Reva Goujon: If the past decade was all about hyper-globalization, the current phase we're in is about the reorganization of global trade. We're in a phase of global trade reorganizing itself along highly geopolitical lines. This all meshes together in a very messy way where it's a series of wake up calls.
Teri Viswanath: That’s Reva Goujon, director for corporate advisory at the Rhodium Group. The number, intensity, and length of violent conflicts worldwide is at its highest level since before the end of the Cold War. What’s more, nearly every single industrialized nation is retooling policies that will re-work and re-map trade relations, with important implications for U.S. exports. But what does this all mean for rural America?
Hello, I’m Teri Viswanath, the energy economist at CoBank and I’m joined by my colleague Tamra Reynolds, a managing director at the bank, and we are going to consider these issues on today’s podcast.
Tamra Reynolds: Hey, Teri. We had an opportunity to meet up with Reva at CoBank’s Executive Forum in August and I was particularly struck by the comments she made about the quickly evolving landscape for international trade and what this means for the rural economy.
Overall, U.S. farmers and ranchers export more than 20% of what they produce. That figure has nearly doubled over the past two decades, so international trade (whether viewed from an ag or manufacturing lens) is vital for the economic health of these communities.
Viswanath: But according to Reva, we are living through a period of accelerated geopolitical change, and that can impact those communities. Here’s some context on how she frames the current cycle of international relations or the “Everything, Everywhere, All at Once” moment that is unfolding in the world. And, why the global capital markets might have been taken by surprise by these events.
Goujon: This is something that has been in motion now for decades. We're just at a point where the symptoms of many of these deep structural trends are manifesting. It's kind of in your face all at once.
What's happening here? When we look at the global trade picture overall, you hear a lot of buzzwords. Is the world deglobalizing? Is this peak globalization, et cetera? The way I see it, and what the numbers seem to show so far is really it's the reorganization of global trade that we're witnessing.
That doesn't mean a net decline in trade volumes, it actually just means in some cases, it can be an increase as we're moving a whole bunch of things around.
One thing, I think it's important to bear in mind that whether we're talking about disruptive technologies, aging demographics, great power competition, the reorganization of global trade, climate and energy transitions, these are all forces that have been in play for let's say at least four decades. When you see a Goldman Sachs saying it's all geopolitical, it's because it's manifesting that way right now.
Reynolds: We anchored the conversation back to the discussion of “A World at War.” As of last year, a quarter of the world’s population— or 2 billion people —lived in conflict-affected areas. So, is the current geopolitical environment and conflict driving the change in trade?
Goujon: If we had to look at three big structural factors affecting global trade flows, one would be geopolitical risks and the diversification efforts attached to that. That's where you hear de-risking a lot in that conversation. What does it actually take to diversify those supply chains away from what's termed as foreign entities of concern, whether we're talking about China, Russia, or others. That's a complicated process, but one very much in play.
Two, is the revitalization of industrial policy very much linked to those geopolitical concerns, but also with an intent to revitalize the manufacturing base within advanced economies, create jobs, promote more wealth equality, upskill labor.
Then I would say when we look at climate issues overall and how to mitigate carbon footprints in shipping and transport, this is also something that's going to lead to more regionalized trade avoiding longer transport times and allowing for clusters of manufacturing to take place so that you're not shipping goods from one end of the world to another, but that you can localize more effectively, especially as defensive trade measures like carbon tariffs come into play.
Viswanath: But there are real challenges or remapping the world, given current dependencies and other factors that restrict trade pathways. Not to mention domestic agendas for economic growth and security. And, of course, the elephant in the room, which is U.S.-China relations. Right?
Goujon: Issue of the day, of course, is diversifying away from China under this broad de-risking banner. Still dealing with very sticky dependencies and critical inputs and electronic supply chains and a whole host of other things. That is one very, very big catalyst in play. Related to that is the revival of industrial policy. Again, more buzz terms, nearshoring, reshoring, all of this.
What does it mean? It's reviving the industrial base, not just in the U.S. but this is across G7 and other partners that get pulled into these ecosystems depending on what their trade advantages are. Upscaling labor for sunrise, clean tech industries, the job creation that is intended to come with that and so on. Another driver is just where are we in broader macroeconomic developmental cycles? The big one here being, of course, China again moving up the value chain.
