Geopolitics and Trade: Mixed Messages

By Ulf Bergman

 

At the same time as the new US administration is realigning the American trade and foreign policies, friends and foes are sending messages of varying subtlety to the new President. As often is the case, the signals are a mixture of sticks and carrots, encouraging cooperation while providing a show of strength.  

In his inauguration speech, President Biden spoke about re-establishing the relationships with the country’s traditional allies. He also showed a firm commitment to multilateralism, with re-joining the WHO and the Paris-agreement being some of his first acts in office. Meanwhile, the US also proceeded with its longstanding practice of freedom of navigation operations, with the aircraft carrier USS Theodore Roosevelt and its carrier group sailing through, what have become disputed, parts of the South China Sea.

Likewise, Chinese President Xi made a speech on Monday at the virtual World Economic Forum highlighting the benefits of global cooperation on issues such as trade and environment. The speech also came after a weekend show of force by the Chinese armed forces, with multiple strategic bombers flying over the Strait of Taiwan. The move was widely seen as an early, and not so subtle, signal to the new administration in Washington.

Despite the leaders on both sides of the Pacific extoling the benefits of cooperation, there are no shortage of flashpoints between the two nations. The new US administration has signalled that it will maintain many policies on China inherited from the previous administration, notably on trade and security. While the tone may be different and cooperation in areas, such as environment, potentially increasing, the two nations are likely to remain rivals. The trade imbalance between the two nation is likely to continue to be a major issue from American perspective, with last year’s trade deal looking like a failure. The new administration is also unlikely to abandon the quest for more Chinese purchases of American goods and commodities.

The new president is also set to reinforce the “buy American” policy for the federal procurement contracts, something that could become especially powerful in combination with the expected infrastructure investment bill in February. The move can be expected to be seen as protectionism by many allies across Europe and Canada, with access to the American market limited for their multinational companies. It is also notable that the issue of trade was very much absent from the reporting covering the recent conversations between President Biden and some key European leaders.

Despite the US elections are recently over, the race for the midterm elections is very much in full swing. The big prize is the Senate-majority, which given the current 50/50 split, could easily go either way in 2022. Hence, it is likely that the Biden-administration will promote and support the manufacturing industry in many swing-states that previously voted for Trump, hoping to secure a continued control of the Senate.

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An American initiative to minimize overseas purchases by the federal authorities could have a significant impact on the shipping industry, as the annual spending accounts for around 600 billion dollars. Container shipping could stand to lose considerable volumes when federal agencies are forced to find domestic substitutes. On the other hand, a boost in industrial output in the US, spurred by federal spending, would fuel an increase in the country’s demand for industrial commodities. In addition, the expected bill on infrastructure and green-energy investments is set to increase demand for steel and other construction materials. If there is a stricter federal policy of prioritizing domestic sources, American production of such materials will rise and lead to increasing imports of dry bulk commodities.

A boost in US industrial production may be contrary to Adam Smith and the economic theory of comparative advantages, with the output likely to be more expensive than the imported substitutes. However, such inefficiencies are often good news for the shipping sector. It often leads to commodities having to travel longer distances and it is not difficult to envisage that Australian coking coal could find its way into American steel mills if the Chinese import restrictions continues and American steel production increases.