New normals in the global economy

Kim Dong-ho
The author is an editorial writer of the 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 is an echo of Pax Romana, a period of European order under Rome’s influence. But American power is not like any in the past. It has been struggling to contain challenges from China, and it has failed to end the Russian aggression in Ukraine. A post-Pax Americana period with the waning of U.S. influence has begun. The economic order that prevailed over the last 30 years has been upset. Here are some aspects of the new normal.

The New York Times recently carried an opinion piece by Dorothy Wickham, a journalist from the Solomon Islands and Editor of the Melanesian News Network, to underscore a new reality America faces. In a guest essay entitled, “Can you blame poor countries like mine for turning to China?”, the writer pointed out how islanders have been “ignored, if not forgotten” by the West, whom her countrymen long identified with during the war against Japan’s imperial advance. Since U.S. Peace Corp volunteers pulled out in the 1990s, 80 percent of the islanders live in hard-to-reach rural areas despite rich natural resources, lack access to running water, basic sanitation and electricity, and rely on family-run plots of lands amid a scarcity of jobs.

China came with construction, hardware, fishing, transport and other projects to build roads, bridges and modern buildings. Jobs were created, hospitals built, and even a stadium is under construction to host the Pacific Games. Nearly 75 percent of the population is under the age of 35, yet poorly educated. They do not really care about their past bonds with the West and find China’s presence helpful. Mindful of rising Chinese influence, America plans to reopen the U.S. embassy in Honiara, the capital of the islands, and dispatch Peace Corps volunteers. But whether the U.S. or Australia can catch up with the Chinese is uncertain.

Henry Ford, dubbed the founder of modern industrial mass production, introduced assembly lines and the conveyer belt system. After acquiring Lincoln Motor in 1922, he ascended to the throne of the automobile industry. His rise owed much to assembly lines enabling mass production of cars that transformed them into accessible conveyances for “every purse and purpose,” in his words.

The key to his success was a sufficient stock of parts to keep the conveyor belts turning out cars. Amid globalization, however, the strategy of minimizing inventories came to define competitiveness. Japan’s Toyota gained ground through the so-called lean or “just-in-time” manufacturing system that America caught onto in the 1990s.

But the unsettling of global supply chains by the U.S.-China trade war and pandemic has brought an end to the Toyota model. Ford was fearful of running out of parts as he believed mass production could not be possible without sufficient stocks. That myth was debunked after multinational carmakers rushed to China to save costs for parts over the past 30 years. But the current supply bottleneck has brought back the Ford principle after a century.

Ford’s wisdom about essential supplies is being examined anew due to the importance of semiconductors to major industries and economies. The U.S. has encouraged Samsung Electronics and TSMC of Taiwan to expand their chip production on U.S. turf. European countries like the UK, France, Germany and the Netherlands have all joined the race to expand their chip manufacturing capacity. The Financial Times noted that major economies are trying to lock in chip supplies in case of shortages after the global supply chain was disrupted. Leaders of the countries that form the North Atlantic Treaty Organization (NATO) defined China’s expansionist moves as a “structural challenge” to the international order.

China has made strides in achieving self-sufficiency in chips. According to market tracker TrendForce, China’s share of the global semiconductor market is projected to shoot up to 17 percent in 2024 from 9 percent in 2020. China has outpaced South Korea in system chip production capacity and has been increasing its influence in chips for cars. Japan has persuaded TSMC to build a $7 billion chip foundry in Kumamoto Prefecture. The establishment of a chip facility in the rural village has brought jobs, according to The Nikkei.

The mania to phase out nuclear power has subsided as Britain and France are going in the opposite direction and expanding reactors. But plugging back their long-abandoned reactors is not easy. French state utility EDF operates 56 reactors that provide half of the nuclear power needed for Europe. But many reactors cannot function due to poor maintenance since the 1980s. EDF is indebted due to its focus on renewable energy. France plans to fully nationalize the state-run company, but cleaning up its heavy debt won’t be easy. Korea Electric Power Corp. (Kepco) is under similar perils as it faces a cumulative deficit of 30 trillion won ($23 billion) this year.

Traditional fossil fuel sources like coal, oil and gas will be in high demand until nuclear reactors are restored for reliable power generation. Energy prices have jumped after Russia tightened its gas supplies to Europe after sanctions over its invasion of Ukraine. Bloomberg expects Europe to fall into panic if it cannot secure enough heating energy for the winter. European governments have been scrambling to seek energy alternatives before the cold season arrives. For now, coal-powered stations must run at full capacity and crude from the U.S and the Middle East must be stockpiled. Crude prices are forecast to soar up to $380 per barrel in the winter.

Two most populous countries, China and India, have been stocking up on Russian gas to upset the U.S.-led sanctions on Russia. Sanctions have had little effect on Moscow after China and India increased their purchases. Economic sanctions are of no use if there is a leak. America and Western Europe are vying heavily to bring more countries to their side in the race with Russia and China.

The world is weaning itself off its reliance on Chinese factories by raising self-sufficiency in parts and encouraging reshoring. China has been sending 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 through the momentum of joining the NATO summit has expanded networks with European governments to seek new opportunities. But because trade with Europe is relatively small compared to China and others, how much Korea will benefit remains to be seen.

The Nikkei pointed out the 10-year hegemony fight over OLED standards for premium TVs between Samsung Electronics and LG Display had set the grounds of ascension by Chinese players. They let Chinese competitors get ahead in LCD production due to their rivalry and made similar mistake with OLED. Their dispute ended last month after the Supreme Court upheld a non-guilty verdict on a former Samsung Electronics employee.

The headline inflation rate hit 9.1 percent in the U.S. in June. Inflation in Turkey is nearing 80 percent. The country has raised the minimum wage by 30 percent, but that isn’t going to help with inflation. Central banks and authorities around the globe have been raising interest rates to fight inflation. But once prices peak, recession may rise on the horizon later this year or early next year. After the world’s biggest company by market-cap, Apple, began to cut jobs, major Korean conglomerates SK and LG have begun adjusting their investment plans.

The U.S. has been condoning a strong dollar since the Bill Clinton administration. The dollar loses strength when economies elsewhere do well. But at times of crisis, the greenback gains power as it reigns as the safest currency. Since the Fed raised the base rate aggressively, the strong dollar will continue for a while.