Why the world’s economic glue is becoming unstuck

The Rest Is Money

The episode explores the increasing fragility of global supply chains and the potential for a major trade shock due to geopolitical tensions

Key takeaways

• Ed Conway's book 'Trade World' reveals how economists have overlooked the vulnerabilities in global supply chains.
• The UK is currently a G7 outlier because it has not closed the 'de minimis' loophole used by brands like Temu and Shein to avoid tariffs.

Main topics

• Global Supply Chain Vulnerabilities
• Geopolitics of Trade Routes

Notable quotes

The glue is mostly invisible... and when they go wrong, everyone notices.

Conclusion

The episode serves as a warning that the era of cheap, frictionless gl

Transcript preview

Speaker 5 (0:00) Is the world's economic glue coming unstuck as war continues to rage in the Gulf and in Ukraine, closing shipping lanes and forcing up the price of energy, transport and pretty much everything? Does this mean we're stuck with years of inflation? Or might we experience the kind of trade shock that causes recession or even? a depression. These vulnerabilities are exposed in Ed Conway's excellent new book, Trade World, which asks the question why governments and economists have ignored the way globalisation has made all nations more dependent on each other than they know. Speaker 8 (0:35) This year on The Rest Is Money, we're proud to be partnered with Octopus Energy. Octopus's Greg Jackson is with me. Before we get on the show, I've got a quick one for you. Andy Burnham announced plans to cut VAT on electricity. Is there anything we could also do on the supply side to bring down costs? Speaker 1 (0:51) First of all, it's good that the government have recognised the importance of energy costs. They took VAT off electricity and prior to that, by the way, some of the levies off electricity, which means that despite the underlying rising cost of energy at the moment, and our gas bills are going up with the next price cap, electricity bills are actually staying roughly where they are during this price cap. That's a good start, but you can't paper over the cracks with these kind of tax changes forever Fundamentally we need to drive down the cost of our electricity system. There's a lot of ways of doing it We need to review the plans to build a hundred billion pounds of new grid and networks Because new technologies like super cheap batteries Flexible use electric cars all mean we might not need that expensive infrastructure and we can push the costs of electricity down Speaker 8 (1:39) Our thanks to Octopus Energy for powering the rest is money this year. Listen out for Greg on our future episodes. Speaker 5 (1:56) Hiya, great to see you. Your assertion is that the glue of the global economy is getting unstuck and that is something that we should all be worried about. So I think we better start by looking Speaker 4 (2:10) at what you mean by the glue. Yeah, well, I mean, the glue is mostly invisible and the glue is, you know, there are various different forms of life support system around the world. There's, you know, there's the stuff that's keeping us. fed, the various supply chains that provide us with food. There's the financial underpinnings of the world, which, you know, as you very well know, are kind of invisible, but incredibly important. And when they go wrong, everyone notices. But above all else, there's the fact that 90 % of all of the items that you're buying in the supermarket or ordering from online they physically have to get traded. They come along supply chains, on ships that come often from the other side of the world. Sometimes it's the finished item, sometimes it's the components that go inside them. I think we're kind of mostly just semi-oblivious of the extent to which pretty much everything in our lives has this kind of hidden journey that we don't spend all that much time thinking about. The example I like to give is... You think about a pack of fish fingers that you buy in the supermarket, fish that comes inside them. Maybe that was caught in the North Sea, but often instead of being sent directly to the kind of processing plant where it's breaded and turned into a final fish finger, often it's sent to the other side of the planet, to China to be processed 15,000 miles and then 15,000 miles back again to Grimsby or wherever to have the bread put on the outside before ending up at the supermarket. And if you're buying the pack, if you're looking at the label, and something similar goes for a pair of jeans or whatever it is, if you're looking at the label, that only tells you a tiny fraction of this extraordinary kind of hinterland that the everyday items actually kind of have. And the worry I have is that because we're so oblivious to the incredible exoticism of everything around us, whether it's just a slice of bread or indeed a car or... an item of clothing. When things go wrong, which right now we're living through a period of things kind of going wrong with what we're seeing in the Strait of Hormuz and what we're seeing elsewhere. When things go wrong, you're liable to face an even bigger shock because all of a sudden you can't get the fish fingers or you can't get the jeans or you can't get the car that you want. And I think that's the world we're now potentially embarking on, which is a more unstable world. where that physical life support system, like I say, the glue that really accounts for so much of the economic activity, where that glue is kind of under threat and could be unstuck. Speaker 5 (4:41) I mean, one of the things that I was really struck by in your book, and it sort of reminded me of something we discovered at our horror in 2007, 8, during the financial crisis, is you say in your book, The way, essentially, globalization has created these really very fragile supply chains is something that economists have just ignored. They took, in a way, they sort of took