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The big mistakes of the anti-globalisers

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Globalisation is not dead. It may not even be dying. But it is changing. In the process, the institutions that shape it, notably the World Trade Organization, are being forced to change, too. We are moving towards a different and far more difficult world. But, in setting our new course, we need to avoid some mistakes. Here are seven.

The first is to focus attention only on trade. As Maurice Obstfeld, former chief economist of the IMF, has noted, today’s fluid global capital markets have generated waves of financial crises, while bringing little evident benefit. Insufficient attention is paid to this reality, largely because the interests in favour of free capital flows are so powerful while their economic impact is so hard for most people to understand.

Line chart of Global merchandise trade as a share of GDP (%) showing The recent era of globalisation is unprecedented and has not reversed

The second is a belief that the era of globalisation was an economic catastrophe. In a recent note, however, Douglas Irwin of Dartmouth College observes that between 1980 and 2019 virtually all countries became substantially better off, global inequality declined and the share of the world’s population in extreme poverty fell from 42 per cent in 1981 to just 8.6 per cent in 2018. I make no apology for having supported policies with such outcomes.

The third is the idea that rising inequality in some high-income countries, notably the US, is principally the result of openness to trade or, at the least, a necessary consequence of such openness. Evidence and logic are to the contrary. Indeed, this is a superb example of “lamppost economics” — the tendency to focus attention and blame where politics casts the brightest light. It is easy to blame foreigners and resort to trade barriers. But the latter are a tax on consumers for the benefit of all those in a specific industry. It would be better to tax and redistribute income less arbitrarily and more fairly and efficiently.

The fourth is the supposition that a greater self-sufficiency might have protected economies from recent supply chain disruptions, at modest cost. To someone whose country was forced into a three-day week by a miners’ strike in 1974, this has never seemed plausible. The recent shortage of baby formula in the US is another example. Greater diversification of supply makes sense, though it can be costly. Investment in stocks can make sense as well, though that will also be costly. But the idea that we would have floated through Covid-19 and its aftermath if every country had been self-sufficient is ludicrous.

The fifth is the notion that trade is an optional economic extra. Here lies a paradox in trade policy: the countries that matter most in trade are the ones to which trade matters least. The US is the only economy in the world that could conceive of being largely self-sufficient, though even it would find this costly. Smaller countries are dependent on trade and the smaller they are the more dependent they tend to be: Denmark or Switzerland could not have attained their current prosperity without it. But big countries (or, in the case of the EU, large trading blocs) shape the world trading system, because they have the biggest markets. Thus, the trading system depends on the most indifferent. Smaller countries must try hard to offset that indifference.

The sixth is to presume we are already in an era of rapid deglobalisation. The reality is that the ratio of world trade to output is still close to an all-time high. But it stopped rising after the financial crisis of 2007-09. This is the result of the dwindling away of fresh opportunities. Global trade liberalisation essentially stalled after China’s accession to the WTO in 2001. Given that, the world has by now largely exploited trading opportunities. But, as the World Bank’s World Development Report 2020 pointed out, this is a loss: the ability to participate in global value chains has been an engine of economic development. These opportunities need to be spread more widely, not less so.

Line chart of Difference between global growth in trade volume and growth in GDP*  (average of previous five years, % points) showing Trade grew far faster than world output for more than two decades

The final mistake is the view that the WTO is redundant. On the contrary, both as a set of agreements and a forum for global discussion it remains essential. All trade involves the policies (and so the politics) of more than one country. A country cannot “take back control” over trade. It can only decide policies on its side. But if businesses are to make plans, they need predictable policies on both sides. The more dependent they are on trade, the more important such predictability becomes.

This is the essential case for international agreements. Without them, the recent backsliding would surely have been greater. The WTO is also necessary to ensure regional or plurilateral agreements fall within some set of agreed principles. It is not least the place to carry out discussions of issues that connect closely to trade, such as the digital economy, climate or the biosphere. Some seem to imagine that such discussions might happen without engagement with China. But China is too important to too many for that to be possible.

