Saturday 16 Oct 2021 | 22:43 | SYDNEY
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Trade wars, populism, and geopolitics. The world is quickly becoming more fraught as complex forces threaten to disrupt and reshape the global economy in profound ways. In this context, the Lowy Institute launched the Global Economic Futures project aimed at better understanding this rapidly changing global economic landscape, where it might take us, and the key choices to be made.

The project examines the future shape of the global economy especially given rising tensions between the world’s two largest economies – the United States and China – and the possible implications for, and changing roles of, major regional economies, including Australia, India, Indonesia and others.

Latest publications

COVIDcast Episode 9: Covid‑19 and the oil price collapse

In this episode of COVIDcast, Roland Rajah, the Lowy Institute’s Director of the International Economy Program, sat down with Rachel Ziemba, Adjunct Senior Fellow at the Center for a New American Security, and Rodger Shanahan, Research Fellow, West Asia Program, to discuss the economic and geopolitical implications of the recent oil price collapse.

Due to the combined effects of a collapse in demand, a glut in supply, and lack of producer co-ordination, last week the price of oil briefly turned negative. Rajah and Ziemba discussed the global economic impacts, with Ziemba arguing that deflation was now a major risk: “Looking particularly at the US economy, we have almost 30 million unemployed and the number is rising. I don’t think labour is going to have wage-setting powers, and retailers and wholesalers are having trouble passing on higher costs to the end user.”

The effects across a range of oil-producing countries were also considered, with Ziemba noting, “Even some of the richer countries are likely to invest less money via their sovereign funds in the region, but also as they face unemployment there will be less remittances set. That’s going to affect countries like Egypt, countries in South Asia and will generally be a hit to consumption across the world.”

The geopolitical aspects of the price collapse in the Middle East were outlined by Shanahan, who commented on the Saudi Arabian Crown Prince Mohammad Bin Salman’s role in initiating an oil price war in early March, and the “additional reputational damage for Mohammad Bin Salman because of his poor decision-making”. He also discussed the particular vulnerability of Iraq among Middle Eastern states, noting that it relies on oil revenue for two-thirds of its GDP and that there is a serious risk of further political instability in that country as oil revenue also fuels public-sector wages.

Finally the panel discussed the role of China. Ziemba commented:

We’ve seen Chinese policy response across the board as being more muted and modest than in past crises ... I don’t see China riding to the rescue, neither do I see countries like India playing that role.

She noted the further economic challenges ahead as “distressed assets com[e] through the pipeline”.


COVIDcast is a weekly pop-up podcast hosted by Lowy Institute experts to discuss the implications of Covid-19 for Australia, the Asia-Pacific region, and the world. Previous episodes are available on the Lowy Institute website. You can also subscribe to COVIDcast on Apple Podcasts, listen on SoundCloudSpotifyGoogle podcasts, or wherever you get your podcasts.


The facts about global trade in face masks, ventilators and test kits

What impact will coronavirus have on economic globalisation, the force that has so momentously changed our world over the last half century?

An early example is the global trade in medicines and medical products, especially those essential to fighting coronavirus such as face masks, ventilators and test kits. As the US Congressional Research Service (CRS) observed in an 6 April note, Covid-19 “is drawing attention to the ways in which the US economy depends on manufacturing and supply chains based in China”. White House trade adviser Peter Navarro said last month he is preparing an executive order to help relocate medical supply chains from overseas to the United States. Japan has already announced such a plan. Australian Industry Minister Karen Andrews has also joined in, foreshadowing a review of Australia’s reliance on imports of medical products.

Although this is shaping up as an interesting debate, facts may intrude.

One fact is that the global trade in medical products is mostly an advanced economy business. The US itself is a very big exporter of medical equipment and pharmaceuticals. On US Bureau of the Census numbers exports in these two categories last year totalled nearly $100 billion, putting the US just behind Germany as the second biggest global exporter of medical products.

On recent World Trade Organisation numbers, the top six exporters of medical products are Germany, the US, Switzerland, the Netherlands, Belgium and Ireland.

Germany and the US are not only the top exporters but also the biggest importers – and in each case their top suppliers are other Western democracies.

Using those same WTO numbers, all of China’s exports of medical products last year totalled just one 20th of world medical exports, way behind Germany with one seventh, or the US with one eighth.

Policies that injure global trade in medical products would hurt the US and its Western democratic allies more than most, and in a sector well suited to their strengths in technology and intellectual property.

A lesson of the pandemic is certainly that no nation can rely on imports to meet its needs when every nation on earth suddenly wants the same products.

The US Bureau of the Census numbers for trade in pharmaceuticals and medical equipment show the US sells more to China than China to the US. Using a wider category the WTO shows a “medical products” bilateral imbalance in China favour but also shows that while the US accounts for nearly a fifth of China’s imports of medical products, China accounts for less than a 10th of US imports of medical products.

US medical products imports from Ireland, Switzerland and Germany are worth nearly five times US medical products imports from China.

Another intrusive fact is that China is only an important supplier of medicines and medical equipment to the US and the rest of the world in a couple of areas.

