Trade wars: Challenges and opportunities for Russia

By Dmitry Evstafiev – Professor of Communications, Media, and Design Department/School of Integrated Communications at National Research University Higher School of Economics

The world has entered the times of trade wars. Over a very short period of time, many relationships which appeared quite stable in the past, such as, in the first turn, those between the US and Europe, have found themselves on the verge of a total disintegration. Whereas the relationships bearing substantial contradictions, such as, for instance, between the US and China, have come to a direct confrontation. All of the institutions that had been built for decades to properly regulate global free trade, tuned to be incapable. That signals of the severity of the unfolding situation since the major factor of the global trade is a possibility to collect various types of revenues from trade, logistics, technologies, etc.

Yet the visualized picture offers a somewhat distorted interpretation of the scale and trends of the processes currently observed. In fact, trade wars have been waged for at least five years, while the signs of the new epoch could be also seen in the earlier periods of time.

Mikhail Klimentiev | RIAN

A trade war is a situation in a certain global trade segment (either sectoral or regional) induced by redressing market shares, influence or regulation principles within the said segment, and representing existing contradictions between two or more participants of the respective market which may not be resolved within the current trade relationships mechanisms.

Trade wars are primarily about a market structure and rules of the game in that market. In the second turn, they are about redistribution of influence of certain countries on trade and on the market’s financial and investment development. Mechanisms of such wars are secondary compared to their goals. The fact that the present-day trade war between China and the USA has become politicized and explicit, means the options for a contradictions settlement through routine arbitration within the current system of trade institutions have been exhausted.

The first trade war of the contemporary world was the struggle for the oil market between classic and shale hydrocarbons producers. That war had an immediate impact on Russia whose task was ensuring its visible presence in the global market of shale energy resources which differ from the classic ones in many respects and require additional investments in building a market infrastructure. In the course of that trade war, the issue of primacy of the investment component could be clearly seen.

An exacerbation of relationships in the natural gas market is now taking shape. In the frameworks of that possible trade war the matters pertaining to primary investments in infrastructures will become even more pronounced and will have a greater strategic priority.

Russia is not a major global exporter. Yet, since its export potential is focused on certain market segments, it found itself among the first ones involved in various trade wars. It should be noted though that those trade wars were waged in a rather traditional format, i.e. by means of price dumping as a market recartelization instrument. The key factors which aggravated the situation were simultaneous and homogeneous structural and geographic disparities of Russia’s exports.

Trade wars, at least contemporary ones, are instruments of redistributing global investment flows in a situation of slowing down globalization and of impossibility of further advancement in the network world paradigm. That means, they should be seen as element of a transformation of the previously existing system. The question is, in what framework the aforementioned  transformation will be accomplished.

Trade wars of 2014-2018 represented the attempts by key industrially developed nations of the world to break away from the longlasting trend of a relatively low economic growth rate which in the middle range results in China’s domination in the global trade while in the long run it results in its domination in finances. The previous system destined Russia’s marginality and incorporation in the global economy on the lowest technology redistributions levels.

Within the current globalization model, trade wars were an efficient instrument of economic influence redivision. The fact such wars became too severe and consequently demolished a substantial share of global institutions, is the result of a deceleration of a constant expansion of the investment capitalism and institutions pertaining thereto. An expanding globalization stopped compensating for its intrinsic inefficiency and an economic laws deformation.

Referring to the main components of contemporary trade wars and challenges and opportunities for Russia, they may be formulated as follows.

First, the prospects of emergence of relatively narrow subregional trade centers with some stable rules of the game primarily based on economics. With the trade contradictions doomed to aggravate in the middle run, the need for the global market segments where non-crisis self-regulation exists, will no doubt grow, even though by their size such segments may not be fully comparable with the classic self-sufficiency parameters (of 200 or more million consumers).

The current system of the so called global free trade has been based on political agreements and politically motivated relationships. Such a situation inherently existed in the mechanism of trade relations between the US and the EU. The political factors of containing China were the foundation of the transpacific world trade system which has been designed. Hence the actions by Donald Trump merely reflected dissatisfaction of the influential groups of interests in the US with the political factors becoming more substantive than the economic interests whereas the system overall became unfavorable for the US in the middle run.

A partial disintegration of the presumably free global trade is inevitable. A larger markets’ segmentation will likely be the most essential element of the global economic processes of the near future. Consequently, in the medium term, a fluidity of the rules of the game in global trade will also become inevitable along with protectionism – including a prohibitive one – becoming an intrinsic component of any competition. A strategic factor for maintaining sustainability of large national economies is their ability to swiftly shape sizeable trade areas which develop according to unified rules, and on the basis of predominantly economic factors. For Russia, that means a growing importance of maintaining and expanding a free trade zone within the Eurasian Economic Union and the Customs Union, even at a low level of institutionalization, and attracting new individual partners to the said entities.

Second, the world trade global settlements system crisis. It may over time bring about an overall crisis of the deferred charges system. Over the recent years, the global economy has been developing in an anticipation of a large scale financial crisis. That to a substantial degree reduced trust in global finances. The matter is, the global trade system is in many respects based on the assumed belief that there may be no alternative payment structures (even though such structures grow more and more sophisticated) and no collapse of global trade traditional institutions. The global trade system has developed a dangerous dependence on the global financial sector durability, and in a number of sectors (energy market, for instance), on the financial derivatives (futures) circulation. Any crisis in the financial market will have a direct impact on the global trade system. In the superlarge digits’ environment, present-day world trade is incapable to operate under the terms of full prepayments and of termination of a global circulation of various money substitutes. For the contemporary world trade system, even a mid-range spasm instantaneously attracting interest to alternative world trade mechanisms, is most hazardous.

