Category: Trade Page 6 of 13

The China Trap

On March 2, 2022

I’d really hate to be China’s leadership right now. This is rock/hard place for them. If they don’t keep Russia alive, they will have no ally when it’s their turn, but the US and Europe are likely to put a ton of pressure on them for sanctions & that will start the cold war earlier than they wanted (for them — it’s already started for Russia).

Obama famously pivoted to China, calling it the biggest threat. Trump slapped on sanctions and used a ban on semiconducters to absolutely savage Huawei, the flagship Chinese tech company, whose phones were rivaling Apple and Samsung, and whose 5G technology was the most advanced and ready-to-deploy in the world.

They put immense pressure on Europe to not use Huawei 5g tech and largely succeeded.

When Biden came in, he removed none of Trumps sanctions.

In effect, the US has been declaring China its enemy for about 12 years now, through both Democratic and Republican administrations, and over the last few years, anti-China sentiment in DC has solidified. As far as I can tell, it is truly bipartisan.

China has known that a cold war with the US was inevitable for a couple of years now, though they suspected it before. They had hoped to keep Europe as a neutral customer, but Europe has bowed down to the US whenever push comes to shove, so China, like Russia, appears to regard Europe as an American satrapy — a subject state who will do what the US says.

The US and Europe will now put immense pressure on China to comply with sanctions on Russia and to not help Russia get around them.

My guess is that China will not, substantially, comply. The calculus is simple: Cold war with the US is coming, and if they let Russia get taken out, they lose a powerful ally and will then be surrounded, rather than having most of their Western flank covered by another Great Power.

Russia has repeatedly told the West to go fuck itself with regards to sanctions. They regarded, even before this war, more sanctions as inevitable. All that the war has done, they believe, is move the sanctions forward. China is likely to have the same calculus: sanctions, tariffs, and so on are never removed, only increased over time.

Both China and Russia have their own SWIFT alternatives. They will hook together and be offered to the rest of the world. As non-US allies have seen, with Venezuela, Iran, and now Russia (among others) that the US will even freeze reserves, they will join the Chinese and Russian systems and settle trade in Yuan. They will move reserves out of the US/European system.

This is, however, a huge hit to both China and the US. The US cannot currently decouple from China — it’s impossible. The US actually needs China more than China needs them. Remember, China is the largest industrial power, not the US.

It’s still a terrible trap, though, and the Chinese will, I think, play to mitigate. The US will not slap the worst sanctions on just yet, but will rush to move production to low-cost US allies.

There is an alternative, of course. China could buckle, agree to join the “rules-based order,” and play by American rules. The issues here are threefold.

First: This means China is not allowed to take control of value chains, which provides much of the real profit. Probably 15 percent or so of the value in a value chain comes just from that. They will have to keep paying US intellectual property fees, which amount to another ten to 15 percent in a lot of industries.

Intellectual property, if it’s not obvious, is on the table. Certainly Russia will stop paying these fees, that’s almost certain.

Second: Playing by Western rules means, the Chinese believe, staying stuck in the middle income trap and not making it to high income. This is one of those places which is a genuine trap: Decoupling will be a huge hit, but staying in the system and playing by the rules set up to favor the US and its allies means being in a system which keeps China from becoming a rich nation.

Third: There is an emotional component. As much as many Europeans, especially eastern Europeans, hate and fear Russia, China has a deep resevoir of hate for Europe, and the US for the “century of humiliation,” for Taiwan (to them a rebellious province which they would have retaken years ago if the West didn’t support it), and of course, a lot of hatred for Japan, the West’s primary Asian ally, for its invasion, occupation, and atrocities before and during WWII.

Emotionally, the Chinese are primed to tell the West to go fuck itself. They didn’t see why they should’ve play by rules made even when they were at their weakest. The “rules-based international order” to them is nothing but a set of rules set up by people who don’t want them to be a great, rich nation again. Rhetoric from the US has solidified this impression, and I think more correctly than not.

So the “cut a deal and compromise” really means “accept the current world order and play by rules that China thinks are unfair to them, and are made without their input.”

My guess is that China will do whatever it takes to keep Russia alive and to stop Western sanctions from achieving their declared aim: To collapse the Russian economy and cause regime change. Viewed pragmatically, I think that is the right call if you are the Chinese leadership, because the other two options (acquiescing to Western rules or letting Russia collapse and facing the West w/o Russia) seem worse.