Coronavirus testing kits were in short supply in the US (and elsewhere). But China had not been an important exporter of these kits and on the CRS numbers accounted last year for only a tiny share of US imports.

Respirators are another essential piece of coronavirus treatment equipment, but China is not a big exporter to the US. According to the CRS, China accounted for 17% of US imports of respirators, much less than Singapore.

China produces some important active pharmaceutical ingredients (APIs) used by US drug makers, but its most important medical export to the US is face masks and other personal protective equipment (PPE). On CRS numbers China accounts for 72% of US imports of textile face masks, 77% of imports of plastic gloves, and half of imports of protective garments.

Though China restricted exports of face masks in early January, when China’s own requirements were huge, it resumed exports in February. Since 1 March, according to China’s customs service, it has exported 26.7 million N-95/KN-95 masks, 504.8 million surgical masks, 195.9 million gloves, 17.3 million surgical gowns, 873,000 goggles, 3,253 non-invasive ventilators and 112 invasive ventilators.

Air regulator tests during the production of medical ventilators in Spain (Pau Barrena/AFP/Getty Images)

In the categories where it accounts for significant shares of US medical imports, China does not appear to be responsible for shortages. In a 27 February press release addressing issues in medical supplies US Food and Drug Administration Commissioner Stephen Hahn told the media that no US firms importing drugs or active drug ingredients from China reported shortages, and the drugs in question were anyway regarded as “non-critical” for coronavirus treatment. The FDA had contacted US manufacturers producing “essential” medical devices in China. Hahn told the media ‘there are currently no reported shortages’ for these medical devices. In respect of masks, gowns, gloves or other PPE, Hahn told reporters the FDA “is currently not aware of specific widespread shortages”.

So what lessons on globalisation and medical products can we draw from the pandemic?

One is that normal production of medical products will never be enough to meet the extraordinary demands of a pandemic, whether the production is at home or abroad.

Surgical face mask production is a good case in point. Despite China producing half the world’s face masks last year, its output proved nowhere near enough for a population the size of China’s during an virulent epidemic. At the high point, according to the Organisation for Economic Cooperation and Development, China was using 240 million masks a day – more than ten times its manufacturing capacity. It cut off exports, imported masks, and increased domestic production from 20 million masks a day before the crisis to 116 million a day at the end of February. Taiwan, South Korea and India also restricted mask exports (including to China), for much the same reasons.

A lesson of the pandemic is certainly that no nation can rely on imports to meet its needs when every nation on earth suddenly wants the same products, and in vast quantities. At various times and to varying degrees, 60 nations restricted exports of medical products during the pandemic.

But another lesson is that nations cannot routinely produce within their borders the volume of medical equipment and pharmaceuticals needed for a pandemic. It is not a practical possibility for any nation or the entire global economy to produce every year the volume of output that might be needed one year in 20. Instead, the lesson is that every nation needs to stockpile enough essential supplies to get it through to the point where imports in sufficient quantity and emergency domestic production are available.

In the US and elsewhere the level of stockpiling was insufficient. The US Health and Human Services reported earlier this year that the US stockpile of face masks was less than 1% of what would be needed for a year-long epidemic. The face masks stockpile in China was clearly insufficient.

Even so, shortages of medical products do not account for the severity of the epidemic in Lombardy or New York. More testing and therefore more testing kits would have helped, but the great difference could have been made by earlier action to reduce infections, including lockdowns, social distancing, and travel bans.

COVIDcast Episode 7: The cost to the international economy

In this episode of COVIDcast, Roland Rajah sat down with the Institute’s Director of Research Alex Oliver to discuss the impact of the coronavirus on the global economy. Roland is Director of the International Economy Program and Lowy’s lead international economist.

One of the key questions about the economic impact of Covid-19 is whether the shock will be temporary or longer-lasting. Rajah explains in this episode why he believes the economic shock will permanently change the global economy, at least in some respects. Looking at the International Monetary Fund forecasts released this week, he notes that even under the IMF's “rosy outlook”, by the end of 2021 “the global economy will already have lost at least $5 trillion”, the equivalent of missing an economy the size of Japan’s. Under the IMF’s more negative scenarios, by the end of 2021 the world would be “missing an economy almost the size of the entire US”.

Each week since the severity of the coronavirus crisis became clear, Lowy Institute experts have been sitting down to discuss the implications of coronavirus for Australia, the Asia-Pacific region, and the world. Episodes one to six are already online, and this is the seventh instalment in the series, which we’ll be continuing on a weekly basis as this crisis unfolds.

Among other issues Oliver and Rajah discussed were the G20 finance action plan announced this week, and the economic plight of developing and emerging nations. According to Rajah, the virus has inflicted a “violent and unprecedented withdrawal of funds from these countries”. He outlines a proposal made on The Interpreter this week that Australia should extend a significant loan to Indonesia, to boost market confidence and help address the financial shocks it is experiencing.

Amid speculation that China will exploit the crisis to its own advantage by providing economic aid to emerging countries, Rajah points out the limits China will face in doing so and that China will only gain the upper hand if other countries don’t also step up in ways that they can, and should.

