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Defense of supply chains must begin in Bali

World finance chiefs should protect commercial links strained by Trump's trade war

| Indonesia
International Monetary Fund head Christine Lagarde, left, must defend global supply chains against U.S. President Donald Trump.   © Reuters

From slowing global growth to rising debt, the world's central bankers and finance ministers have plenty on their plate as they gather in Bali this week for the annual meeting of the International Monetary Fund.

Yet they must now also turn their attention to a new threat: that a U.S.-China trade war which has so far has focused mostly on tariffs could soon spiral out of control, as Donald Trump begins to attack directly the supply chains upon which globalization depends.

There can by now be little doubt about the severity of Trump's trade policies, which led the U.S. president to threaten China last month with further levies of $267 billion. Sensing he has the upper hand, Trump appears to be seeking new ways to put pressure on Beijing, not least by taking aim at U.S. businesses that organize their production across borders.

Companies with extensive foreign supply chains in sectors from electronics to automotive have long been a presidential target. In a tweet last month, Trump again called on the likes of Apple, Amazon and Ford Motor to unwind years of global integration. "Make your products in the United States instead of China," he wrote. "Start building new plants now."

Behind Trump stand a band of ideological backers armed with even more radical visions of decoupling the U.S. from its foreign suppliers, especially in China. Speaking earlier this month, influential ex-Trump adviser Steve Bannon made clear that ripping up international production networks was now in effect U.S. policy. "China has always been taking advantage of the rules," he told CNBC. "This is about the realignment of the global supply chain."

This is dangerous talk. The IMF has already trimmed its global growth outlook on the eve of the Bali meetings, citing trade woes as it cut projections to 3.7% both this year and in 2019, down from 3.9% three months earlier. This remains a healthy clip by any measure. But the worry is that both the U.S. and China will now escalate further, not just adding extra tariffs but also attacking more directly the supply chains that crisscross each other's economies.

Arguably the crowning achievement of decades of globalization, some economists call these intricate cross-border flows "global value chains," a term emphasizing trade that stretches beyond mere components to encompass high-value services like design and intellectual property.

Whatever you call them, supply chain efficiencies have been a boon in richer countries for many large companies and consumers alike. They helped some developing countries raise the productivity of workers and companies, plugging them into worldwide production networks. There is good evidence that global links can help hold down inflation too, another reason central bankers in Bali might pay attention to their fate.

"The stakes are high because the fracturing of global value chains could have a devastating effect on many countries, including advanced economies," as IMF head Christine Lagarde said in a speech last week. "It could also prevent emerging and low-income countries from reaching their full potential."

This is not to argue that supply chains are magic cures for development. As Harvard economist Dani Rodrik points out, few other developing nations have managed to mimic entirely those in Southeast and eastern Asian, who grew rich on the back of decades of globalization. Basic manufacturing has declined in rich countries over the same period too, although most evidence points to this being largely driven by automation and other technological changes, rather than outsourcing directly.

Economies in "Factory Asia" that depend on these linkages would of course be hit especially hard by any moves to unwind them. Electronics components alone, largely linked to smartphone production, last year accounted for a third of exports in Taiwan and 15% in both Singapore and South Korea, according to a recent IMF report.

Even so, attacks on Asian suppliers now look likely to grow, especially after last week's blockbuster expose from Bloomberg Businessweek, in which the U.S. magazine suggested Chinese spies had embedded tiny surveillance microchips into servers made by Supermicro, a U.S.-based electronics maker. These chips then allegedly slipped into the supply chains of dozens of major American companies, including Amazon and Apple, although both of these have since strenuously denied the article's details, as have China's authorities.

Yet the mere suspicion that China could have pulled off such an elaborate espionage coup will only ramp up political pressures in Washington, adding to calls for action after a Department of Defense report published last week arguing that the U.S. military has become excessively reliant on foreign military components, mostly supplied by China.

There are worries on the Chinese side too. So far, Beijing has played a moderate "tit-for-tat" trade strategy, matching Trump's tariff increases but not upping the ante. But soon, as the smaller economy, this approach will run out of road. Facing the risk of losing face President Xi Jinping could decide to escalate by meddling with supplies to U.S. companies, for instance by forcing suppliers to halt or delay the delivery of important export components.

The IMF's Lagarde began to sketch a way out of this messy impasse in her speech this month, calling for fairer trade rules, especially in areas like intellectual property rights and state subsidies that underlie much of the bad blood between the U.S. and China.

This would be a good start. But supporters of globalization, including most of those gathering in Bali, must now champion the role of supply chains more broadly, while also acting to enlarge the benefits they can bring.

Here developing nations need help spreading the gains productive global companies introduce into their economies, not least by helping to push knowledge and efficient practices far out beyond a narrow circle of local suppliers and workers.

Much the same is true in the rich world, where the trade benefits enjoyed by profitable multinationals can be more evenly shared, for instance by changing tax rules to stop avoidance and evasion, and encouraging businesses to take more responsibility for the social and environmental effects of their foreign production networks.

It took decades for companies to build the links that created Factory Asia. Without such action, it could take just a few years for Trump and his supporters to begin to bring the shutters down.

James Crabtree is an associate professor in practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is author of "The Billionaire Raj."

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