Decoupling proceeds

The great debate is about whether or not globalization is at an end, and how far decoupling will or can go, and there has been a slew of material to consider over the past couple of weeks. Our view, in brief, is that globalization is indeed being rolled back, and that while full decoupling is not possible in a phase 1, it is going to be a moving process in which more would be possible in a phase 2. There are so many factors that are pushing it forward. The surge in negative perceptions of China in many other regions, concerns about home economies, concerns about reliance on an external source for strategically important items, quality issues and cost issues. Amazing. They are all coming together. 

On cost issues, an example of the situation is the simple three-ply surgical masks, the blue ones. Vietnam is producing them at close to half the price of China, but China currently has, we would guess, the lion’s share of global production capacity. Where is that going? Easy. In six months, China will likely have a much smaller proportion of global capacity, and down from there. 

What is the cause of the pricing difference between Vietnam and China on this issue? Labor costs, you say? But labor costs on a product like blue masks is only 30% of total costs. Could it be that the past 20 years of being the factory of the world has made links in China’s domestic supply chains complacent and hooked on higher levels of profit than competitor economies will require? It’s hard to spot other possibilities. 

Anyway, the US and China did a trade deal phase 1 phone call, and the message was – it’s on track. Which meets the requirements of both sides for now. There was also a possible agreement on Huawei being involved in 5G research with US telecoms companies. But in other ways, the relationship is going to continue to get tougher. The elephant in the room we have referred to in past missives – the virus question of what the hell happened here? – has begun its trampling around earlier than we would have predicted. But the way in which Trump and Pompeo have handled it is ridiculous, counter-productive and makes cooperation into the causes and sources less, not more, likely. 

For what it’s worth, from our watchtower on the China coast, our macro sense is that Europe will muddle through with Germany as its anchor, that the US will find a way through the craziness with California and NY as anchors, and that China is a question mark. Precisely how the effects of the virus are going to play out on the economy and the system – it is too early to say. 

And then there is the US election. The sense we get currently is that Trump is now more likely to lose than win, but that the US policy on China afterwards, if Biden was to win, would not change much. Those in Command, we believe, would much prefer Trump to win due to the continued deconstruction of global frameworks he could be counted upon to execute. The irony is that China has been the biggest winner over the past half century of Pax Americana, and who knows how a leaderless world scenario would play out for everyone. Certainly not us.

And so on to another thrill-soaked week ahead.