Fewer boxes on more boats

The current global trade slowdown began eight years ago in China, and it is China that will redefine the global trade order through the rise of parallel trade, Tristan Kenderdine writes.

From 2008 China’s stimulus spending flowed into the shipbuilding sector as a strategic investment in an attempt to make China number one in the industry, as Japan and later Korea had been number one before it. Had China become the world’s largest shipbuilder in 2013, its boastful elation would have been uncontainable.

However, it wasn’t until two years later, in 2015, that China became the world shipbuilding leader with, globally, 38 per cent of deadweight tonnes built, 34 per cent of new shipbuilding orders and 36 per cent of on-hand shipping orders.

According to the flying geese theory of economic development, this holds to the pattern of ‘co-prosperity’ that Japan, Korea and China were expected to enjoy in Northeast Asia as the third co-terminus of globalised capital.

However, 2016 witnessed only a meek scramble to clear excess shipbuilding capacity as the number one crown came to China on the wrong side of stagnating, ‘new normal’ industrial growth rates, debt-deflation scenarios in the financial architecture and a turn away from free trade to parallel trade.

With Chinese domestic industrial output entering a glut as global trade slumps, 2015-16 saw a panicked return to industrial policy. The decline in industrial output in China is part and parcel of the decline in global trade and makes the ‘number one’ shipbuilding spot an empty tag.

More on this: Virtues and pitfalls of China’s state-driven growth

International howls of alarm throughout 2015 at the collapse of the Baltic Dry, a global measure of dry commodity freighting prices, signalled a structural decline in Asia-Europe containerised throughput. Post-Keynesian permabears at Zero Hedge in August 2015 popularised the shipping decline with the quip ‘if only central banks could print trade’ and linked the decline to both overcapacity in the Chinese shipbuilding industry, fed on soft loans, and the slowdown in containerised freight throughput in major Asian ports.

As international trade appears headed for the Keynesian growth-accounting equivalent of a recession (international trade cannot have a ‘recession’ only a national industrial economy can), we should be mindful that China’s industrial capacity is not disappearing, and that the current international trade regime is not fulfilling China’s globalisation ambitions.

The antithesis of free-trade is all around us. Australia, Indonesia, Brazil and Ghana’s iron ore prices were for years set by the China Iron and Steel Association, effectively the ‘bureau of ferrous complex in the ministry of steel’. Most grain commodities are shipped bulk point to point on government memoranda of understanding, particularly Thai rice.

Many sectors do not enter formal markets at all, and the informal trade sector is not simply a few small tuna smugglers; it represents massive trades between massive economies.

Orthodox trade theory would assume that markets can entice these sectors into formal trade frameworks by operating markets in customs unions with zero tariffs and diligently enforcing non-tariff barriers. Formal markets should then appear more attractive than informal markets, economies of scale should emerge and governments are then able to regulate labour, environment, and safety.

The integration of China into the world economy was supposed to be the ‘end of development’ in East Asia, the final goose in the flock to conform to the capital order in Northeast Asia and the one to lead Akamatsu’s flock into Africa, Central Asia, Southeast Asia and Latin America. However, China’s upset of the global trade order represents nothing short of a new chapter in development economics.

It has meant not the end of development, as China struggles with a middle-income trap and a disenfranchised peasantry, but the decline of the globalisation agenda and the beginning of the end of an unprecedented period of trade and prosperity. As China flexes its institutional voice in global international law, it is important to remember that there never was a China model. It was state mercantilism all along, a play straight out of the Anglo-Dutch wars.

The Rotterdam Rules for carriage of goods by sea are awaiting ratification to replace the Hague-Visby rules as the global legal norm for trade shipping. With China at the helm of international law in drafting the next generation of international trade norms, let Europe, Japan and the United States be there with them rather than see the development of a parallel trade agenda subvert the shipping balance of power.

But as a political, geographic concept – which was policy re-commissioned to rebuild the Japanese economic bloc as a trading institution, the flying geese pattern of economic development is dead in the water and Beijing is preparing to roast it.