I would guess, and it is just a guess, that this takes about four to eight years, because the US would be insane to decouple now, and China also wants time to prepare. But emotions are running high and a lot of policies have been made without clearly thinking through their consequences lately, so I while I think it’s odds on, I won’t be surprised if emotions rule instead. The decoupling may happen sooner.

Welcome to the new Cold War. Remember, in this one, the world’s biggest industrial power and most populous nation is on the other side. This isn’t 1950 or even 2000. China is the biggest trade partner of more nations than the US, not the other way around.

And China needs what Russia has: wheat, oil, and mineral resources.

Cold War 2.0 isn’t one in which the West are necessarily the favorites to win.

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China’s Economic “Miracle” Was Normal

By Ian Welsh

On November 1, 2021

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Over the last few weeks I’ve been reading books by some of the smarter members of the international elite. One thing they all seem to agree on is how amazing and unprecedented China’s economic rise was.

It wasn’t.

China industrialized and modernized the way almost all nations have:

Through mercantalist policies. In China’s case, keeping the value of the currency low, taking advantage of low wages, and starting with the oldest parts of industrial value chains.
By exporting to large external economies which let them: the US and Europe.
By grabbing as much intellectual property as possible.

This is how America did it in the 19th century. This is how Japan did it twice (Meiji, post WWII, Taiwan and South Korea did it. This is how virtually everyone did it.

Americans got greedy and stupid, from a geopolitical point of view. They believed the nonsense “End of History” bullshit about how capitalism and democracy are intertwined and capitalism inevitably leads to democracy and they were salivating over the profits they could make in China. So they traded and they let China into the WTO.

Contrary to the idea that democracy and industrialization/modernization are intertwined; Japan and Germany did most of it under authoritarian governments and with massive government direction. Even post-WWII, Japan was a one-party state, not a real democracy. Germany’s industrialization was based on Prussia’s command economy, and the great companies were practically state organs even if they were nominally civilian.

Japan didn’t become a nominal democracy because “capitalism” it became one because it lost WWII. The Kaiser had a parliament, but still a great deal of power and he didn’t step down voluntarily, he lost power because the Germans lost WWI.

But the emphasis on authoritarianism misses what is actually interesting and almost unique about China: it has the most decentralized government spending of any major country, with over 70% of spending decisions made below the Federal government. As a rule, the center made and makes goals and guidelines, but leaves it up to regional and municipal governments to figure out how to achieve them. China has a dynamic government, and there is a lot of competition between governments, as much as between firms.

It is also easier and cheaper to start a new business in most of China (free in Beijing to incorporate) than it is in most of America or Europe.

Meanwhile, the great danger to capitalism is capitalists being too successful, and buying the system, and then getting rid of necessary oversight and regulation. China has largely avoided that (though real-estate wealth is still a problem) and Xi Jingping has cracked down repeatedly those he considers bad actors. In one recent example he forced delivery app companies to treat their employees much better (better than in America). In another he got rid of the College prep industry almost entirely, which a lot of western observers thought was bad, but the industry was a pure “Red Queen’s Race” situation, because it existed everyone had to do it, and as with all such college prep industries it favored those with money over those without. Xi was entirely right to end it.

Democracy used to serve this purpose in the West. Almost everything FDR did, economically, was to stop capitalism from destroying itself.

Further, all evidence I have seen indicates that contrary to what I thought in the past, the Chinese Communist Party (CCP) goes out of its way to recruit smart, competent people and has thus, so far, been able to avoid the generational nepotism and degradation cycle.

To bring this back to Western elites, a lot of the mistakes come from drinking their own Kool-aid. While virtually no country larger than a city state has ever modernized without mercantalist policies, the orthodox economic position of the West for decades was laissez-faire, and that’s what the World Bank and IMF made most countries do. Those policies are vastly destructive and don’t work IF you want a country to modernize, but if you really want it to become a helpless satellite state they work well. (Bad Samaritans, by Ha-Joon Chang covers this well.)

“Free” trade is not what America did, Germany did, France did, Japan did or even England did to industrialize, and it’s not what China did.

What it is truly unique about China’s industrialization is its size: it’s a subcontinental power with a huge population. Japan was never really a threat to the US, for all the screaming in the 80s, because of its population size and limited geographic extent. China is by some measures already a larger economy, and the only thing might stop it from becoming the world’s greatest power and eclipsing the United States is that climate change will hit it hard somewhat earlier than it will hit the US, as best I can tell.

