Why US-China decoupling is a dangerous mistake and tantamount to self-harm

The World Bank expects Covid-19 to impact commodities like oil and platinum, and even the Opec cartel itself
Its report shows how central China is to commodity trade, and why the US would inflict more harm on itself by decoupling

David Dodwell

Published: 3:00am, 2 May 2020

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Over recent weeks, as we obsess daily about the unfolding of the Covid-19 pandemic worldwide and its economic impact, a series of reports from the world’s leading multilateral agencies have shed valuable light on the short-term and long-term implications. None of them make comfortable reading.

As the United States, Germany and Spain have reported horrendous collapses in gross domestic product, so the International Monetary Fund has wrenched downwards its 2020 global economic forecast – to a contraction of 3 per cent. The World Trade Organisation is expecting a crash in global trade of up to 32 per cent.

The UN’s World Food Programme foresees a further 135 million people facing starvation, mainly in Africa, the Middle East and Asia. The International Labour Organisation has come up with some hard, miserable numbers on global job losses.

Last week, the World Bank joined this symphony of distress with its half-yearly Commodity Markets Outlook, warning that “the impact of Covid-19 has already been larger than most previous events and may lead to long-term shifts in global commodity demand and supply”.

In many ways, this 90-page report simply brings together in one place the fragmented stories we have already been reading over the past month: oil prices crashing as surface and air transport judders to a halt worldwide; food supply chains in disarray all the way from farm to fork; metal prices oscillating violently, in particular around the car industry; even Kenya’s flower exports are down by 80 per cent as air cargo services are disrupted.

But the report does more than aggregate hard numbers. It reflects on the awesome impact of Covid-19, compared with other recessions and disease outbreaks over the past 70 years; on the perhaps unique opportunity to eliminate climate-harming fossil fuel subsidies; and on the self-harm that would arise from export or import controls.

Perhaps most forcefully, its 40 pages of tightly spaced tables show vividly the critical centrality of China to almost all international trade in commodities – as a producer, a consumer and an importer – and the dangers associated with US efforts to decouple from China.

Perhaps inevitably, the report gives priority to the crash in oil and gas prices, which the World Bank authors predict will persist at low levels well into 2021.

Drawing on data from the International Energy Agency, they foresee demand for oil contracting by 9.3 million barrels per day in the coming year, down about 10 per cent. They see oil prices rising only marginally from the current lows to around US$42 a barrel next year.

The pandemic crash has inflicted much more serious harm on oil than gas, because of the disruption to the transport sector, which accounts for two-thirds of all demand for oil. Natural gas and coal, much more heavily used in the energy sector and domestic heating, have been soft but steadier.

The oil price crash obviously has massive negative implications for oil exporters, both within and without the Opec cartel. Putting together the collapse in demand and the failure of oil exporters on agree on limits on supply, the World Bank authors raise questions about the possible collapse of the oil cartel, which is the only survivor among four international commodity agreements forged in the 1950s to 1970s. (The other agreements were for tin, copper and rubber.)

The US in particular faces acute challenges, because the shale oil wells and fracking technologies its oil producers rely on require constant new investments, with each new well needing a price of at least US$48 a barrel to break even.

The World Bank authors believe that air and road transport will be impacted for a long period by the pandemic, reducing demand for cars and therefore transport-related commodities like platinum (40 per cent of global demand comes from catalytic converters in vehicles) and rubber (two-thirds of demand comes from tyre production), whose prices are down about 20 per cent and 25 per cent respectively.

On the positive side, the authors note that the collapse in oil demand could reduce pollution and carbon emissions for as long as transport activity remains subdued, and could provide a unique opportunity to eliminate fossil fuel subsidies, which the IMF says amounted to US$5.2 trillion in 2017.

Among the long-term impacts of the pandemic, the World Bank sees remote working reducing transport demand, transport costs rising and border controls throwing a spanner in the works for international supply chains. It says this will result in a partial unwinding of supply chains and some “reshoring” as demand rises for locally produced personal protective equipment, for example.

Counselling against the use of import and export controls as a means of ensuring secure supplies of food and medical goods, the report echoes the view of the UN’s Food and Agriculture Organisation, whose chief economist recently asserted that export restrictions are “a mistake” and “will only exacerbate the situation”.

The picture of China’s centrality to the world’s trade in commodities is less clear from the text of the report than from the tables that make up more than half the report. China is the leading source of global demand for the great majority of commodities worldwide, less to underpin export manufacturing than to underpin demand from inside its own huge economy.

In the event that the US continues to press forward with extensive decoupling, the likelihood is that it will inflict more harm on itself, its local and multinational manufacturers and its own consumers than anyone else.

Many economies worldwide – particularly those in Africa and Asia that have engaged intensively with China over recent decades – would be excruciatingly conflicted and harmed if forced to make a choice between the US and China.

Perhaps the key lesson from the pandemic for the world’s commodity markets, and the global economy as a whole, is that we are all integrally interconnected, and have been for the better part of the past two centuries. The challenges we face are best tackled together, cooperatively, whether they are a pandemic, climate change or more routine international economic matters.

Let’s hope our leaders have the common sense to recognise this before even more harm is inflicted than already visited on us by Covid-19.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

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