Also, you see this in countries like Indonesia and others, where as you try to move up the value chain, you're going to put certain trade barriers in place to ensure that movement happens. Then you're going to see trade flows follow, so movement towards Southeast Asia, other parts of Latin America, and clean tech value chains will catapult countries in this process. Bolivia, Chile, the Democratic Republic of Congo, Canada, Australia, all of these countries become extremely relevant in short order.
As these countries start to move up and up and up, you look at things like labor competitiveness, where you diversify at certain segments of those supply nodes and what are each of these countries capable of along each of these critical value chains?
Viswanath: Reva, you mentioned that we are seeing a tremendous revitalization in the industrial policies for developed nations. What is the U.S. doing on this front? And how might it impact our rural communities?
Goujon: One term that you'll see come from the current administration in the U.S. is the idea of “place-based” industrial policy, which is essentially a more mindful approach to distributing economic activity across geographic centers. When we talk about reshoring, it's not just about invigorating already established economic hubs like Silicon Valley in California.
It's about creating and growing what's been called the Battery Belt running through Southeast United States and creating new manufacturing hubs, revitalizing auto hubs in Michigan, for example, with the growth of the EV industry. Texas, of course, where I sit, is a major hub when we're looking at semiconductors.
The idea here is create these innovation hubs and research hubs and drawing in from university communities to draw on talent, forging these public-private partnerships to create healthy talent pipelines.
The technology's evolving. You have universities that are, for example, building out clean rooms for semiconductor manufacturing, which is a very advanced technological process. That is really cool to be a university student and be in that environment already so that when you enter the workforce, you have that experience and companies investing in those efforts because they need the talent, and the labor to actually underpin these industrial policies as well.
Viswanath: Sort of incubated the next cycle of manufacturing at our universities. That is really exciting. Tamra, you and I had a chance to tour Arizona State University’s Laboratory for Energy and Power Solutions.
Reynolds: That’s right. But other developing nations are probably also developing competing policies and establishing these private/public partnerships, right?
Goujon: Of course, the U.S. has a lot of advantages when it comes to innovation but when it comes to infrastructure build-outs, permitting reform, and upskilling labor, this is hard and the U.S. is competing against South Korea, Taiwan, other countries, especially in the tech space that have a workforce that can move quickly and at lower cost.
This is part of the momentum that the U.S. wants to create in saying, look, we have this industrial policy, we're attaching big dollar signs to this, we want to put forward these public-private partnerships. If other countries grumble about that, for example, the Europeans, South Korea, others, when the Inflation Reduction Act came out, they said, "Well, wait a second. This is just going to take investment from us and steer it toward the U.S. when you're putting all these tax incentives in play."
The U.S. response was, "Well, then you do it. If you want to be part of this industrial policy, yes, let's negotiate where we have some common cause here, but you're part of this clean tech innovation cycle as well." The demand is huge globally, there will never be enough at this point right now in terms of capacity build-out, at least at this current stage so you go build.
What's happening? Europe is leaning in with a big industrial policy, individual member states are going big like France. Japan and others are also getting the message and teeing up their industrial policy. I think that's all by design and that, at least for this U.S. administration, is the healthier side of competition in this era of industrial policy.
Viswanath: Let’s go back to this idea of whether it is achievable for the U.S. to beef up its manufacturing to a level that is competitive on the world stage and whether rural communities will be brought along in the process.
Goujon: There's intent to ensure that the industrial policy funding is being distributed to manufacturing hubs across the country to include parts of rural America that can tap into these bigger opportunities.
Now, does that mean all this industrial manufacturing is coming back to the U.S.? No, this is much bigger than a U.S. solution. This is on the one hand, a North America solution in that in drawing from the USMCA and other free trade agreements, the U.S. is going to be looking to partnerships to ensure that low-cost manufacturing is geared toward those areas that can best optimize those parts of the supply chain.
When you see things like the IRA come out, the Inflation Reduction Act, there's a reason why those local content provisions talk about North America manufacturing. It's not just based on the U.S. in every instance when we're talking about EVs in particular. Then it goes beyond North America to what's happening among G7 partners, especially when it comes to technology partnerships.