So, what matters about China is just that it’s not Western, and poised to become the first Eastern hegemonic power in about 200 years. Of course the US doesn’t like that, and of course Europe (still an American satrapy) is uneasy.

This could have been avoided easily enough, though it probably shouldn’t have been, simply by refusing to cooperate with Chinese mercantalist policies and certainly, if the US didn’t want a rival who would probably eclipse it, letting China into the WTO was insanity. (This was clear at the time, and many people objected.)

The other issue is that the West no longer has a veto on who gets to industrialize. For various reasons Japan, South Korea and Taiwan couldn’t serve as the necessary markets for mercantalist expansion, but China can and that’s what they’re offering many other nations the West never let develop. The European/US monopoly is broken.

The lesson is not to believe your own lies and bullshit. Fukuyama was obviously full of shit about “The End of History” and developed world suggested “development” policies in the last half of the 20th century were meant to stop nations from developing, which was their record, and anyone with sense who spent a few hours examining the policies of countries which actually industrialized, could know it.

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How To Predict If The Shortages Will Be A Priority To Fix

By Ian Welsh

On October 26, 2021

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Covid has not been a priority to fix in many countries for a simple reason: it’s making the rich a lot richer. U.S. Billionaires have seen their wealth increase by 70% during the pandemic.

Man, people dying and getting sick and having to buy much more online is good for Billionaires! What a time to be a peon!

So, as for the shortages, the question is how much they are inconveniencing people with power. If shortages are actually making the rich, richer, how can they be a problem politicians or anyone else with any power in most Western countries will take seriously?

I don’t know the answer to this, but so far what I’ve seen is that large customers are receiving limited goods first. Walmart fines supplies for late deliveries, small and medium size businesses can’t do that.

So my guess is that this will lead to further consolidation, wiping out more small and medium firms and allowing many to be bought up by their bigger brethren, and on top of that will make the big boys more money at the same time.

Of course, some industries will be losers, but overall it seems likely that at least for a time shortages will redound to the benefit of those with more money, and that they will see no urgency in ending them.

Hopefully I’m wrong (quite possible, not my area of expertise) on the shortages being good for most of the rich, but I’m sure I’m not wrong that if they are, the rich and powerful won’t give a damn how much other people are hurting, and won’t feel any urgency in ending the shortages.

Remember: in a lot of countries now, certainly the US and Britain, you cannot expect the government to act in your interest or care for you, unless it is in the interests of the powerful and rich that it does so. It may, if there are still existing programs not yet privatized but you should never expect it. You, your family and your friends, should make plans assuming that when bad things happen, there will be little help.

It’s ugly that this is so, but acknowledging the truth makes you more likely to survive.

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The Shortages Will Get Worse Before They Get Better

By Ian Welsh

On October 12, 2021

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… so stock up if you can.

Depending where you are there may also be rotating power brown-outs or shortages or heating and auto-fuel.

Don’t wait on this, buy now. It’s unlikely most of you can do much about fuel or power outs, but if you can, do. For example, if you have a fireplace or wood stove, stock up on wood. You can buy chargers for your small electronic devices; blankets or sleeping bags rated for real cold, and so on.

Not all areas will have power issues, you’ll have to do a bit of research to see if your area is vulnerable.

Meanwhile stock up the normal purchases: staples, water, medicine and so on. This means keeping a larger supply on hand than you would normally to buffer supply chain shocks.

Remember that the shortage of items which require semiconductors will continue for some time. Not only is there a global shortage, but the US embargo on China causes real issues because China is where final assembly of many products is done: if they can’t get the chips they need, those items don’t get finished.

I’m going to write more on why this happened because it’s not just about Covid, it’s about a system where this was inevitable if the system got hit by big shocks, but I don’t want to dilute this particular post’s message that you should personally prepare.

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How The Structure Of The World Economy Made Shortages Inevitable

By Ian Welsh

On October 7, 2021

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For the second time I find myself referring readers to an essay by John Michael Greer, this time on shortages. This is the best piece I’ve read on the issue and I agree with almost everything he says. JMG’s overall worldview isn’t mine, but he’s unquestionably brilliant, and this has been nailed. Go, read.

