June 13, 2024
World Economy

Geopolitical Tensions Continue to Shape Global Trade

State of the Global Economy 

Last week Sweden became the second advanced economy to cut interest rates as the post-COVID inflation surge eases, following Switzerland which first cut rates in March. All eyes are now on the European Central Bank (ECB), which meets next on June 6th. Eurozone consumer price index (CPI) data released today shows April inflation holding steady at 2.4%, the same as March, while Core CPI, which strips out the more volatile food and energy prices, fell from 2.9% in March to 2.7% in April. On Wednesday, the European Commissioned announced that it expects inflation to reach the ECB’s 2% target in 2025, prompting speculation that rate cuts will begin in June. Elsewhere in Europe, the Bank of England held rates steady though the market is increasingly optimistic that rate cuts will begin this summer. The UK also emerged from a recession, with GDP growing 0.6% in the first quarter after shrinking slightly in the last two quarters of 2023. 

Across the Atlantic, the U.S. economy shows some signs of slowing. Inflation eased slightly, as April CPI registered an annual price increase of 3.4%, a slight decrease from the 3.5% registered in March. Core CPI fell from 3.8% in March to 3.6% in April, the lowest level since April 2021. Further, U.S. employers added 175,000 jobs in April compared with 315,000 in March, while the unemployment rate rose from 3.8% to 3.9%. Wage growth slowed as well, with average hourly earnings rising just 3.9% from a year earlier in April, compared with 4.1% in March and 4.3% in February. Combined, these data suggest that price pressures could continue subsiding, despite the stubbornly high inflation in recent months. 

Meanwhile, China continues to show signs of a slow economic recovery. After declining in March, exports in April grew 1.5% on an annual basis while imports surged 8.4%. The high import volume was driven by an increase in equipment for developing AI and other high-tech products as the government leans on manufacturing to boost economic growth and offset slumping real estate investment. At the same time, China’s consumer inflation rose 0.3% in April, marking the third straight month of positive inflation. China’s economy had been beset by stagnant consumer prices for over a year, as consumers opt to save instead of spend following the upheaval of the COVID-19 pandemic.  

Around the World 

Geopolitical tensions continue to shape global economy as trade flows are set to rebound: International bodies such as the OECD, IMF, and WTO are forecasting a sharp rebound in global trade in 2024 and 2025 after a slowdown in 2023 driven by inflation, surging interest rates, and sluggish demand. The OECD, for instance, projects the global trade in goods and services to rise 2.3% this year and 3.3% in 2025, compared to 1% in 2023. Still, all three organizations warn about the risks to trade caused by geopolitical tensions as governments focus on national security, supply chain resilience, and support for domestic industries. Per the WTO, trade flows within blocs of geopolitically aligned countries have been growing 4% faster than trade between those blocks since Russia’s full-scale invasion of Ukraine in February 2022. The WTO also found that bilateral trade between the United States and China has grown 30% less than their trade with the rest of the world since 2019. 

Xi Jinping visits France, Serbia, and Hungary as trade between Europe and China slows: Chinese leader Xi Jinping visited Europe for the first time in 5 years last week, seeking to rebuild trade ties with the key economic bloc. In the first four months of this year, China’s exports to the EU fell 4.8% from the year before, while its imports from the EU dropped 5.3%. European leaders are also increasingly frustrated by surging Chinese exports that threaten to undercut their domestic industries, along with China’s continued support of Russia. While no major breakthroughs were made in France, Xi received a much warmer welcome in Serbia and Hungary. China and Hungary signed several new agreements, including an “all-weather comprehensive strategic partnership for the new era,” while China and Serbia signed an agreement to build a “shared future.” China has invested billions in the two nations in industries such as mining, agriculture, and energy, with more likely on the way. 

Biden Administration slaps new tariffs on Chinese goods amid frustration with Chinese manufacturing overcapacity: President Biden on Tuesday announced major increases in tariffs on a range of Chinese goods, expanding the sweeping tariff program implemented by his predecessor. The new tariff rates exemplify the U.S.’s “small yard, high fence” approach vis-a-vis China; they range from 100% for electric vehicles, to 50% for solar components and legacy chips, to 25% for steel and aluminum—but only affect about $18 billion in imports, or 4.2% of all U.S. imports from China, and will take effect over the next two years. The Biden administration frames the tariffs as a response to China’s unfair trade practices, such as subsidies, intellectual property theft, and forced technology transfer, which threaten jobs and emerging industries in the United States. Still, tariffs can increase costs for consumers and reduce jobs in the affected sectors. Some analysts view the tariffs implemented by President Trump and maintained by President Biden as harmful to the U.S. economy overall. 

Vladimir Putin visits China to buttress relationship with its key economic supporter: Russian President Vladimir Putin was in Beijing this week for an official state visit as China and Russia look to continue their “no limits” partnership. The trip comes as China plays a growing role in supporting the Russian economy during its invasion of Ukraine, such as by purchasing Russian energy and supplying it with components for its military industry. Indeed, some analysts view China’s support as a “lifeline” for the Russian economy and war effort. Since Russia’s full-scale invasion of Ukraine in February 2022, Chinese exports to Russia have risen 60%, which includes over $300 million each month in dual-use products. Notably, however, Russia is much more dependent on the relationship than China. While China accounts for about 33% of Russia’s overall trade, Russia makes up only 4% of China’s trade. Still, while the United States and its allies are increasingly pressuring China to roll back its support of Russia, China seems determined to continue the relationship. 

United States revokes licenses for sale of semiconductors to Huawei: Last week, the Biden administration revoked export licenses that allow U.S. semiconductor firms Intel and Qualcomm to sell certain products to China’s Huawei in the latest U.S. effort to curb China’s tech base. Huawei has been under U.S. export restrictions since 2019 and, while these restrictions had a short-term impact—Huawei reported a 70% drop in profits in 2022—the company appears to have recovered. Earlier this year Huawei reported 2023 profits of $12 billion, more than double its profits in 2022, raising questions about the efficacy of U.S. sanctions. Economic sanctions have become a go-to foreign policy tool for the United States, though their effectiveness is hotly debated. While some view them as a potent foreign policy tool, others question their long-term effectiveness as targets may find workarounds. U.S. export controls also risk harming U.S. companies through lost revenue. Both Intel and Qualcomm project decreased revenues due to U.S. export controls, while a study from the New York Fed estimated that previous U.S. export controls cost U.S. semiconductor firms an aggregate $130 billion in market capitalization.  

What we’re watching 

  • May 29 – South Africans head to the polls on the 30th anniversary of their nation’s first democratic elections. The ANC, Nelson Mandela’s party and the winner of every national election, is under more pressure than ever before as the economy becomes a central issue in the BRICS member nation. By one measure, the World Bank has ranked South Africa as the most unequal country in the world. 
  • June 11 – The U.S. Federal Reserve meets to decide on interest rates. 
  • June 13 – 50th G7 Summit held in Fasano, Italy. 

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