Nearly two years after the pandemic shut down the global economy, policymakers are facing a new challenge as global supply chain bottlenecks push up inflation and hamper economic growth. How countries confront these disruptions will have a big impact on economic growth in the coming year.
We expect that 2022 will be a year of major policy shifts in the United States toward more open policies that will aim to ease domestic inflationary pressures by unclogging the global supply chain logjams and, at the same time, fixing the remaining tariff hurdles from the 2018 U.S.-China trade war.
With the infrastructure bill signed into law and the Build Back Better plan gaining new life in Congress, the government can focus on policies that foster partnerships with key allies on trade and make global supply chains more resilient.
If pandemic eases in 2022—an open question with the recent emergence of the omicron variant of the coronavirus—we believe that global trade will reach above its pre-pandemic trend as supply chain woes fade. The most recent indicator for global trade in the fourth quarter of 2021 from the World Trade Organization pointed to a level that is slightly below the long-term trend, even after a sharp drop from the previous quarter because of the delta variant’s spread.
The economic reopening in many parts of the world and a rejuvenated global trade system will help the global economy maintain an elevated growth level at around 4.5%. Still, that is quite a big if, especially given the recent lockdown in Austria and the emergence of the omicron variant, which might lead to further restrictions.
On the flip side, those international uncertainties only highlight the competitive edge that the United States has had because of its access to quality vaccines and its sharp economic rebound. We believe there will be more opportunities than challenges regarding global trade for the United States in 2022.
Rebuilding global supply linkages
It was not until the pandemic that American businesses' heavy reliance on foreign suppliers was exposed. In effect, the recent disruption is a grander version of the problem that the U.S.-China trade war created in 2018.
Looking at the RSM US Supply Chain Index, we can see the negative impact of the trade war on supply efficiency, dragging the index to one standard deviation below neutral for all of 2018. Once the pandemic hit, the index dropped to its lowest level in two decades of 5.3 standard deviations below neutral.
Despite the difference between the trade war and the pandemic, there is one common denominator: the existence of trade barriers. In the case of the trade war, those barriers are tariffs, and in the case of the pandemic, the barriers are closed borders and restricted travel.
To deal with supply chain bottlenecks, the Biden administration has sought to foster a system that prioritizes domestic production of key products like semiconductors, clean energy products and personal protective equipment.
While it is well within reason to invest in those industries that have major national security implications, it should not be at all costs. There is a fine line between developing a strong domestic production backbone for such products and spending too much on inefficient and costly subsidies.
Competition through globalization was a big reason that prices came down in the last expansionary phase after the financial crisis. It would be another major risk to inflation if global trade continues to be viewed through a negative lens.
The government should walk the line with a more hybrid approach that can diversify the risks from both policy paths to maintain the right amount of domestic capacity while strengthening trade routes with not only its closest allies, but also countries that are willing to cooperate for the common goals.
Developing new international trade agreements and renegotiating existing ones on a larger scale will help reduce U.S. dependency on a single country or a small group of countries for certain products.
Of course, it is impossible for the government to deliberately force multinational corporations like Intel, Nike or Tesla to put their factories in a designated country or move back to the United States. But with effective trade agreements, the government can offer plenty of incentives for corporations to move to a more strategic location, without sacrificing the competitive advantages that country can offer like low labor costs or key resource availability.
On the other hand, the single greatest risk to global trade in 2022 will continue to be potential COVID-19 surges around the world. The United States should consider broadening the distribution of vaccines to major trading partners, and then extend that availability to the rest of the world.
Already, the United States has donated millions of vaccine doses to countries in the supply chain that have been hit hardest by the virus.
In the end, the donations can be an effective diplomacy tool. Access to billions of quality vaccine doses and potential COVID-19 pills will help other countries reduce the economic harm of the coronavirus, and in turn can help foster better relations, in trade and otherwise, with the United States. Not doing so would possibly invite other countries to enter a void through vaccine diplomacy.
The China factor
Even with the severe shock of the pandemic, the trade war between the United States and China has still not been resolved. Little has been done since President Biden took office in January. It all comes at a cost because tariffs lead to higher prices for imported goods, which puts more pressure on inflation.
Both Treasury Secretary Janet Yellen in a recent interview and business leaders in a letter to Biden acknowledge that easing trade tensions could help the current historically high inflation.
Unwinding such tensions while holding China accountable for fair trade standards will be a difficult but important policy point to look for in 2022 when the global economy is back online.
China's economic performance will also have major implications on the U.S. trade deficit with China—the third-largest export destination for U.S. goods.
With the recent economic slowdown in China that might last well into the first half of 2022, there is an upside risk to the U.S. trade deficit that could put a dent in the U.S. economic growth.
A potential domestic economic fallout from the debt saga of Evergrande, the Chinese developer, will be another risk to China's growth and production that will have a ripple effect on the world's economy in 2022, as China remains the manufacturing center of the world.
Navigating global trade in 2022
The uncertainty around the political landscape in 2022, an election year in the United States, will pose substantial challenges to trade policies that favor globalization. But if there is a lesson to be learned from the pandemic regarding trade, it must be about what deglobalization, simulated in real time by the pandemic, can mean to the U.S. economy.
Instead of retreating from globalization, the United States should capitalize on its leadership role to develop a more resilient global supply chain so that it can transfer the benefits from globalization to American citizens.
To do that, one proposed solution is the global minimum tax to crack down on multinational corporations that relocate to countries with favorable tax rates.
While the proposed 15% minimum tax on corporations gained the endorsement of G-20 leaders, it is still a long way from becoming reality. But if it is eventually approved, it will pose new opportunities and challenges for U.S. businesses to compete and benefit from a more level playing field.
Businesses should also lessen their exposure to global trade risks by diversifying their international sources while considering the potential impact of economic shocks.
The takeaway
A supply chain system that cannot survive under the extreme pressures of economic shocks will be reassessed both on a governmental level and on a business level. It won't be a surprise if the term "supply chain stress test"—which has quite a long history—will be more in the conversation in the post-pandemic world.