Bar chart of Developing countries' trade with China & US/EU, as a % of  total trade (2021, %) showing China is a crucial trading partner for many developing economies

As Ngozi Okonjo-Iweala, director-general of the WTO, remarked back in April, the impact of new competitors, rising inequality within countries, the global financial crisis, the pandemic and now the war in Ukraine “have led many to conclude that global trade and multilateralism — two pillars of the WTO — are more threat than opportunity. They argue we should retreat into ourselves, make as much as we can ourselves, grow as much as we can ourselves.” This would be tragic folly: consider the economic damage that would be done in the process of reversing most of the trade integration of the past few decades.

Yet the disruptions of our age — above all, the rise of populism, nationalism and great power conflict — put the future of global trade in question. So how should we try to reshape trade and trade policy? That will be my topic for next week.

martin.wolf@ft.com

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Economy

FirstFT: Nato to bolster Baltics

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Good morning. This article is an on-site version of our FirstFT newsletter. Sign up to our Asia, Europe/Africa or Americas edition to get it sent straight to your inbox every weekday morning

Nato is to agree an overhaul of its plans to offer better protection to the alliance’s eastern flank, tearing up a model that could have meant relinquishing Baltic states and then attempting to recapture them in the event of a Russian invasion.

Jens Stoltenberg, Nato secretary-general, told the Financial Times that the military blueprint, to be agreed at an annual leaders’ summit that begins in Madrid tomorrow, would drastically upgrade the alliance’s eastern defences, shifting focus from deterrence to a full defence of allied territory.

Estonia’s prime minister has claimed that under the current doctrine, Baltic states would be “wiped off the map” by a Russian assault before Nato attempted a counter-attack to liberate them after 180 days.

The alliance will “significantly reinforce” its defences in eastern Europe, Stoltenberg said, pledging that Russia would not be able to capture the Estonian capital Tallinn “just as they have not been able to seize the city of Kirkenes in northern Norway or West Berlin during the cold war”.

More on Russia’s war in Ukraine

  • Military developments: Russian missiles struck residential buildings in central Kyiv yesterday. Ukraine’s retreat from the eastern city of Severodonetsk was a “tactical” move to avoid a repeat of the siege in Mariupol, the country’s military intelligence chief said.

  • Energy politics: G7 leaders meeting in the Bavarian Alps are seeking a deal to impose a “price cap” on Russian oil to curb Moscow’s ability to finance its war.

Thanks for reading FirstFT Europe/Africa. To start your week, here’s the rest of the day’s news. — Jennifer

1. EY valued NSO Group at $2.3bn The Big Four accounting firm valued the secretive Israeli spyware company at $2.3bn, months before the maker of the Pegasus cyberweapon needed emergency bailout funding. By contrast, Berkeley Research Group, which represents NSO’s private equity owners, said this year that the company’s equity was “valueless”.

2. BIS: leading economies at risk of high-inflation trap The Bank for International Settlements warned yesterday that major economies were close to “tipping” into a high-inflation world in which rapid price rises dominate daily life and are difficult to quell, and urged central banks not to be shy about inflicting short-term pain and even recessions to prevent it.

Line chart of proportion of countries with inflation over 5 per cent  showing The proportion of countries with high inflation has exploded

3. RWE: UK windfall tax could risk £15bn in renewables The head of one of the country’s largest power producers has warned that Germany’s biggest utility will reconsider £15bn of investment in the UK’s renewable energy sector if the country imposes a windfall tax on electricity generators.

4. UBS courts US investment heavyweights The Swiss lender, the world’s biggest wealth manager, has begun courting investment houses to become top shareholders as it tries to improve its market value to be closer aligned with Wall Street peers and project an image as a global bank.

5. UK Treasury takes stake in sex party planner The British taxpayer has become a shareholder in Killing Kittens, known for its exclusive and hedonistic events, under the Future Fund, a scheme set up by Chancellor Rishi Sunak to support innovative firms during the pandemic under which loans are converted into equity.

The day ahead

UK lawyers on strike Members of the Criminal Bar Association begin a walkout in an escalating dispute with the government over funding, which is expected to cause widespread disruption to hearings across England and Wales.

