Trade is going through a period of displacement and redistribution of supply chains, its size remains stable overall, but the decrease in foreign direct investment suggests that it will be negatively affected, states in his interview with “Vima” the Bernard Hookmanprofessor and director of Global Economy at the Robert Schuman Center for Advanced Studies at the European University Institute in Florence.
The trade expert and researcher at the Center for Economic Policy Research (CEPR) believes that the politicization of trade affects SMEs the most, and believes that EU trade policy decisions should be discussed by European leaders.
How would you describe the global trading system today?
“I don’t think we’re in a trade war, but the temperature is dropping. We are seeing a redistribution and shift of supply chains, many companies are trying to diversify away from China, partly for political reasons, partly because of recent shocks, in the Suez Canal, in Panama, due to climate change. Companies are trying to ensure their supply chains are more resilient, reduce the impact of efforts to politicize trade and instrumentalize trade policy, with China and the US leading the way.
The US is more of a concern than China, especially for some companies that use the dollar. If they are on a sanctions list or do business with someone on the list, they are in trouble. So companies are paying more attention to knowing the supply chain, the suppliers, and this especially affects the smaller companies.
Large ones can diversify their supply chains more easily, which small ones cannot, which are more specialized and depend on one or two suppliers, and if they happen to be in China or affected by political shocks or other exogenous shocks , then they face problems. Often their relationships with suppliers are long-term and there are technological interdependencies.
The problem is not evident in the statistics because the largest share of trade is dominated by large companies and they continue to trade. However, although we see that the figures for world trade are relatively stable, what will happen can be seen in where companies are investing. Foreign direct investment flows are declining significantly. So we’ll see that trend affect trade, we’ll see it in a year or two in the overall trade figures, but for now we’re seeing shifts. When this change becomes apparent, then the impact on smaller companies will be greater.”
“The trend of a significant reduction in foreign direct investment will be seen to affect trade,” says Bernard Hookman.
To which markets are companies shifting and moving their production?
“They move production to Vietnam, Mexico, Eastern European countries. Many companies are leaving China, but so are Chinese companies; they prefer to be in Singapore, Mexico or Hungary. Some production transfer is done for impressions, some is actually transferred. But even Ireland is attracting significant investment from the momentum created by Chinese companies. The big question is how tough the US will be. If at some point they separate the companies that are in Ireland but a significant part of their resources still comes from China and goes to the US.”
The backbone of the European economy is SMEs, so will we see a significant impact on the European economy?
“We will have to see the whole again. Overall we may see some reduction, but for certain industries and certain companies it may be dramatic, because if they are forced to diversify their supply chains for geopolitical reasons, the costs will increase, so they may go bankrupt. We don’t know yet, but the situation is fluid and creates uncertainty. High-tech companies that do business with China may reduce investment, so there will be an impact. In Italy, for example, they are not satisfied, they cannot cope with this situation.”
Tariffs on electric cars hurt who the most?
“The consumers, because the prices will increase, but also the green goals will become more difficult to achieve. Will the Chinese lose? I don’t think so. China has already been blocked from the US market for a long time, there are no Chinese cars in the US, and the EU is trying to balance the interests of the industry with pressure from the US, and the will to convey to China that there needs to be reciprocity, but I don’t think it will “hurt” China. Even with tariffs the prices will increase but will remain cheaper than European cars. Will it fulfill the goal of expanding the availability of domestic European cars? No”.
How do you see the discussions on Mercosur?
“We need to be more cohesive. We have been negotiating Mercosur for twenty years and at the same time unilaterally imposing the deforestation directive that affects 30% of Brazil’s exports, and from December Brazil will not be able to export these products to the EU. The issue is bigger. We should have more relevant policies towards large emerging markets. If we want them to be our partners, we should probably talk to them more. The deforestation directive has caused a huge stir in Brazil, and rightly so.”
You say there should be greater cohesion, but we see that European leaders are following their own policy towards China.
“We think we should impose tariffs on electric cars from China, it makes perfect sense, China is subsidizing their production and we want to protect our production. This means China will retaliate. They are now saying no more ham from Spain, the issue hurts Spain, it hurts other countries, maybe not. There is an internal dimension to the use of trade policy, which has never been taken seriously in Brussels. Because it concerns redistribution of income.
We give more money to Volkswagen, for example, and take away from pork producers in Spain. We may agree on the ultimate goal, but we need to manage the negative consequences and especially if we are going to use trade more actively for strategic reasons. These issues should be discussed in the European Council, “this is what we plan to do, we foresee retaliation, are the leaders in agreement?”.
What can we do to support the cost of adaptation and cost management in case we save one sector but others are squeezed. What makes a Volkswagen worker more important than a pork producer? Probably nothing.”
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