I want to note, as does JMG, than none of this is unexpected: the fact that the just-in-time inventory and ordering system was obviously subject to shocks is a warning given by many.

I want to emphasize, though, that it’s not only “just in time”, it’s the structure of production itself, which is both very dispersed and very centralized. A final assembly factory may draw parts from dozens of other factories, none of them near it, so when one of those factories goes down, the entire show can draw to a halt.

This dispersion was a deliberate choice. Some of it started as early as the fifties, as a deliberate way to tie economies together and attempt to avoid WWIII thru mutual dependence, but as with most of our economic pathologies, it really took off after 1980 and Reagan, with the vast offshoring and outshoring of industry and production: we were told the choice was to seek the lowest costs and highest profits.

None of this was necessary; the proper use of trade and industrial policy could, and I would say, should, have been to encourage every country to produce what it could in its own country, only importing what it couldn’t make or grow itself. Comparative advantage is, and always has been, garbage and no great state has ever allowed it to determine anything. Britain didn’t industrialize under”free” trade and neither did America or Japan or anyone else of significance.

But doing it this wasn’t mostly about profits and costs; it was about tying the world together in a way which disempowered every country outside the core. The so-called value chains were initially all controlled from the West or, perhaps Japan or South Korea. Everyone paid a vig to the controlling interests in the West: the rich did very very well, they just didn’t pay their fellow countrymen and women.

This was excellent, from their point of view, because money is power and it broke the power of their domestic opposition: absolutely gutting unions, the working and eventually the middle class, leaving them completely in charge.

Meanwhile, because of the dispersion of manufacturing and its inputs, other countries mostly couldn’t create any industry they really controlled (again, South Korea, Germany, Japan are exceptions), so there was not threat.

Until they got too greedy, and the Chinese saw their weakness, and they put so much in China while China had a policy of grabbing as much knowledge of how to produce as possible.

Which leaves us where we are today: vastly vulnerable supply and manufacturing chains, an onrushing cold War, and a struggle over who controls the “value chains.”

The Chinese are damn tired of paying the West its vig because the West is at the top of value chains where most of the work is done in China or other countries. Equally they are sick of paying for IP.

US elites, on the other hand, are terrified of losing their top-seat position; their ability take a big percentage of all profits because they own the IP and control the value chains.

There are no good actors here, be clear: the Chinese have done reprehensible things and so have the Americans. But understand that America was a known IP scofflaw in the 19th century, when it was industrializing (and the Brits were stupid enough to ship know-how and factories to the US for “profits”.)

This is a standard pattern, and as long as we make it so that a few countries can skim off everyone else the struggle will always be ferocious.

John Maynard Keynes wanted to end this: he wanted a world in which every country, as noted before, produced as much of what it needed as it reasonably and was allowed to use subsidies and tariffs and policies to do this.

We created a different world; a world in which everyone was dependent, most countries couldn’t even feed themselves, and everyone needed everyone else while a few countries, but especially the US, still remained in overall control of production (again, until US elites got too stupid and greedy and the Chinese took advantage (you can’t cheat an honest man.) Some of the reasons were good, if misguided (especially in the early post-war period), most of them were greedy, stupid and shortsighted, since Keynes could see it was a bad idea even in the 40s.

Now we’re paying, but most of those who set up the system then overbalanced it thru their greed are either dead or still alive and filthy rich, and getting richer.

Life is good if you’re in the top .01% or so. Really, really good.

And really, you know, to them the problem with mid-century Americans not of the ruling class is they didn’t know their place. Now they’re being taught their place again. No more servant problems.

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Ricardo’s Caveat

By Ian Welsh

On September 21, 2021

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Ricardo

In 1817, David Ricardo formalized the Law of Comparative Advantage. Since then, it has stood the test of time as one of the very few laws that an economist can point to and say: “This is indisputably true.” It’s because of this law that you only rarely find an economist who doesn’t believe in unrestricted free trade. But Ricardo added an important caveat when he discussed free trade and comparative advantage, and it’s one that most modern economists seem to have forgotten…

Let’s quote straight from Ricardo:

In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. If the profits of capital employed in Yorkshire, should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England, from the increase of capital and population, wages should rise, and profits fall, it would not follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.

This is the Achilles heal of comparative advantage — the flaw in the foundation of free trade that causes outsourcing woes. Those who say that the law of comparative advantage proves that free trade is good are absolutely right, but they’ve forgotten his caveat.