UK changes N Ireland trading regime MPs will have their first vote on Boris Johnson’s legislation to unilaterally rip up parts of Northern Ireland’s post-Brexit trading arrangements, despite fierce criticism from Brussels.

Economic indicators The annual European Central Bank Forum on Central Banking begins in Sintra, Portugal. In the US, durable goods orders may show whether inflation, rising interest rates and economic uncertainty weighed on demand in May. (FT, WSJ)

UN Ocean Conference The week-long conference on ocean conservation and sustainability starts and is co-hosted by Kenya and Portugal.

Companies developments Nike posts fourth-quarter results. Disney’s board meets for two days less than a week after giving under-fire chief executive Bob Chapek a vote of confidence.

Wimbledon begins The tennis tournament starts at the All England Lawn Tennis and Croquet Club in south-west London without the men’s top player or women’s reigning champion. Daniil Medvedev is ineligible after a ban on Russian players, while Ash Barty has retired. “Retiring aged 25 seems like filing for divorce while on honeymoon. But Barty’s decision reveals various truths,” writes Henry Mance.

What else we’re reading

Grim times lie ahead for UK The country is in the throes of the kind of labour unrest not seen for decades. The explanation for it is clear. Unanticipated inflation delivers losses everybody wants to recoup. This triggers social conflict, writes Martin Wolf. Yet if inflation is bad, so is the cure.

The road to rolling back Roe vs Wade As the Supreme Court overturns the landmark 1973 ruling enshrining the constitutional right to abortion, Lyz Lenz documents the rise of the Christian right and how it reached this historic moment. In response to the ruling, Democratic lawmakers are stepping up efforts to establish “sanctuary states” for reproductive rights.

Crypto and meme corporate bonds follow their own path The crash of some of the flagbearers of the equity bubble has been painful for investors. Less noticed are the losses of their bonds. Such gaps illuminate differences in the ownership and returns for stocks versus bonds, writes Ellen Carr at Barksdale Investment Management.

How the beauty industry left tortoise-like Revlon trailing Once a behemoth of the beauty industry, Revlon has been sidelined by modern influencer- and social media-driven make-up brands. The 90-year-old group’s bankruptcy filing reveals how competitive and fast-paced the sector has become.

There’s no such thing as an accidental plagiarist The acclaimed Australian novelist John Hughes claims that many of the 58 instances of plagiarism in his new book were by accident. Everyone steals when they write, but where does “good” theft end and clumsy rip-off start?

Books

Whether you are looking for a book on urbanism, a literary thriller, a tome on the royal family or something else unexpected, you will want to take a look at these must-read titles recommended by FT writers and editors.

An abstract illustration of a man and children looking at boxes of books that form the body of a kite
© Cat O’Neil

Thank you for reading and remember you can add FirstFT to myFT. You can also elect to receive a FirstFT push notification every morning on the app. Send your recommendations and feedback to firstft@ft.com. Sign up here.



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The high cost of producing cheap food

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Anyone who wants to better understand the costly economic and political externalities that come with cheap food should spend some time in America’s Midwestern farm country. I did last week, driving from Wisconsin to Missouri through hundreds of miles of corn and soyabeans, the vast majority of which is grown not as food but as feed for cattle.

It was easy to find fast food and red meat in the small towns I passed, but it was often tough to find a decent supermarket with fresh fruits and vegetables. What a terrible irony that some of the richest farmland in America is often where you are most likely to find a “food desert”, or a place where it is challenging to source the components of a healthy diet.

Nearly a century on from the Great Depression, we still farm as we did then, trying to produce cheap calories for growing numbers of hungry people — and using huge amounts of fossil fuels — rather than providing better nutrition for an overfed yet undernourished population in ways that might support the planet and local communities.

Consumers have become used to cheap food. But it’s a model that makes little sense environmentally, and has led to tremendous consolidation on the production side.

Consider that in the middle of the biggest commodity price spike since the 1970s, some farmers are still struggling to stay in the black. Texas A&M University research shows that two out of three rice farmers will lose money this year, since input costs including fuel and fertiliser are rising even faster than commodity prices. Corn and soyabean producers will make money, but not as much as you’d think.

