Don’t get too excited about deglobalisation


One difference between the rivalry with China and the cold war is that the Soviet Union was completely economically segregated from the western world. That is not the case with China nowadays: cheap goods have flooded western markets for decades. But are we heading back to the multipolar world of the 20th century?

China and the West are out of step in terms of monetary policy. China’s central bank actually moved to reduce interest rates this morning, after stronger-than-expected data on wages. A short-term lending rate was cut from 2 per cent to 1.9 percent.

How come? Because inflation in China is beginning to go into reverse as its economy sags.   China’s Consumer Price Index (CPI) is running at just 0.2 per cent. Producer prices – raw materials which determine a large part of the cost of manufacturing goods – are stumbling, falling by 4.6 per cent in May.

A large part of this is down to weakness in the Chinese economy. Exports in May plunged by 7.5 per cent. Just like in the West, the economic rebound which followed the end of lockdowns has faded. Once again, it has been shown that you cannot lock down an economy for months on end – extremely severely in China’s case – and expect to be able to carry on where you left off.

There is a positive side to low Chinese inflation. For three decades, inflation in the West was tempered by imported deflation from China (i.e. the form of cheap Chinese-made goods). Until recent months it was widely thought that we had come to the end of that era – that goods we import from China are not going to get any cheaper. Now, it seems less clear that this is the case. So, could we soon return to the benign inflationary conditions which existed up until 2020, and see interest rates in the West fall as a result?

Trouble is that we are in a much more protectionist world now. While China is quite capable of flooding the West with relatively cheap electric cars, for example, western governments are resisting this. Joe Biden’s Inflation Reduction Act is offering huge bungs to people who buy US-made electric cars. EU rules of origin are trying to keep out Chinese batteries and other components for European cars. The question is to what extent western governments are prepared to go to protect their domestic industries. Protectionism might help extend the life of some western jobs, but it also makes goods needlessly expensive for consumers. At some point there is bound to be resistance to protectionist measures.

It has been shown that you cannot lock down an economy for months on end – extremely severely in China’s case – and expect to be able to carry on where you left off

However, that may not come in the near future, not least because of Ukraine. One of the reasons for falling producer prices in China is the availability of relatively cheap Russian oil and gas. The West is boycotting Russian fossil fuels, pushing down their prices as a result, but China has shown little intention of following suit. On the contrary, it has upped its imports of Russian oil and gas. Given that Chinese-made goods are manufactured with the aid of Russian fuel, importing them to Europe is a form of indirect sanctions-busting – something western government are likely to wake up to before long.

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Meanwhile, the EU is developing proposals for a carbon border tax – or Carbon Border Adjustment Mechanism – which will penalise Chinese-made goods. China derives a far higher proportion of its electricity from coal, which means higher embedded carbon emissions compared with goods made in the West.

Put all this together and it may be that the forces of globalisation no longer work in quite the way they did up until 2020 – the West could be much slower to import an inflation slowdown from China.    

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