Because, in Ricardo’s world, it was true that capital was not particularly mobile. It is not true in our world, and it wasn’t true in the Victorian world.

In a world in which I can move my capital freely between locales, in which I can also move my profits freely, and in which I don’t have to live where my capital is working, there is no reason to invest in any productive activity in my home country if I can make more money elsewhere.

The higher surplus locale is going to get as much free capital as it can soak up and as is available. The logic behind this is simple: Let’s say I have one million dollars to invest, and I can invest it in two different locales. In one place, I’ll get five percent return, in another a ten percent return. In both locales, I can take my profit and do what I want with it. I can live in either locale and, in both places, my money is secure from being seized by the government or destroyed by violence. Obviously, I’m going to put my money into the place with the higher returns.

When I get those profits, I’m going to sink any reinvestment into the place with the higher returns again. It’s a virtuous circle — if you’re the place with the higher returns, and it ends when returns even out or there is no more excess capacity.

If the higher-return country runs out of investment opportunities that pay higher than the low-return country, it makes no sense to invest in it. What matters here is the marginal rate of return — that is, the return on the next dollar of my investment. In principle, there ought to be diminishing returns; people snap up the good opportunities and, over time, the opportunities get worse and worse until returns equalize (this happens faster when currency values are decided independent of government intervention, but it doesn’t always happen — even in the long term, when we’re all dead).

Profit is just how much surplus you’re receiving. Let’s say my workers are capable of producing $5 of goods for every hour they work and my costs are $3/hour for everything (property, taxes, capital costs, and wages). I’m making $2 an hour for every worker I have working for me.

That’s Country A. In Country B, the average worker produces $10 an hour, but my costs are $9, so my surplus is $1. This is half the profit of Country A, even though my workers are more productive.

That’s why US workers are more productive and people are shipping jobs to China and India. Costs in the US are higher for property, wages, and taxation.

To stop capital (and jobs) moving from Country B to Country A, you have to increase surplus. There are two ways to do that: You can reduce costs (most easily by cutting taxes or wages), or you can increase productivity. If the average worker produces one more dollar of goods while costs stays the same, and Country A’s worker’s productivity doesn’t increase, then you’re even.

Or Country A could increase wages, taxation, or property costs and become less competitive.

In a world without mass capital flows, there was another way. You could have lower capital costs. But having the Fed set lower capital costs than another country means little — borrow in the US, invest it where the ROI is higher.

More than that, money you can’t use is, well, useless. Let’s say you’re investing in a factory in China, but you want to live in Europe or the US — and Europe and the US won’t let you use the money you have in China in their countries (or will only let a fraction back in). In this scenario, you’re not likely to invest in China, are you? In addition, money that can’t move is captive to political unrest and other such events, which gives mature, stable countries a big leg up. If moving money is hard or slow, then you’d better be sure that where you have it is stable because if something goes wrong, you can kiss it goodbye.

A key problem right now is demand. Capital flows to low-production-cost/high-surplus domiciles. But there’s only so much demand for goods and only a limited amount of growth in demand for goods. So you’ve got your profits, and you have to figure out what to do with them. You can’t plow all of it back into productive investment, because you’d wind up with more productive capacity than there is ability to buy the goods. As a result, the excess money has to go into nonproductive uses.

The money that does go into productive uses will go to the domiciles that produce the greatest surplus (profit). Many people have pointed out that the US hasn’t lost jobs to outsourcing, that’s only true in a technical sense. What has happened is that the new jobs have been mostly created overseas (in cases where they can be done overseas). Old jobs haven’t been moved (mostly) because of sunk capital costs. Once you’ve paid ten million dollars to create a factory, spending another ten million dollars to relocate the factory usually doesn’t make sense. But if you have to build a new factory anyway (either because you need more capacity or because the old factory would have to be replaced for some reason), then it makes sense to build it in the domicile with the higher surplus production. That’s exactly what we’ve seen over the last few years: China and India getting the new jobs in non-protected sectors. It’s not rocket science, it’s just ROI (Return On Investment).

Because you can’t put all the money back into production, you’ve got to stick some of the money elsewhere. And what we have going is a nice, reinforcing trend. Oldman has called it strip mining the US economy. The money is used to buy your customers’ assets or lent to your customers. In exchange, they put up as collateral either the full faith of their government (we’ll see how good that is in a few years) or their assets, which in the current case means mortgage-backed securities, bonds, and common shares in companies (which represent ownership of assets). They then use that money to buy your goods, and the cycle continues.

