020 peak. In that year, it was brought to its knees after the U.S. government stopped supplies of computer chip technology made with American equipment and software.
It was followed by the detention of Meng Wanzhou, daughter of Ren Zhengfei, by the Canadian government waiting for the U.S. extradition charges but was later released.
Its revenue in 2021 fell to $90 billion dragged down by sharp declines for core businesses such as making smartphones and selling infrastructure equipment to telecoms carriers around the world. While as many as 170 countries have used Huawei hardware in their telecoms networks, its network equipment and smartphones have suffered from the U.S. sanctions.
Since then Huawei has been struggling to secure its chip supply and it has made collaboration with the Chinese company, Semiconductor Manufacturing International Corporation (SMIC), a state-backed foundry using dated equipment to produce chips.
As the result, Kirin 9000, the new chip used in Huawei’s Mate 60 series phone, has been unveiled. Unlike what TSMC and Samsung are using—the extreme ultraviolet (EUV) lithography equipment, SMIC is using the less efficient deep ultraviolet (DUV) machines. Both machines, EUV and DUV, can produce 7nm chips, but the later one produces more defective chips resulting lower efficiency and higher cost. We have to say that Kirin has allowed Huawei to reclaim lost market share.
Both SMIC and Huawei have decided to move on to increase its chip production for artificial intelligence systems in response to tightening restrictions imposed by Washington on high performance chip sales to China.
It is said that Huawei has tried to revive Ascend AI chips made by TSMC and tried to revive its production line. Internet giants in China, Tencent, Baidu and Meituan have purchased its Ascend 910b chips for trials. But Huawei would have to deal with the high percentage of defective chips that it can produce.
Its DUV machines from ASML have been around for some years already. But SMIC received a new batch of advanced DUV machines from ASML before the U.S. tightened export controls. It is still possible for ramp-up in production and its technology is still possible to apply over the next two to three years. But the situation can be challenging as they can also be the running out of spare parts.
But both companies can have the state support as China has declared that to establish the production lines for cutting-edge chips can be at all cost. For the past decade, it was a whopping $47 billion and it is projected to raise another $41 billion. China knows that to be independent against imports and to have a strong foothold in the global supply chain, it has to rely on Huawei and SMIC.
This is a very good case study for watching Huawei, once a very important player in 5G technology for smartphone, electing telecoms networks and network equipment around the world, to be cut off from global supply chains. It is resilient and tries to fight for its survival.
Globalization’s Role in World Economy
We have noticed that globalization has been under fire in many nations. It has been challenged by massive shocks that we haven’t seen before, the Russian-Ukraine war, Hamas-Israeli war, lingering of the coronavirus pandemic, and the rising of geopolitical lead to the geo-economical tensions.
During the Covid-period, it expedited the digital-enable trade and services, which enable the economy to drive forward. This will continue, and replace the conventional ways of doing businesses, as we have entered into the digital world unknowingly and also unexpectedly.
Due to the geopolitical and geo-economical tensions, there have been talks about de-globalization which means to move to inward-oriented trade and industrial practices. All of the sudden we are talking about doing business with friendly states. Again, unknowingly we have entered into a very dangerous zone which can lead to Cold War once those states have been segregated. To me this is very unwise.
We know that the U.S. and China, the two largest economy of the world today, are in loggerhead now. They have taking one another as the economical, political, cultural, and military, as strategical rivals. The U.S. has effectively blocked China from acquiring technology that would allow them to have the cutting-edge against the U.S. The U.S. went further to promote manufacturing in the American shore for certain strategical areas. High-end semiconductors, quantum computer, advanced artificial intelligence and anything relate to military and surveillance uses are restricted from China. What is left with China is a narrow range of goods, and even with those they have been put on tariffs to restrict their export.
I am not saying that China is without problem as it is an authoritarian government and it is subsidizing its industries, especially those state-owned enterprises, and made their prices very competitive in the world market. In many instances, they don’t represent the market price just because their productions are not based on market demand, in another word, market economy, but rather follow the state-planned economy. In another word that a very big part of their gross domestic product is planned and fabricated.
