US Pacific Trade Floats Directionless, Risks Worse Inflation

joe biden
U.S. President Joe Biden delivers remarks on the Omicron COVID-19 variant following a meeting with his COVID-19 response team at the White House on Nov. 29, 2021 in Washington, DC. (Fox News)

December 2, 2021

Analysis/Commentary

Continued from U.S. Pacific Trade Policy Remains Unclear, Putting U.S. Security, Alliances at Risk.

The lack of direction in Biden’s Asia-Pacific trade-to-security policy balance increases inflation risk factors, experts warn. U.S. inconsistency regarding the new Trans-Pacific trade pact has left an economic vacuum for China to fill.

The Biden administration continues to stall any new TPP agreements with alternative deals. Yet, as the Biden administration appears to lack a resolute course in its Asia purpose, Western trade with Indo-Pac partners flounders, and Beijing gains.

Lisa Anderson, founder, and manager of LMA Consulting Group Inc. told American Pigeon that the upheaval surrounding the Trans-Pacific Partnership has already had supply chain-related consequences. 

“The increased political tensions over the Trans-Pacific Partnership simply add to the escalating political tensions with China as well as the realization that U.S. companies have taken on far too much risk in their supply chains,” Anderson said. 

Returning factories to nearby shores

The market shifts to mitigate the risk. Anderson highlights the steps that business owners have taken to protect their supply chains against risks. 

“The most progressive executives are moving their supply chains much closer to their customers, minimizing risk throughout their supply chain and expanding control of their manufacturing processes,” Anderson said. 

“Therefore, manufacturing is on the move with North, Central and South America gaining steadily in popularity. As these transitions take place, further supply chain disruptions will occur, and prices will continue to rise,” she added. 

In a November press release, Anderson and her consulting group, LMA associates, observed a “huge impact” from this return to the Americas. These are called near-shoring and re-shoring manufacturing practices in business terms.

Anderson notes that not only U.S. but also European companies are reshoring from Asia. Western companies are vying for greater control of their supply chains with this return-to-nearby production tactics.

Loopholes for China’s rivalry exist in Latin America too

East Asia Forum, however, analyzes that South and Central America will lean toward Beijing’s presence in the new Trans Pacific deal ( now called CPTPP) due to clashes between the Latin states and the Biden administration. 

The forum writes that Mexico is expected to give Beijing “the warmest welcome” into the CPTPP due to Mexican President Obradors’s “anti-US” stance since Biden took office. East Asia Forum analyzes the gaps in American concrete trade policy that can give Beijing continental advantages in Latin America. 

“Xi could cultivate a closer relationship with Lopez Obrador by building on his anti-US stance and thus gain a valuable ally. Beijing could find friendly ground in a country that shares a 3145-km border with China’s rival in the new cold war that is unfolding nowadays,” Juan J Palacios with East Asia Forum writes.  

This serves as an example of politics and gray zone interventionism adding strains to the economic procedure. As manufacturers work around the many issues of a foreign-leaning marketplace, a lack of coherence on Beijing intervention and strong, defined policy in the American region continues to pressurize inflation factors. 

Inflation: Contributing Factors 

The inflation crisis has been on the uptick under the Biden administration. The United States Federal Reserve has estimated an acceptable, normal rate of inflation at roughly 2%. This rate has increased exponentially. 

Brookings Institute estimates that U.S. inflation rates now stand at 6.2%, more than twice the average percentage. See the source data for all inflation statistics in the Consumer Price Index Summary, US Bureau of Labor Statistics. 

 This inflation data was estimated as of October 2021, a spike of roughly another 2% from stats taken in September 2020, when inflation stood at a rate of 4.4%. 

When hyperinflation becomes a risk  

Investopedia has researched the prospect of hyperinflation, the place where inflation can reach a status of 1000% or more. This can happen when the balance between supply and demand is far outside the normal status. 

This, economic theorists warn, could be caused by the increase in economic stimulus packages, the gap between working employees and available jobs, and other factors that put the balance of supply versus demand far out of sync. 

Investopedia finance authorities determined that, while inflation is likely to continue rising outside the bounds of a 2% rate, explosive inflation is not likely under normal circumstances. The circumstances that typically created hyperinflation are those of wars or the collapse of financial authority systems.  

Where we are at present

The inflation outlook continues to press grimly forward as manufacturers make some progress with alternative production, but costs remain unstable. These conditions, which economists trace to Covid-19 era bailouts, job losses, and other pandemic incidents, are already “extraordinarily high” when compared to average terms. 

Enter Omicron pressures on the market

As the development of the Omicron variant COVID-19 dominates mainstream media broadcasts, experts warn that public panic will contribute to an increased supply chain risk. Mainstream media continues to bolster these worries by publicizing fears that Omicron will impact the supply chain. 

Stressors that could trigger hyperinflation

The added political risks of a lack of clear trade direction in the United States, coupled with the risk of China’s economic and political interventionism, builds pressure. 

Brookings noted “extraordinarily high” rates of inflation in goods. Anderson notes that this could continue given the conditions surrounding manufacturing. 

“Manufacturers are showing no signs of slowing down, and so prices continue to climb as shortages persist with high demand. Our clients and colleagues are expecting these conditions to persist throughout 2022. The typical peak season turned into a consistently strong peak season throughout 2021 and shows no signs of slowing down,” Anderson said. 

Examples of this balance upset are found in retail. As the trucking industry takes a labor hit, this has had an impact on supply distribution. McKinsey retail analysis estimates that American retailers will need to spend “$39 billion” to “return to pre-pandemic inventory levels.” See also the U.S. Census Bureau statistics, March 16. 