Beyond that, there are all these plurilateral partnerships that are also taking place among countries that the U.S. needs and others need for critical inputs. When you think about in Indonesia, DRC, in trying to diversify critical supply chains, these are all countries that matter. There may not be an easy way to fit them into a free trade agreement, but you need to have some kind of forum to coordinate.
Reynolds: Ok, got it. So, Reva, this goes back to your argument that the prior decades focus on hyper-globalization is giving way to reorganization of global trade largely drawn by these important geopolitical lines. We are still looking for those global efficiencies, but through a slightly altered lens.
Goujon: The U.S. has a lot of companies like Nvidia, Qualcomm, others that are what's called “fab-less” designers. Meaning they're not putting all their capital and energy into actually manufacturing the chip itself. They leave that to the experts, which currently, that's Taiwan Semiconductor Manufacturing Company out of Taiwan, which has dominated the space, and really perfected the manufacturing process for it within a very integrated supply chain.
Those chips end up in everything. From your smartphone to a medical device or in all different kinds of agricultural applications. When you're looking at these downstream effects, the labor cost really matters at the end of the day. The founder of TSMC, Morris Chang, he gave some very blunt remarks over the past year saying, he said, "Globalization, basically, is over as we know it because there's no way we can make this cost competitive in the U.S., and this is a very heavy price that we have to pay."
Now what's interesting here is, well, TSMC is still investing in manufacturing in the U.S. If it's not cost efficient, why is it doing that? Well, because that's where geopolitics comes into play. When you have countries like Taiwan, like Japan, like South Korea, that are extremely vulnerable geopolitically speaking, whether we're talking about Taiwan's vulnerability to a Chinese invasion, South Korea is, of course, constantly dealing with North Korea and its own China risks and Japan as well.
All of these countries have important security partnerships with the United States. The United States has leveraged that when it comes to tough negotiations in saying, look, we want secure supply chains. We're willing to put money behind it through this industrial policy. What is your geopolitical down payment so to speak?
That comes in the form of TSMC investing in a fab in Arizona, and saying, "We'll make some advanced chips. They're going to be more expensive but we're doing it." The same thing is happening with investments in Germany and elsewhere. It’s expensive, but they’re doing it.
Viswanath: I know that there's a lot of studies and commentary about decoupling the global trading system into two segments — a U.S.-centric piece and a China-centric piece. My sense, is that this might be little bit self-involved from a U.S. perspective. Do you think there's any merit to this?
Goujon: The idea of having a Cold War economic system where it's two distinct blocks of trading partners and very divided supply chains, that's not really possible in the current context.
Take an example like Indonesia, which is really important for nickel production, class two nickel production that goes into EVs and other applications and battery making. If you look at what is China related content in Indonesia nickel production, it's at least half. You can't just exclude certain partners based on a China factor because you need those critical inputs.
The Europeans are not saying no to Chinese investment. They're still saying that, "Okay, a Chinese battery company can come and invest but it has to be on European soil." That is a different dynamic than what you see happening in the U.S. where there's a harder line being set around that.
The point is the lines are much more blurry in the current geopolitical dynamic. China's role in these supply chains remains pervasive, and so it's very hard to just cut off one particular source overnight without creating massive inflationary impacts that then creates big political problems. At the end of the day, politicians don't want big political problems when it comes to inflationary impacts on their constituencies. There are always arresters along the way.
Now, in more advanced technology supply chains, decoupling is happening. You can already see this in when you look at the bleeding edge of the semiconductor space, and the inputs to manufacture those, and where China's weaknesses are. That's where you can have real decoupling happening in a more bifurcated system.
All in all, no country has the luxury of self-sufficiency in the current geopolitical climate. It's those dependencies that are going to lead to some very creative negotiations, and even between partners where you can have like-minded interests among the U.S., Japan, Europe for example, but there are a lot of pending trade battles as well that are in play.
Reynolds: That makes sense, but let’s focus in on U.S. capabilities and labor. This seems a particularly important conversation, given this year’s unprecedented and historic strike action taken by one of the nation’s largest labor unions.
Goujon: The thing about industrial policy is that it takes two. It takes public-private partnerships to make actually bring these goals to fruition. This is where, on the one hand, on the policy side, you can create conditions and guardrails on things like screening against investment and inputs from China, for example.