This vicious cycle (or virtuous if you’re the one getting rich, and you get out in time) results in excess productive capacity, a slow decline in employment in the low-surplus domicile, and an increase in debt in the low-surplus domicile. It also pushes costs in the low-surplus domicile lower (meaning wages and taxation, primarily).

In the meantime, if the developed world (and specifically the US) were to stop borrowing to buy, the entire engine would collapse. This is not a sustainable development; if the US were to buy only what it could afford, based on its own exports, there would be an economic shockwave — not just in the US, but in China, India, and other high-surplus/low-cost domiciles. And right now, the dynamic is being funded by taking money out of the US and other high-cost domiciles, which must ultimately end in a reduction of demand. If the low-cost domiciles, which have been getting the capital investment, are not capable of soaking up the excess capacity when the US’s consumption comes in line with what the US can afford, then you will have a worldwide recession at the least — and likely a depression.

Economics views systems as moving towards equilibrium. But it’s more useful to view systems as subject to multiple different tendencies. At any given time, different tendencies may be stronger than others. What should be happening is that US costs should drop and developing country costs should rise. It is happening, but it’s not happening very fast. Where these costs meet is going to be somewhere a lot south of the current US standard of living. In the meantime, the dynamic has the US shipping its capital and its growth in productive capacity to lower-cost/higher-surplus domiciles. This will continue until the conditions enabling it end and not before. The conditions which can end it are increased shipping costs (favouring more localized production), the evening out of surplus production, a political decision to discourage either trade or capital flows, or an unwillingness or inability of either the US to borrow or its creditors to lend (the end of the housing bubble strikes directly at this). Until then, capital will go to the higher returns, and since the highest returns on production are mostly not in the US, capital that creates production jobs will flow disproportionately away from the US while asset bubbles form in the United States in order to pay for imports. (And the assets they have bought, or allowed the US to borrow against, are likely to crash in the final days of this system. A suckers’ game all around, but the only thing worse than playing is trying to stop playing.)

(Originally published years ago at BOP news, I put it back up here because this is what is at the heart of problems with globalization and why comparative advantage no longer works. April 25, 2015 — and back to the top again, in honor of the Trans-Pacific Partnership Trade Agreement. Sept 2021, and again, twice a decade seems appropriate.)

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The New Age Of Vertical Integration

By Ian Welsh

On August 9, 2021

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When I was very young, conglomerates which controlled the entire chain of production were still somewhat popular. Companies didn’t like outsourcing or offshoring; if a widget went into their product, they wanted to own the factory, or eat least effectively control the supplier. Toyota had lots of suppliers, sure, but they were close the factories and they were under Toyota’s thumb: subsidiaries in all but name.

But business fashion changes, and the mantra of the day became “concentrate only on core business, get an expert to do everything else.” It often did reduce costs, but at the price of losing control. It didn’t work for everyone, General Electric under the over-praised but actually incompetent Jack Welch gutted itself. Following GE’s lead, other companies like the Big 3 auto producers started thinking they were financial companies and in the business of making money, not products.

Didn’t work out well for those who followed the fad whose business model didn’t actually support it.

But it did work well for many, at least in terms of increasing CEO and executive stock compensation. Growth actually slowed in the economy overall, but the economy in neoliberalism exists for companies, not companies for the economy, let alone society.

This era is now ending. Climate change is here, and infrastructure in foolish countries like America is failing repeatedly. China and the US are gearing up for a Cold War, Covid revealed that world shipping is fragile and not always cheap, and that no one can actually understand modern supply chains.

Supply officers panicked and started stockpiling goods, putting further pressure on supply chains and driving up prices for both shipping and materials, BUT if we didn’t have an era where trade and shipping and even production will become more and more subject to shocks, it would just be a passing fad.

But smart CEOS will now be reeling in their supply chains: rationalizing them so they know exactly where all the parts are made; the parts are made close to where they are assembled (if not in the same plant complex) and insulating them from problems with 3rd party shippers. The smart ones will pursue both vertical integration AND will have some geographic distribution (but not too much) so that geographical problems (wildfires, marine inundations, hurricanes, food riots) don’t shut them down entirely.