McKinsey cites a significant lack in trucking industry labor, which only gained an estimated 3,600 jobs in early 2021, as a significant contributor to “snarled U.S. supply chains.”  

Disruptions to the supply chain can cause an imbalance in the economic supply to demand ratio that would precede hyperinflation-causing conditions. 

Tariff strain scenario

The heat is on underneath the tariff attrition dispute. 

A lack of consistent policy promises to add further pressures to the already conflicted supply chains. 

“If additional tariffs are thrown into the mix, inflation will continue to rise, and more importantly, executives will commit even more resources to reshoring and near-shoring manufacturing operations to ensure they can serve their customers and scale the business to meet the ever-increasing demand,” Anderson explained. 

“It will also become a matter of urgency in order to stop the bleeding of the escalating costs in the extended supply chain. The weaker companies will dwindle, die out, and get absorbed, enabling the stronger companies to continue with even higher levels of demand for the foreseeable future.” 

Possible solutions

Anderson’s analysis notes some practical solutions the U.S. could implement. 

“The U.S. can invest in manufacturing facilities, technologies, resources, and raw materials. There are many priorities that would definitely give manufacturers a boost.”

“For example, providing tax credits and incentives, training and resource opportunities, maintaining a competitive tax rate with other countries, quick turnaround for building and construction permits, smart reductions in unnecessary regulations, and access to low-cost energy would be a great start,” Anderson added, referring to cheap alternative energy such as solar turbine and onshore, as per IRENA estimates

Biden’s energy policy has created calls for green energy. See further analysis:” Biden’s Self-Made, Intentional Crisis Leads to Calls for Green Energy.”

Positive production

“U.S. manufacturers have come a long way and are dramatically greener than their Asian counterparts. As more manufacturing returns to the Americas, the total carbon footprint of the end-to-end supply chain will decrease significantly,” Anderson points out. 

“Regional manufacturing clusters are on the rise! U.S. manufacturers are innovative and resilient. If we provide opportunities to work collaboratively with public-private partnerships (such as the great success of Operation Warp Speed) and to work collaboratively within our industry and even competitors to turn 1+1 into 21, U.S. manufacturing will surge, providing almost 3 jobs to the economy for every 1 manufacturing job,” she added, referring to the Trump-era Operation Warp Speed campaign to produce a COVID-19 vaccination.

Anderson’s positive outlook shows that there is a degree of effectivness in the America First styled trade and manufacturing policy. However, China continues to politically undermine these tactics.

China demands a walk-back from “America First”

China politically continues to call for tariff reductions, as continued criticism for the Trump-era China decoupling trends in expert debate. This is the continued pressure of the Chinese political arm to undermine the Trump-era “America First” trade policy that the Biden administration appears to be continuing at present, to some degree.

Pressure over “America First” comes even from allies

Because China contiunes to undermine the U.S., trade is under pressure to adopt a strong Pacific policy factoring in security measures for the Chinese regime’s aggressive behavior. The U.S. is pressed to work with its allies in the region as they experience growth.

To illustrate, Deloitte Insights has observed a growth spike Japan’s trade value in recent days. 

Japanese media, in recent weeks, has criticized the Biden administration for “ceding economic opportunity” to Beijing, theorizing that the Biden administration continues to “pursue America First” trade. Criticism here attributes the ceded opportunities to America’s domestic trade strengthening policy. Asia trade policy continues to walk on precarious ground as it must factor in the risk of Beijing’s aggressive influence and the risk of alienating its regional allies, as policies wander without a rudder to steer.

Domestic criticism over the “Asia-sized hole”

Meanwhile, western mainstream media outlets such as Politico refer to the “Asia-sized hole” in the Biden trade agenda, calling out the lack of a “firm plan” on Asia trade. In November, Politico published comments from United to Safeguard America From Illegal Trade organization, which continued to criticize Biden’s trade officials and their “deal-less tour of Asia.”

Critics writing in The Wall Street Journal called out Biden for “failing to deal with economic dislocation and China’s cheating.” Financial Times writes that the U.S. Trade Representative Katherine Tai has admitted to “a need for a course correction” in Asia and calls for cooperation opportunities outside of the CPTPP pact. 

Media and trade officials continue to debate Biden’s unclear direction. They agree that it needs correction, but the exact way this will happen is still not clear.

Biden administration trusts in the AUKUS deal to kill two birds

As policy debates continue, Biden’s Asia adviser reveals the administration’s internal mindset regarding Asia Pacific trade and counterbalance.  

White House Indo-Pacific adviser Kurt Campbell expressed confidence in the AUKUS deal. AUKUS, a trilateral pact between Australia, the United Kingdom, and the U.S., was a deal to provide Australia with nuclear-enhanced submarines. The deal was understood to deliberately target China’s pressure campaigns in the Asia-Pacific region.

AUKUS has been highly criticized for damaging trade relations with U.S. NATO ally France, which held a previous submarine contract with Australia. This submarine contract was terminated to usher in the AUKUS. 

Campbell told the Lowy Institute, an Australian defense think tank, that he was confident AUKUS has fueled “excitement” among U.S.-Australia allies,see also ABC Australia.

Campbell believes that China will walk back some of its trade pressures on Australia in the region due to Biden’s “expressed concerned.” Campbell expressed belief that China would settled trade war with Australia on “Australia’s terms” stating that China “respected” strength.

U.S. confident in AUKUS, but China’s aggressive policies continue full speed ahead

Despite Campbell’s confidence, China’s regime media highlights Beijing’s resolve to “fend off” on U.S. counter moves in Asia digital trade. As the Biden administration appears to meander in its Asia trade and counterbalance priorities, China’s aggressive tactics amplify.

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