On the other hand, on the industry side, there's some leverage to say, well, this is what we need in terms of the talent to support these mega projects and this is what we need as well in terms of the H1B visas for example and other types of immigration asks from the policy side. I think it's going to be very important to see how that actually shakes out. If you look at just polling around this, Gallup polling shows about 68% of Americans see immigration overall as a good thing.
There is, I think, an opportunity at hand to rationalize immigration policy. There's some discussion around this and you're seeing more scrutiny on the security aspects of this on asylum cases and border protection. But this can also hopefully spur more pro-active ways of just drawing in much needed labor and talent to underpin this industrial policy revival.
Viswanath: At the start of our discussion, Reva, you mentioned that climate concerns and global decarbonization were impacting trade. Energy concerns are so interwoven with geopolitical and national security concerns that it can be hard to separate them. The challenge, of course, that we don’t have infinite time to figure this out. Let’s talk about security ‘guardrails.’ In particular, I’m thinking about European EV probe. You recently wrote about this at Rhodium, can you explain?
Goujon: The key question for any policymaker right now is, how do you reconcile your decarbonization goals with your broader national security objectives? This is really hard.
You referenced the recent EU EV probe that was launched and this was launched by the European Commission, not by any particular member state.
What's happening here, if you step back, is something really interesting in that Europe is taking-- is actually embracing more of a preemptive approach to China in launching this probe. Now, the U.S. is very comfortable with preemptive policy moves. You see this in, for example, last year, the U.S. did a paradigm shift in export controls around semiconductors to say, advanced semiconductors could go into military end use and therefore we're drawing a very big line here and that changed the semiconductor world overnight.
What do you see out of this EV probe from the European Union? It's preemptive and there's like a never again posture taking place here.
What I mean by that is if you look at solar photovoltaic manufacturing, solar PVs. In the late 2000s, Chinese solar PV manufacturers they really relied on foreign technology primarily, especially coming from German companies like Siemens. There was a lot of state financial support that went up to building the supply chain. Now, China's share of global PV cell production grew from just under 14% in 2006, to 28.7% in 2007 and then up to almost 33% in 2008.
Now, the EU in launching this case is saying, "We don't want the same thing to happen again. We've already seen China's share of EU imports and EVs grow from 4% to 16% in value terms." The idea is Europe doesn't want heavily subsidized China-made EVs dumped into the market and competing with their own brands.
This sets an important precedent and wind turbines are on the table, heat pumps are on the table, medical technologies are on the table for using these defensive trade measures.
Reynolds: This sounds like it might get messy? Right?
Goujon: That is what you see coming through and a number of policy proposals and in some cases, attempts to just hit the accelerator on policies in ways that can lead to massive disruptions without really a whole lot of consideration for the spillover effects. For example, while there may be political objectives to show a toughening on China and a desire to extricate China from critical supply chains in very short timeframes, in some cases, immediate if you look at some policy proposals, there's also a feasibility test that has to come into play.
China has a vote in many of these areas. Retribution is real when it comes to restricting critical inputs, whether we're talking about dysprosium for rare-earth magnets, or graphite for battery production or gallium and germanium for semiconductor manufacturing, these are exactly the areas where China's exercising the threat of being able to disrupt those supply chains at the same time, the U.S. and others are trying to get these industrial policies off the ground.
This all meshes together in a very messy way where it's a series of wake up calls. A wake up call on where federal spending has lagged on basic research and development and leading to a revival and industrial policy to address these key shortfalls.
Wake up policy in terms of critical dependencies on foreign entities of concern like China, like Russia and the massive wake up call of what is it going to take to meet Paris climate goals and decarbonization goals and balance those with these national security objectives at the end of the day. Finding that balance point is going to be an extreme challenge over these next several years and decades. That is where the most disruption potential occurs.
Viswanath: As the U.S. confronts a series of challenges—climate change, global supply chain instability, and the rise of China foremost amongst them—experts are debating the role of industrial policy and government support for industries that are deemed strategically important. The outlook and really the future of the rural economy will be tied up in these evolving policies.
Reynolds: I hope all of you have enjoyed our conversation with Reva on how these policies are developing and the implication from a global partnership standpoint.
Viswanath: And that you will join us as we close out the year with a conversation with Jim Matheson from NRECA next month as he takes a look at developing domestic policies on U.S. power plants and the implications for co-op reliability and affordability. Bye for now.