The crisis of the system will have an impact on insurance industries and forward marketing investments which over the recent years have been the major driving forces behind global trade. The limits of sustainability of the global trade system to impacts of small local liquidity crisis are not yet absolutely clear. Still, judging by the oil price crisis and related financial speculations, such limits are quite substantial.

Even now, a growing interest is observed towards subglobal systems of mutual settlements in global trade of archaic payment systems. Such systems have a most important feature in common, namely commercial risk hedging.

For Russia, the task of a principal importance is building a system of payments, quite possibly, clearing payments, which could be employed in case a global financial crisis practically evolves into a trade default crisis. Russia has made some substantial steps in that direction. It is also noteworthy that for emergence of such a system there already exists a solid foundation, the Customs Union.

Third, growing significance of non-economic risks. This first of all relates to such an integral element of the global trade as logistics. A most essential risk may be the competition between the old and new logistics of the global trade.

Old logistics means transport corridors which are under control of Western, primarily American, capital and to a substantial degree are interrelated with the sea communications potential’s realization. New logistic projects will create competition to the traditional logistic corridors by using mainly continental routes. That will eventually change the mechanism of collecting logistic charges and costs.

A specific feature of this development in global trade is a high and nearly predominant role of the investment component for both new logistic projects (greenfield facilities) and the old ones (which require forward investments in facilities renewal). The competition of the old and new logistics will involve using tough instruments as well as causing various investment and operational risks for a competitor. The trade war with China initiated by the USA is aimed, among other things, at depriving Beijing of an investment potential for a head-on implementation of the new logistic projects.

For Russia, this area of the global trade development generates both risks and opportunities. On the one hand, from the economic development viewpoint, Russia is most interested in the new logistics dominance. It is interested in the new logistics in general, not in merely the projects on its own soil. On the other hand, Russia is one of the very few countries which are capable of effectively rendering state and non-state security services in both stable and aggravated political situations.

Fourth, the global factories concept crisis and localization of production of a broad variety of consumer goods. The global free trade system has been based on trading such goods. The main technologies of the so called fourth industrial revolution are based on a possibility of a small scale production of goods for both industrial consumption (equipment, spare parts, etc.) and broad personal consumption. Apart from technology factors which ensure cost efficiency of even a small scale customized production (consumer expendability), significant parts are played by a range of marketing factors (markets structuring and segmentation, and a growing economically unmotivated social consumption) and an overall social development process where a key role is played by an adjustment of the labor force cost within urbanized areas.

The only source of cheap labor force which is still intact is the South Asia which is economically clustered around India. That’s where most interesting processes of large scale industry restructurization will take place.

A possibility of unrestricted and commercially viable regionalization of production through customization is a major feature of the fourth industrial revolution, especially in case nonproductive (logistics, marketing, political) costs of mass production keep growing at the current pace.

For quite apparent reasons, Russia will have no problem with the crisis of industrial exports volumes. Quite the opposite, in the present situation it will get an opportunity to get hold of global market’s sizeable segments, especially in some specific industries. But that is certainly only possible in case it can ensure a low level of logistics and operational costs in servicing relatively small segments of the global economic space, and provide favorable conditions for initial investment activities and access to operating assets.

Fifth, higher significance of non-economic (political) administration of global trade. As a matter of fact, it is currently the most evident and visible global economic process which Russia had faced on numerous occasions prior to the sanctions imposition. Now, the principle of the markets administrative management is being gradually expanded onto the overall global economy. That causes some strain among the countries – primarily the EU members – which at some point initiated incorporating the administrative regulation principle into the market economy.

Short-term administrative decisions in global trade are the inevitable aftermaths of the global economy long-term deinstitutionalization and of the shift towards the national regulation of respective processes. The situation as it has been over the past one and a half years has demonstrated that the possibilities of the economic voluntarism in the contemporary global economy are the highest since possibly the end of the 19th century. To a great degree that evidences the internal erosion of the postindustrial capitalism’s integrating potential. The main problem of the contemporary trade wars is their relative swiftness and progression irrationality which makes it impossible to manage the escalation processes.

A classic example of such a development is the fluctuating trade relationship between Trump and China (in this case, a personification of the US standing is more than reasonable). The situation evolution is taking place outside the frameworks of the traditional bureaucratic institutionality which used to allow detaining and managing escalation.

In practical terms, that is the aspect of global trade wars which is the easiest to manage, especially if the scale of asymmetry in trade relationships is limited.

The key risk for Russia rests in Europe where active processes of the European energy market redivision can result in brief crisis outbursts in matters relating to hydrocarbons trade. As for the other aspects, Russia’s current involvement in the global trade makes the country to a certain degree self-sufficient, especially in view of the Eurasian Economic Union’s back-up potential. In the current circumstances Russia also gets possibilities for implementing non-economic regulations in its foreign trade, yet such possibilities should only be employed with a great care.

In the strategic context, a further trade wars paradigm development seems advantageous for Russia, since it provides a chance to significantly expand its presence in the key global markets. But that will only be possible if it can reconfigure the financial and investment components of its foreign economic activities. A mere formal expansion of the non-resources exports in the environment of the global trade regionalization may prove to be counterproductive. Building a new system of investment support for foreign trade will be the best way to prepare for a possible major crisis in the global trade.

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