As Joe Outlaw, a professor at Texas A&M, put it in his testimony on the topic to the House Agricultural Subcommittee, consumer inflation may be 8.5 per cent but farmers have been hit with price increases at double that rate on seed. For other inputs, inflation is even higher. Herbicide is up 64 per cent from 2021 to 2022, and nitrogen fertiliser, perhaps the most important input of all, is up a whopping 133 per cent. Corn, meanwhile, is up only 4.84 per cent per bushel, and soyabeans are up a little over 7 per cent year on year.

Farmers have tried to hedge and hoard to account for these spikes, but they are outgunned by large, highly concentrated companies that control much of the agriculture supply chain. As Outlaw explained: “Simply put, the input suppliers would not lock in a price until the producers [meaning farmers] agreed to take delivery.” 

The result is that many farmers, particularly small and medium-sized ones, will scale back on inputs this planting season, which will in turn hurt their future harvest. Grain trading giants such as Cargill are getting rich, as are many multinational energy companies. But growers themselves are barely in the black.

All of this speaks to a model that no longer works. Farming in America has been about cheap food for nearly a century. The New Deal encouraged the production of massive amounts of subsidised cereal grains to feed an influx of urban dwellers. The Reagan revolution encouraged further consolidation — as an illustration, consider that four companies control up to 85 per cent of the meat market.

Democratic President Bill Clinton then passed the “Freedom to Farm” act, which eliminated any government management of supply and demand. This is one reason farmers were dumping milk after the pandemic; overproduction encourages boom and bust cycles. It also makes it difficult to get food inflation under control now. While the US has strategic petroleum reserves, it has no grain reserves for domestic buyers despite being one of the world’s largest producers.

The “pile it high, sell it cheap” paradigm assumes that simply driving down prices will create a healthy market. But it comes with obvious costs for the planet, our health, and in some parts of the country, for politics. One would think that a state like Missouri, for example, would be fertile ground for Democrats campaigning on a message of corporate greed. In fact, the state voted for Donald Trump in the last election — in part because the failed industrial farming model hasn’t been replaced by much else, creating a disenchanted population that’s ripe for the former president’s dog whistles and his brand of populism, with its empty promises of help for the white working class.

Plenty of neoliberal economists might shrug at all this and note that farmers make up less than 2 per cent of the labour force (the agricultural sector as a whole is slightly over 10 per cent). They might even shrug at the fate of a state like Missouri, since they tend to think about overall numbers, not individual people in so-called flyover states. But in America’s electoral college system, states like this still matter — a lot. Taken together, they can make the difference between winning or losing.

So, what’s to be done? The Biden administration is correct to go after concentration in agriculture and energy, as in other industries. Indeed, the discrepancy between input costs and raw commodity prices makes me think that the White House has a point about corporate price gouging. If the commerce department gets its way, more rural broadband would help too. But ultimately, we are going to have to rethink the entire way we farm in America. Like so much of our economic system, it was built for a different era.

rana.foroohar@ft.com



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China’s Yangtze Memory takes on rivals with new chip plant

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The Chinese memory chip producer Yangtze Memory Technologies plans to bring online a second plant in its home city of Wuhan as early as the end of this year, sources familiar with the matter say, in a move that could further close the company’s technology and output gap with global leaders such as Samsung of South Korea and Micron Technology of the US.

The company, also known as YMTC, needs to expand production after a growth spurt that put it on the world’s semiconductor map and delivered a notable success in Beijing’s attempt to reduce China’s reliance on imported chips.

Its original plant has been running near capacity and churned out 100,000 wafers a month at the end of 2021, two people told Nikkei Asia.

YMTC held a global market share of nearly 5 per cent last year, according to analyst and industry estimates. It has become the world’s sixth-largest Nand flash memory maker behind Samsung, SK Hynix, Kioxia, Western Digital and Micron, and the only one from China.