Those who don’t stand to lose their business entirely if a shock takes out a key part of their supply chain they don’t control or understand, or which supplies generally and is not bound to them.

We’ve been thru a very stupid era, and it’s not over yet, but it’s ending. Central banks can print money, but they can’t print machines parts, oil or food, and the limits of their power to deal with actual, real, non-financial shocks to the system are about to become evident.

Indeed, central banks, by funneling money to rich people and corporations which would have otherwise gone bankrupt have done almost everything within their power to make the system more fragile and worse run.l

When the food riots hit your country, remember to pay a visit to the central bank officers, past and present, to see how they are doing and to express your appreciation for their service. Perhaps you could also see the welfare of neoliberal politicians.

(Accurate job feedback has been removed from our elites, and they need it badly. When you have the chance, remember to help them out by providing it.)

Midas was a fool, but electronic bits are even more worthless than gold when the real world comes knocking.

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The Canadian Economy Under US Hegemony and Neoliberalism

By Ian Welsh

On July 19, 2021

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Canada’s economy is substantially resource based: minerals, wood, agriculture, and, before the collapse, fish. (The Maritimes were originally colonized largely to harvest trees for masts, which Britain had run out of at home.)

Resource economies are boom and bust economies; resource prices are cyclical, and sometimes resources get replaced. Brazil had a huge rubber plantation industry at one point, before chemists figured out how to make synthetic rubber.

Resource economies tend towards corruption because the profits are so high during good times, and they tend to not develop industry for the same reason, but also because the currency rate tends to be too high to allow exports of manufactured goods during boom periods — so any industry gets destroyed during the boom.

For about a hundred years, Canada had a simple solution to these problems. We had a manufacturing sector, and during boom resource times, when the Canadian dollar’s strength made manufactured goods too expensive, we just subsidized the manufacturing and slapped on tariffs.

This was a fair deal, because when resource prices went bust and the dollar went low, manufacturing would boom and the taxes from that would be used to support people who worked in resource extraction.

Combined with some simple industrial policy along the lines of “don’t export raw logs or raw fish,” this created a nicely self-balancing economy, and it did so from about 1880 until the 1980s.

Neoliberalism and idiotic trade deals like NAFTA and the WTO put paid to that. It became very difficult to subsidize industries or to insist that processing be done in Canada; we started shipping raw logs and fish to the US, and we stopped subsidizing manufacturing during resource booms, so Canadian manufacturing got gutted.

This was, well, stupid, and a lot of blame is on Canada, Canadians, and the Canadian system, though, to be fair, most Canadians voted for parties opposed to the Free Trade Agreement (which later became NAFTA), but because of vote splitting in a third-party first past the post system, it went through anyway.

But it’s also because the US is, well, powerful. Canada’s economy is a little smaller than California’s, and Canada is a satrapy. Back in the 50s, Canada had a world-leading aviation industry and created the best fighter jet in the world: the Avro Arrow. The US government put on the pressure, and Avro (the company) was put out of business. The prototypes were sunk in a lake.

The threat was that if Canada didn’t give up its aviation industry, the US would take away auto manufacturing, and that was a much larger industry.

If the US wants Canada to do something, Canada generally does it. There have been exceptions, especially under Pierre Trudeau in the 70s, and in the early 2000s Prime Minister Chretien did refuse to invade Iraq, but they are exceptions.

Anyway, Canada’s economy is now much more fragile than it used to be, because it’s much more integrated into the world economy and much less able to adjust cyclically or insist on keeping a significant manufacturing sector.

This isn’t unique, or anything. It’s the shape of the world economy overall, where countries, especially under neoliberalism, mostly aren’t allowed to have an independent economic policy. Canada was never autarchic; we were always a trading state, but we were able to more or less run our own affairs and insist that resources mined, chopped, or fished here be at least primarily processed here.

Nations which do not make what they need are at the mercy of those who do. The US got around this by maintaining control of making, growing, and digging things without keeping them in the US, until they made the mistake of letting China industrialize.

That has lead to the rise of China/US tensions, and a realization that neoliberalism is a two-edged sword.

More on that later. In the meantime, the reason most of the world’s nations are poor and have to do what the US wants when push comes to shove, is exactly because they were not, and are not, allowed separate industrial and economic policies.

Canada, the near neighbour and satrapy, actually still has a pretty good deal, better, in fact, than is given to American peasants.

But all of that will be changing over the next couple decades.

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