Achi news desk-
The tendency to shift production and trade away from countries considered to be political rivals or national security risks and towards allies, so-called “friendship gatherings”, is a hot topic among economists. The term emerged during the COVID pandemic, a period of significant disruption to supply chains, and gained further traction when Russia invaded Ukraine.
One of the most obvious results of the crony policy is that Canada and Mexico have recently replaced China as America’s largest trading partners by total trade, while Mexico has overtaken China as America’s top importer (see figures below). This followed the introduction of Donald Trump’s trade strategy, which aimed to reduce US dependence on Chinese goods – partly for political reasons and partly because of Trump’s perception of China as a competing power.
Joe Biden has also imposed restrictions on trade with China in an attempt to strengthen US competitiveness with China and grow the US technology industry.
The US raised tariffs on imports from China significantly during the Trump administration. These levels remain high, making the cost of importing goods from China to the US more expensive.
In addition, the International Labor Organization’s Global Wage Report 2022-23 shows that China experienced the highest rate of real wage growth among all G20 countries over the period 2008-22, also pushing up the price of Chinese goods .
The Biden administration continues to promote crony sponsorship, which has further encouraged companies to shift production from China to Mexico as they weigh geopolitical risks against differences in production costs.
Although there is no data available on the number of companies relocating production, the latest trade data (see Figures 1 and 2) suggests that Mexico has succeeded in taking advantage of the competition between the United States and China.
Closer relationships with allies can be created by forming new trade agreements, for example, the United States, Mexico, Canada Agreement (USMCA), which is more about geopolitics and protecting friends than lowering tariff barriers as in the case of its predecessor, the North . American Free Trade Agreement (Nafta).
But the USMCA was also a product of its time. The political will of the United States had shifted towards undermining political rivals and putting out anti-China political statements that resonated with voters.
Trump, a frequent critic of Nafta, had argued that it undermined American jobs and wages, a statement that no doubt played well in the industrialized states of the United States that are experiencing a manufacturing decline. A paper by the National Bureau of Economic Research suggested that many more jobs in the US are being lost due to competition with China.
Doing business with your friends
Friends is a new term for something that has been around for a long time. Countries that took part in sanctions, blockades and friendlies during the first and second world wars on a much larger scale.
In 1948, the United States initiated economic sanctions against the Soviet Union, a 50-year strategy that began with export restrictions and was confirmed by the Export Control Act of 1949.
These sanctions, which intensified after the 1951 War Act, aimed to restrict strategic goods to the Soviet bloc and became a permanent fixture of cold war policy after the Korean war escalated.
Data analysis shows how trade responds to political factors. For over sixty years, trade economists have made extensive use of the gravity trade model, which has provided empirical evidence that countries tend to trade more with countries that are geographically closer to them as well as where there is a common language, legal system ordinary, ordinary. exchange rate regimes and a shared colonial history.
Research also shows how political distance between countries and formal military alliances affect trade.
Value of US imports from top five trading partners in 2010-23:
Trade data monitor, Author provided (no reuse)
US trade with countries by value:
Trade data monitor, Author provided (no reuse)
Governments can use trade policy to strategically support their own industries, so reducing trade with competitors can be part of a political agenda based on promoting domestic manufacturing (and jobs) rather than relying on imports. The US Chips and Science Act, and in the EU, the European Chips Act, are examples of policies that can cause economic pain to opponents in ensuring that this key component in high-tech manufacturing is produced domestically.
However, developing an industry takes time. By the time the industry is established, it may not pay off, either due to a drop in prices caused by increased supply or an economic slowdown that suppresses demand.
In the case of US chips, it is particularly interesting to note that the current industry is focused on the design and production of high quality chips. Therefore, the latest policy will see low-cost microchips, the mainstay of the Chinese chip industry, begin to be produced in the United States and compete with established high-end US suppliers.
The US has experienced the negative effects of these types of policies before. Consider US support for the steel industry, a popular choice among US presidents, including the current administration. Under the Trump administration, this saw the imposition of 25% tariffs on steel imports, which benefited US industry but imposed costs on steel consumers.
Countries such as Australia were exempt from this policy, while other allies, such as the EU, were hit hard. Industrial policy can reduce dependence on competitors, but it is not clear that friends always get special treatment.
Other policies can match an agenda that offers friends. The new generation of EU trade agreements cover issues including labor rights and environmental protection, making it clear that third countries wanting to do business with the EU need to meet the same standards. The EU has also been discussing new legislation against forced labour, so this type of legislation may also start to receive more serious consideration in the UK, for example.
Friend sponsorship policies are not new, but the slogan is. Self-sufficiency at the national level may cause short-term pain for opponents but may have limited medium-term benefits. However, it is more widely accepted that businesses need the assurance of trading bloc friends.
Half of all trade currently takes place between members of trade blocs, and recent trade data for the US and Mexico (see figures above) suggest that trade blocs may become more important over time as production shifts.
