Rabo: To Achieve “Buy American” The Entire Supply Chain Needs To Shift From Raw Materials To Components
By Michael Every of Rabobank
There isn’t a lot of direct interest to report on markets today, so I am going to take a small/big segue to cry “Oy Gestalt!” The phrase “Oy gevalt!” is a step up from “Oy vey!” as a cry of deep frustration. “Gestalt” is a school of psychology which emphasizes we need to perceive entire patterns or configurations to solve a problem, sometimes summarized with the adage, “the whole is more than the sum of its parts.” So let’s cry “Oy gestalt!” at what is going on around us.
US President Biden is to meet Russian President Putin in Geneva on 15 June to try to reset relations. This is a U-turn from the Democrats’ Russia obsession – but that’s just domestic politics; comes after Biden called Putin “a killer” – but that’s just domestic politics and bad diplomacy; after a Russian hack on a US oil pipeline, and the skyjacking of a jet; the latter came a few days after the US allowed Russia to complete the Nord Stream 2 gas pipeline to Germany, despite experts saying is not in its long-run interests; and as the WSJ says “Russian Military Seeks to Outmuscle US in Arctic”; a US General warns of Russia and China filling the US void in the Middle East; and the Global Times says “China, Russia eye fixing ‘global disorder’ amid US withdrawal”.
Geostrategically, this summit is a logical attempt at a ‘reverse Nixon’ to move Russia away from China, which is clearly seen as the #1 problem for the US. But in the 1970s, the power differentials between the US, USSR, and China were very different to today. The US could offer China Western markets and FDI: what can it give Russia today they may not already be close to achieving (with China) anyway? Is the US pushing back on NS2, or in the Arctic, or on Ukraine, or in Central Asia, or the Middle East, or Africa? No, it is retreating – while making no effort to create a new pan-European umbrella to try to shift Russia back westwards to a retirement in St Tropez.
As part of the US China-centric Cold War approach, Congress is deliberating a USD52Bn package that could, according to the Commerce Secretary, build 7-10 new semiconductor plants in the US. This is the kind of hi-tech on-shoring required for ‘resilience’ – but it’s small beer compared to what South Korea has planned, and they are still located next door to China and Russia. Moreover, where are the critical components to build the US semiconductors going to come from? These key inputs are increasingly located in territories or facilities friendly, owned, or in China and/or Russia, which are both rapidly expanding their geopolitical footprints. The same is true for green tech inputs, from solar panels to electric car batteries.
There is broad recognition in the US of the need to address deep-rooted inequality, expressed via ‘Buy American’, which Covid-19 has also shown is essential for vaccines, medicines, and medical equipment. However, the entire supply chain may need to shift, from raw materials to components, in order to be able to achieve this political and geostrategic goal. Private businesses are not going to front-run such a disruptive, expensive process unless the state lays down guidelines they can see are going to last. This means new trade relationships and/or physical infrastructure.
Think of China’s Belt and Road: is there any doubt in the mind of anyone involved that China means long-term business with the logistics that allow it to lock in physical supplies of key commodities in a hub-and-spokes model? And if it has the bulk of supply of critical inputs, how can it not then have the bulk of the manufacturing capacity too? Where does that leave US, EU, and UK hopes to ride green tech to a more self-reliant, more socially-equal future?
This brings us back to the more immediate market focus of the inflation/deflation debate. There is obviously a lack of joined-up thinking at play, which is why we have record US job openings and a very low labor participation rate. But how many central banks understand that as they concern themselves with economic justice at home, with echoes of ‘the class struggle’, and the fight against the climate crisis, that part of their ability to achieve these national goals may be directly linked to a very different kind of struggle going on abroad – over future supply chains and the finite resources needed for “Levelling up” and a “Green New Deal”? Few enough that it is worth crying “Oy gestalt!”
Central banks used to understand geopolitics. The Fed and BOE were more than aware of what was going on in WW2, and what needed to be funded, and which supply chains were required to make sure the Allies won. But outside such obvious episodes, central banks were created specifically to fund major national conflicts – not to target inflation or jobs. The assumption was that if you won the war, the jobs would flow; inflation could be worried about later, while the deflation of not having enough gold or silver would be averted. More commercially, think of the US hunt for powerful natural phosphate guano, which saw the States seize 100 islands in the Caribbean and Pacific in the 19th century to ensure enough supply to fuel their growing agricultural economy – which helped keep US food prices low, and to sculpt the global balance of power we see today.
In short, the gestalt view is that dealing with Western inequality is needed to prevent the pillars of liberal democracy from cracking. Here we have broad agreement. This requires abandoning parts of the neoliberal international economic consensus to onshore more production and jobs. Here too we have broad agreement. That requires making supply chains more ‘resilient’. Again, there is consensus here. However, in a Cold War environment where everyone wants to do the same thing, this means forcing an entire nexus of supply chains to come home; and the raw materials at the end of it; and the physical infrastructure to get it there safely. There is little recognition of this uncomfortable mercantilist truth – yet. But if you don’t do the above, then dealing with inequality via more stimulus can only end up in supply-push inflation that kills consumer demand and worsens inequality; or at least in a larger trade deficit that worsens inequality.
Of course, building that infrastructure and directing/controlling supply chains involves a lot more than polite committees passing resolutions. Or guano. It’s raw realpolitik. And it’s expensive. But then again, so are endless stimulus packages, and getting this big picture view wrong. Yet selling this kind of change to countries not used to it is difficult. Try telling the EU it needs to do a lot more than rolling its sleeves up if it wants to have true “open strategic autonomy” as one example. And a new outwards policy focus needs a change in the inwards one too. As the White House pushes for transformative economic and cultural change, the Financial Times today already carries an editorial arguing “Biden may have to choose between cultural and economic radicalism” because “history shows that Americans can only tolerate so much change at any given time”. Try selling those voters the message that the US has to build its own muscular Belt and Road when it cannot agree on building any roads at home.
A lot more change will be seen regardless, because others are already playing this game. And imagine if this spike in supply-chain driven inflation gets worse and isn’t transitory. Imagine if it is or isn’t covered by wage growth. And imagine if we then get deflation to follow. ”Oy gestalt!”
Wed, 05/26/2021 – 11:01