In this area, only if the two economies, the U.S. and China, can sit down and discuss sincerely and try to come to an agreement and look for co-existence in this world theatre, what we are seeing today is worrisome.
In the past year, we have seen the world going through extreme weather and have experienced more frequent and devastated climate-related disruption that have led to huge financial losses. Some extreme weather events have disrupted our supply chain directly through droughts, floods, wildfires, hurricanes, and low water levels in the main rivers, have all caused us big challenges. The latest episode is the drought that has affected the Panama Canal for instance.
The world’s leaders would have to face the facts that the extreme weather events can affect us to make policies. We need to build more resilient and adaptable systems when such situation arise. The world would need to work hand-in-hand.
In the recent years we have built up the geopolitical tension unknowingly. It began with the Trump administration, and it was not only with China, but also with Europe. It was very unwise and his use of MAGA – Make America Great Again was so short sighted and narrow-minded.
We have seen China retaliated with their exports of rare earth, minerals that are critical to produce batteries and other IT products. With the sanction of Russia due to the war they created with Ukraine, the export of natural gases that are indispensable for the countries in the European Union, and the conflicts in Gaza can trigger oil embargo for instance. All these are unnecessary if the countries in conflicts can come to terms. Globalization would need peace and harmony to go forward.
It is said that the retailers are now more focused in their inventory strategy. During the beginning of the Covid, we had noticed that inventory throughout the complete supply chain, starting from the work-in-progress from the factories, to the different warehouses along the delivery, not only the manufacturers were stuck with products, but also the retailers. The lockdown caused excess inventory, and sometimes they became out-of-season. Then in 2022, when the supply chain eased as shipping schedules became more predictable, the retailers started to pile up goods and this time they were caught by the market that was more focused on those essential purchases. The optional spending was being pushed aside.
It took until this time to clear up their inventory and if we look back, the past four years were the toughest for retailers, and because of the unpredictable situation it caused so many of them going out of business.
This time they want to do “read-and-react”, and also “just-in-time” for inventory replenishment.. They want to bring their suppliers closer to them geographically for quick response. They want to react to the market instead to predict what the market can take. The dynamics for the supply chain would need to be planned so that they can perform better to the market’s expectation.
Perhaps this can be taken as an area more positive and can take some planning to make it work. We have read that the fast fashion player H&M has changed its strategy to source closer to the market. This is carrying two meanings, one is to shorten the lead-time of the order to deal with the irrational behavior of the market, another one has to do with the geographical location where the suppliers and retailers should be closer with the shortening of distance. This also means the delivery time can be reduced significantly.
Last and not the least, the challenge to the stability of the world during 2024 will come from the election results of different nations. There are 70 nations with two billion people who would cast their votes for the new government. This time we have seen a lot of the left-wing populists entering into the election race. Most important elections are the European Union parliament and the U.S. presidential election.
The European Union (EU) is a political and economic union of 27 member states primarily located in Europe. The EU has 448.4 million people with the total gross domestic product of €14.5 trillion. It is the second largest economy in the world in nominal terms, after the United States and the third one in purchasing power parity (PPP), after China and the U.S. The EU election will happen in June 2024.
In the U.S. it will be the reelection of both President Biden and President Trump. Both are too old for the role but there are no younger candidates who would come for the running of the president.
If Biden would be reelected, his policy can be more predictable and the U.S. would most likely to follow the route and take the hi-tech more abreast. Relationship with China as the trade partner can be more rationale. But if Trump would be reelected, he would take a harsher term with China and would push Europe to look more after their own interest. The war between Russia and Ukraine can also come to an end, and North Korea would be more under control. It is not that he would be a better president, but his behavior has been always more irrational, it is hard to tell his move. He will make globalization something more remote and to reinvigorate it would be unpractical.
