New Norms in the Global Economy
The author is a columnist for JoongAng Ilbo.
Pax Americana refers to the period of relative peace and stability under the economic and political leadership of the United States after World War II. The term echoes Pax Romana, a period of European order under the influence of Rome. But American power is not like the others. He struggled to contain challenges from China and failed to end Russian aggression in Ukraine. A post-Pax Americana period with the decline of American influence began. The economic order that had prevailed for 30 years has been turned upside down. Here are some aspects of the new normal.
The New York Times recently published an opinion piece by Dorothy Wickham, a Solomon Islands journalist and editor of the Melanesian News Network, to highlight a new reality facing America. In an essay entitled “Can you blame poor countries like mine for turning to China?”, the writer pointed out how the islanders have been “ignored, even forgotten” by the West, to which his compatriots have long been identified during the war against Imperial Japan’s advance. Since US Peace Corp volunteers withdrew in the 1990s, 80% of islanders have lived in hard-to-reach rural areas despite the wealth of natural resources, lack access to running water, basic sanitation and electricity, and depend on family plots. in the midst of a job shortage.
China came with construction, hardware, fishing, transportation and other projects to build modern roads, bridges and buildings. Jobs have been created, hospitals have been built and even a stadium is being built to host the Pacific Games. Nearly 75% of the population is under the age of 35, but poorly educated. They don’t really care about their past ties to the West and find China’s presence helpful. Aware of China’s growing influence, America plans to reopen the US embassy in Honiara, the islands’ capital, and send in Peace Corps volunteers. But it is uncertain whether the United States or Australia can catch up with the Chinese.
Henry Ford, dubbed the founder of modern industrial mass production, introduced assembly lines and the conveyor belt system. After acquiring Lincoln Motor in 1922, he ascended the throne of the automobile industry. Its rise owes a lot to the assembly lines allowing the mass production of cars which transformed them into accessible vehicles for “all budgets and all uses”, in his words.
Key to its success was a sufficient stock of parts for treadmills to produce cars. In the midst of globalization, however, the strategy of reducing inventory has come to define competitiveness. Japanese Toyota gained traction with the so-called “lean” or “just-in-time” manufacturing system that America adopted in the 1990s.
But the upheaval of global supply chains by the trade war and the pandemic between the United States and China has put an end to the Toyota model. Ford was concerned that it would run out of parts because it believed mass production would not be possible without sufficient inventory. This myth has been debunked after multinational automakers have rushed into China to cut parts costs for the past 30 years. But the current supply bottleneck has brought the Ford principle back after a century.
Ford’s wisdom on essential supplies is again reviewed due to the importance of semiconductors to major industries and economies. The United States has encouraged Samsung Electronics and Taiwan’s TSMC to expand chip production in the United States. European countries like the UK, France, Germany and the Netherlands have all joined the race to increase their chip manufacturing capacity. The Financial Times noted that major economies are trying to lock in chip supply amid shortages after the global supply chain was disrupted. The leaders of the countries that form the North Atlantic Treaty Organization (NATO) have defined China’s expansionist measures as a “structural challenge” to the international order.
China has made progress towards achieving self-sufficiency in chips. According to market tracker TrendForce, China’s share of the global semiconductor market is expected to grow to 17% in 2024 from 9% in 2020. China has overtaken South Korea in production of system chips and increased its influence in car chips. Japan persuaded TSMC to build a $7 billion chip foundry in Kumamoto Prefecture. The creation of a chip facility in the rural village has created jobs, according to The Nikkei.
The mania for phasing out nuclear power has died down as Britain and France go in the opposite direction and expand reactors. But reconnecting their long-abandoned reactors isn’t easy. The French utility EDF operates 56 reactors which supply half of the nuclear energy needed in Europe. But many reactors have not been able to operate due to poor maintenance since the 1980s. EDF is in debt due to its focus on renewable energy. France plans to fully nationalize the state-owned company, but cleaning up its heavy debt won’t be easy. Korea Electric Power Corp. (Kepco) faces similar perils as it faces a cumulative deficit of 30 trillion won ($23 billion) this year.
Traditional sources of fossil fuels like coal, oil and gas will be in high demand until nuclear reactors are restored for reliable electricity generation. Energy prices jumped after Russia tightened gas supplies to Europe after sanctions related to its invasion of Ukraine. Bloomberg expects Europe to panic if it cannot secure enough heating energy for the winter. European governments have endeavored to seek energy alternatives before the arrival of the cold season. For now, coal plants must operate at full capacity and crude from the United States and the Middle East must be stored. Crude prices are expected to climb as high as $380 a barrel in the winter.
Two of the most populous countries, China and India, have stocked up on Russian gas to thwart US sanctions on Russia. The sanctions had little effect on Moscow after China and India increased their purchases. Economic sanctions are useless in the event of a leak. America and Western Europe are vying hard to bring more countries to their side in the race with Russia and China.
The world is weaning itself from its dependence on Chinese factories by increasing self-sufficiency in parts and encouraging relocation. China has turned away foreign companies by favoring local producers in competitive areas with subsidies. South Korean companies are losing ground from smartphones to cars and batteries due to the rise of local brands. President Yoon Suk-yeol, in the wake of joining the NATO summit, has expanded his networks with European governments to seek new opportunities. But since trade with Europe is relatively small compared to China and others, it remains to be seen how much Korea will benefit.
The Nikkei pointed out that the 10-year fight for hegemony over OLED standards for high-end TVs between Samsung Electronics and LG Display has laid the groundwork for the rise of Chinese players. They let Chinese competitors get ahead in LCD production due to their rivalry and made a similar mistake with OLED. Their dispute ended last month after the Supreme Court upheld a not guilty verdict against a former Samsung Electronics employee.
The headline inflation rate reached 9.1% in the United States in June. Inflation in Turkey is approaching 80%. The country has increased the minimum wage by 30%, but this will not help fight inflation. Central banks and authorities around the world have raised interest rates to fight inflation. But once prices peak, recession could be on the horizon later this year or early next year. After the world’s largest company by market capitalization, Apple, began cutting jobs, major Korean conglomerates SK and LG began to adjust their investment plans.
The United States has tolerated a strong dollar since the administration of Bill Clinton. The dollar loses strength when economies elsewhere are doing well. But in times of crisis, the greenback gains power as it reigns as the most secure currency. Since the Fed increased the base rate aggressively, dollar strength will continue for some time.