The hot topic in international diplomacy is "trade wars." The idea that a major economic power, by blockading access to certain economic resources to foreign firms, can somehow hurt foreign economic interests to such a degree that the foreign country in question has no choice but to make economic concessions. The idea is rooted in a "zero-sum" mentality, whereby economic victory and resulting benefits of one country and its firms is correlated with economic defeat and economic costs of another country and their companies.
The fundamental problem of such a zero-sum mentality in the modern context is the ignoring of just how complex and interwoven global supply chains have become. For any sufficiently advanced product that consumer of any country purchases, the components of the product is bound to come from different countries. For instance, a smartphone produced in China will require chips made in Taiwan, LED display made in Korea, software made the US, with other hardwares possibly sourced from across Southeast Asia. To label the smartphone just a China-made phone is grossly oversimplifying.
Hence, for a country A to restrict movements of products from a country B, production in country B will surely take a hit, but so will countries C, D, and E whose firms supply the components that create the final product in country B. Trade war between A and B, then, is no longer just about the costs and benefits of the two participants. A whole slew of other countries will take collateral damage in the process and have genuine stakes in ensuring that the trade war does not happen or are at least minimized. Because A buys products from B that they help to make, they want to ensure the trade occurs as usual.
And indeed, often times, it is the collateral damage that is more damaging than the direct ones. While assembling the final product in country B certainly requires a massive labor input, who undoubtedly will suffer if sales of the product is restricted, the number of firms that supply components to the final product is often much bigger. Collectively, the component suppliers may have an even bigger employee pool than the assembly of the final product. And because components are worth more than labor for final product assembly, the value destroyed in collateral damage may be even higher than the direct.
The problem is that countries C, D, and E often have little power in affecting the diplomatic results between direct participants countries A and B. With stake in ensuring that trade continue to happen between the two, they cannot ostentatiously choose one side over the other, as one is immediate demand for components, while the other is final demand for product made with those components. Choosing either side would ensure enlargement of trade war as they themselves are subjected to direct damage of restrictions from country A or B as revenge for supporting the opposing party.
The ultimate problem underlying the conundrum is that politicians who made the decision to use trade restrictions as a weapon of choice choose to ignore such global supply chains. In terms of explaining politics to the general populace, it is so much easier to finger-point at one particular party as the source of all economic malaise. Hence, to satisfy the resulting popular anger, they have no choice but to undertake concrete actions that punish that one particular culprit, instead of all players that created the current state of the global supply chain in the first place.
Yet, the supposed positive outcomes of the trade war is highly dubious. Politicians speak in highly economically nationalistic terms, whereby restrictions in foreign imports can lure production and entire supply chains within their political jurisdictions. But they choose to not think about "stickiness" of those supply chains. Firms invest hundreds of millions in factories, logistic networks, trained employees, and other assets where they are physically located right now in order to ensure that the most efficient and least expensive production can take place. Those assets cannot easily be relocated at a whim.
Moreover, each location offers its unique set of advantages for productions of a certain kind, created as a function of available resources and institutions. Another location, devoid of the same resources and institutions, cannot simply replete the production processes are they are, using the same method to achieve similar levels of scale, efficiency, and cost, even if the political will motivates the relocation. Perhaps before politicians think about how to fight a better trade war, they should spend sometime analyzing what factors really shift the whereabouts of global supply chains.
The fundamental problem of such a zero-sum mentality in the modern context is the ignoring of just how complex and interwoven global supply chains have become. For any sufficiently advanced product that consumer of any country purchases, the components of the product is bound to come from different countries. For instance, a smartphone produced in China will require chips made in Taiwan, LED display made in Korea, software made the US, with other hardwares possibly sourced from across Southeast Asia. To label the smartphone just a China-made phone is grossly oversimplifying.
Hence, for a country A to restrict movements of products from a country B, production in country B will surely take a hit, but so will countries C, D, and E whose firms supply the components that create the final product in country B. Trade war between A and B, then, is no longer just about the costs and benefits of the two participants. A whole slew of other countries will take collateral damage in the process and have genuine stakes in ensuring that the trade war does not happen or are at least minimized. Because A buys products from B that they help to make, they want to ensure the trade occurs as usual.
And indeed, often times, it is the collateral damage that is more damaging than the direct ones. While assembling the final product in country B certainly requires a massive labor input, who undoubtedly will suffer if sales of the product is restricted, the number of firms that supply components to the final product is often much bigger. Collectively, the component suppliers may have an even bigger employee pool than the assembly of the final product. And because components are worth more than labor for final product assembly, the value destroyed in collateral damage may be even higher than the direct.
The problem is that countries C, D, and E often have little power in affecting the diplomatic results between direct participants countries A and B. With stake in ensuring that trade continue to happen between the two, they cannot ostentatiously choose one side over the other, as one is immediate demand for components, while the other is final demand for product made with those components. Choosing either side would ensure enlargement of trade war as they themselves are subjected to direct damage of restrictions from country A or B as revenge for supporting the opposing party.
The ultimate problem underlying the conundrum is that politicians who made the decision to use trade restrictions as a weapon of choice choose to ignore such global supply chains. In terms of explaining politics to the general populace, it is so much easier to finger-point at one particular party as the source of all economic malaise. Hence, to satisfy the resulting popular anger, they have no choice but to undertake concrete actions that punish that one particular culprit, instead of all players that created the current state of the global supply chain in the first place.
Yet, the supposed positive outcomes of the trade war is highly dubious. Politicians speak in highly economically nationalistic terms, whereby restrictions in foreign imports can lure production and entire supply chains within their political jurisdictions. But they choose to not think about "stickiness" of those supply chains. Firms invest hundreds of millions in factories, logistic networks, trained employees, and other assets where they are physically located right now in order to ensure that the most efficient and least expensive production can take place. Those assets cannot easily be relocated at a whim.
Moreover, each location offers its unique set of advantages for productions of a certain kind, created as a function of available resources and institutions. Another location, devoid of the same resources and institutions, cannot simply replete the production processes are they are, using the same method to achieve similar levels of scale, efficiency, and cost, even if the political will motivates the relocation. Perhaps before politicians think about how to fight a better trade war, they should spend sometime analyzing what factors really shift the whereabouts of global supply chains.
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