COVIDcast is a weekly pop-up podcast hosted by Lowy Institute experts to discuss the implications of COVID-19 for Australia, the Asia-Pacific region, and the world. Previous episodes are available on the Lowy Institute website. You can also subscribe to COVIDcast on Apple Podcasts, listen on SoundCloudSpotifyGoogle podcasts, or wherever you get your podcasts.

Australia should offer Indonesia crisis insurance ­– quickly

The Morrison government needs to urgently consider how it might best help Indonesia manage the economic risks posed by the Covid-19 pandemic. Indonesia faces a perilous outlook. The government is struggling badly to control the virus. Making matters far worse, Indonesia has also been among the hardest hit by the violent rush of money surging out of emerging economies worldwide.

What happens in Indonesia is of special importance to Australia given its size, proximity, and general centrality to our economic, diplomatic, and security interests. Australia should do what it can to help.

Indonesia’s huge size – 270 million people and a trillion-dollar economy – might make it seem impossible to offer meaningful help without this being at such great cost as to be politically infeasible. Especially as Australia’s economy is itself taking a battering from the virus.

Yet, Australian support could make a significant difference and, if structured properly, at little to no cost to the Australian budget.

Specifically, the Australian government could provide the Indonesian government with a sizeable “standby” loan facility – as much as US$10 billion (A$16.1 billion) – that could be drawn upon if Indonesia ran into difficulty raising adequate budget financing from the market. This could be complemented by also extending a currency swap line – perhaps for another US$10 billion – to bolster Indonesia’s defences against excessive currency depreciation, as recently suggested by former Indonesian finance minister Chatib Basri and economists at the Australian National University.

The beauty is that neither arrangement would need to be drawn upon to have a positive insurance effect. Their mere existence would serve to boost market confidence that Indonesia will be able to finance its budget deficit and withstand unwarranted currency pressures, making it less likely that the facilities would be called upon in the first place.

Unfortunately, it is easy to see how a perverse feedback loop might form, with market fears limiting the ability of policymakers to respond effectively, thereby increasing the damage from the virus, prompting more capital outflows, and so on.

Australia has participated in similar standby loan facilities for Indonesia in the past – in 2009 during the global financial crisis, and again in response to the 2013 “taper tantrum”. On both occasions, Australia committed about A$1 billion, that was never drawn upon, as part of a roughly US$5 billion multilateral facility led by the World Bank.

Today’s crisis clearly requires a far larger sum. Yet, the huge pressures on Australia’s own budget risks complicating the politics. To overcome this, a key difference this time around could be to anchor the loan terms close to Indonesia’s own sovereign borrowing costs during “normal” times, instead of providing a semi-concessional loan as in the past. The currency swap could take a similar approach.

Indonesia does not need a modest amount of cheap financing. What it needs is to be able to borrow at normal market rates but with certainty and at scale. Crucially, for Australia this means that, even if the funds were called upon, it would not impact negatively on the underlying cash balance nor fiscal balance of the Australian budget – as the lending terms could be priced for any risk of default.

Australian Prime Minister Scott Morrison with Indonesian President Joko Widodo during a visit to Canberra in February (Australian Embassy Jakarta/Flickr)

To see why such support could be pivotal, it is critical to recognise that Indonesia’s reliance on unstable foreign financing threatens to greatly exacerbate the damage from the virus pandemic.

Indonesia has already suffered around US$10 billion in financial outflows since late January while its currency has plummeted 14%. A sizeable US$410 billion in external debt, owed mostly in US dollars, make this a big problem. Evaporating commodity export demand compounds the difficulties.

Outflow pressures have eased in the last few days. But these could easily return with even greater force – especially if problems in other emerging economies were to spark fears of financial contagion or if Indonesia lost control of its own domestic virus situation.

Equally worrying is if a reliance on unstable foreign financing were to prevent Indonesia from deploying the kind of massive fiscal and monetary expansions needed in all countries to keep the economy (and society) afloat through the pandemic. Worse, Indonesia’s government might be deterred from pursuing adequate public health measures if it fears it would be unable to deliver the policy support needed to mitigate the economic and social fallout that would directly result.

One can already see signs of all this. Indonesia’s economic policy response to the virus has been relatively timid – with new budget measures worth just 2.8% of GDP and interest rates only cut to 4.5% to avoid putting further pressure on the currency. The central government has also only reluctantly begun to slowly roll out enforced social distancing measures.

Far more might be needed on both the health and economic fronts. The question is whether market conditions will allow it. Unfortunately, it is easy to see how a perverse feedback loop might form instead, with market fears limiting the ability of policymakers to respond effectively, thereby increasing the damage from the virus, prompting more capital outflows, and so on. Whatever happens with the virus itself, such a vicious cycle threatens to make things far worse.

Fortunately, Indonesia’s economic fundamentals are sufficiently healthy that, with some additional support, it could be in a good position to withstand the economic pandemic unleashed by the virus. The Australian policy support suggested here, combined with realistic contributions from other governments and multilateral institutions, could make that difference.

If Indonesia is interested in taking out such crisis insurance, Australia should willingly oblige.


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