About 40 per cent of its output at present is 128-layer 3D Nand flash memory, the most advanced produced so far by a Chinese chipmaker. But that is one or two generations behind global leaders Samsung, SK Hynix and Micron. The rest of YMTC’s output is of older 64-layer 3D Nand flash memory.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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The new plant would first build mainly 128-layer flash memory and could later shift to even more cutting-edge chips, such as 196-layer or 232-layer 3D Nand flash memory, assuming development goes smoothly in 2023 and 2024.

Apple has been testing YMTC’s flash memory products since last year and could place its first order for “limited quantities” as soon as this year, two people familiar with the matter told Nikkei Asia. The US tech giant has been talking with the Chinese chipmaker since 2018 in hopes of finding a cost-effective source of storage components.

Securing a deal with Apple would be a milestone, highlighting the quality of Yangtze Memory’s chips, industry executives say. Apple’s Chinese suppliers, including those from Hong Kong, already outnumber those from Taiwan, making China the largest source of suppliers to the US company, according to a Nikkei Asia analysis. Apple also has close ties with several Chinese electronics manufacturers, including Luxshare, Goertek and BYD.

Yangtze Memory’s success is also viewed as a victory for China, as the world’s second-largest economy strives to localise semiconductor production and build industry champions. Yangtze Memory is backed by the China Integrated Circuit Industry Investment Fund, Beijing’s most important chip investment funding vehicle. And YMTC is bullish on its growth prospects, increasing its investment budget from $24bn in 2016 to the equivalent of $32.8bn this year.

The Chinese chipmaker is currently installing equipment at the new chip plant, a key step before it goes into production. The factory will eventually have twice the capacity of the first, several people briefed on the matter said. The total capacity for the two factories will reach 300,000 wafers per month and could help YMTC expand its market share to more than 10 per cent globally.

The company is split into two parallel teams composed of hundreds of top engineers tasked with developing 196-layer and 232-layer flash memory, one of the people said. Its aim is to catch up with foreign rivals.

The most advanced products on the market, which Samsung, Micron and SK Hynix have all succeeded in producing, are 176-layer 3D Nand flash memory chips. They are now racing to create chips composed of more than 200 layers. Kioxia and Western Digital said they will be making 162-layer 3D Nand flash memory by the end of the year.

The more layers a flash memory chip has, the more advanced the chips are — and the harder they are to develop and produce commercially. Nand flash memory is a vital storage component used in all kinds of electronic devices, from smartphones and PCs to data centre servers and connected cars.

Most YMTC flash memory is currently used to make consumer-grade solid-state drives (SSDs), mainly for the Chinese market. Its clients include leading storage makers Lenovo, Longsys and Kimtigo of China, as well as Adata of Taiwan. YMTC has also introduced its own brand, ZhiTai, to sell SSDs directly to consumers.

Its share of the global flash memory market has risen quickly from 1.3 per cent in 2019, when it first put 64-layer Nand flash memory into production, according to Counterpoint Research, which believes it could grab nearly 6 per cent of the market by 2023, up from 4.8 per cent in 2021.

Brady Wang, an analyst at Counterpoint, told Nikkei Asia that Yangtze Memory had been working on its technology even before the company was formally launched in 2016. It had demonstrated its capabilities and gradually become a viable global player after years of effort, Wang said. It had also more than doubled its payroll in four years, to about 8,000 employees currently.

“It recruits many engineers and veterans who have Chinese backgrounds but used to work for multinational tech and chip companies,” Wang said. “Managing a plant, however, is different from managing several plants at a massive scale. It remains to be seen if it [can] successfully ramp up production.”

Political tension between the US and China also increases uncertainties for Chinese companies like YMTC, Wang said.

Washington has slowed the advance of China’s semiconductor industry by adding the country’s top chipmaker, Semiconductor Manufacturing International Co, and the telecom equipment group Huawei, to a trade blacklist to restrict their use of American technology. Yangtze Memory has been among the most aggressive companies in pushing ahead with the development of domestic chipmaking equipment, but it continues to maintain good relationships with US and other foreign vendors to ensure its expansion plans come to fruition.

YMTC declined to comment for this story.

A version of this article was first published by Nikkei Asia on June 23, 2022. ©2022 Nikkei Inc. All rights reserved.



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