for granted the cost benefits of globalization, essentially making, you know, bits in the finish. products that we all enjoy in the lowest cost parts of the world, companies holding incredibly low stocks because they never thought there'd be a problem of getting hold of this stuff. And it really reminded me when the financial system was essentially grinding to a halt. And for example, it was impossible for banks to issue bonds to raise money, which started in the summer of 2007. I was actually horrified by... how few economists had built into any of their models, you know, the risk of the financial system seizing up, which is why, you know, when people like you and me, you know, I was shouting from the rooftops, oh, my God, this financial crisis is going to make us all poorer. All the economists' models continue to say, no, it's all fine. The economy's going to continue to grow. And it's because they just never looked at, in a sense, the gubbins, the financial underpinnings. of the economy. So how worried should we be that essentially, whether it's economists or regulators or governments, they don't really understand the kind of stuff that you've exposed in your excellent book? Speaker 4 (6:19) It's a really good analogy. And I think you often only kind of, you only see the weirdness of the system, the extent to which the emperor doesn't have clothes, when you really do take a lot of steps back and look at the system from the bottom up. And the analogy is great, because if you think about what happened in the financial crisis, well, there was a lot going on. But amongst many other things, there's this notion of fractional reserve banking. So basically every bank in the world, if every consumer customer was to go to that bank and say, oh, hang on, actually, I'd quite like my money back right now, then every bank in the world would be bust instantly just because of the nature of the way that the system. Operates, you know provided people do not do that then you're okay But if everyone suddenly does do that then you're in big trouble this as you know as we all saw in kind of 2007 with Northern Rock and with other banks and with the financial crisis in general and You could make the case and I try as I do in the book that to some extent It's the same thing writ large across the global economy. We have these Supply chains, there's just-in-time supply chains, which mean if you want to buy anything from a car Well, if your car producer wants to get the parts for a car They just turn up at the very moment they're needed if you want toilet paper if you want something for the supermarket It appears in the supermarket relatively soon before you're actually buying it if we were living in a world where all of a sudden everyone started fretting and started going out and buying the things that they worried about running short of, whether it's loo paper, and obviously I use that analogy because that's kind of what happened in the early stages of COVID, then we would run out of stuff very quickly. And the extent to which the entire global economy is run on those incredibly tight margins that assume that everything will always turn up on time is kind of staggering. Speaker 4 (8:07) Like I say as long as the ships keep sailing through the choke points as long as everything you could assume that it's going to turn up as long as the factories still keep running as long as there are no accidents everything is great and everything is fine and you don't have to think about this stuff and we will live in a world where everything is increasingly cheap or at least cheaper than it would otherwise have been because we are concentrating so much production in certain factories, but if things go wrong And that's the point, you know, and I think we're living through an era now where a lot of things that, you know, that system is being tested to its limits. If things go wrong, then all of a sudden you are left facing a big shock. And all I'm saying in this book is, wouldn't it be good if we started to try and think about that stuff ex ante rather than ex post in the teeth of a crisis? Wouldn't it be good if we started to try and think about the nature of the global economy in all its... amazingness and all its perversity. And I think there is something amazing, but also perverse about a pack of fish fingers, or at least the fish and fish fingers traveling to the other side of the world to be processed before coming back, just because it's that bit cheaper to do it in China. I think that's something that we should be debating. And yet, because we're not really given much of a sense, and I don't blame... consumers because frankly you look at the label on your pack of fish fingers and it doesn't tell you this stuff you look at the label on your pair of jeans and it doesn't tell you where the cotton came from or where it was woven or where it was spun and so we're to some extent the full you know extraordinariness but also weirdness of the world is actually kept from us and i think were we to understand a bit more about that then i think we would treat things with more respect and we'd be more aware of the possibility of things malfunctioning when all of a sudden your ship can't go through the Strait of Hormuz or the Bab al-Mandab Strait or the Malacca Strait. That stuff still matters. Geography hasn't ever gone away. It's still just as important as it ever was before. It's just that we've kind of fooled ourselves because we've run such a tight ship in the last few decades, excuse the pun. We've fooled ourselves into thinking it doesn't exist or it doesn't factor anymore. But the point of this book is to say it does. And we need to prepare for a world potentially where more stuff is going wrong because we're in a more bumpy world right now. And globalization isn't necessarily proceeding in the direction it was in the last few decades. And that matters. That's the main gist. And Speaker 5 (10:32) what I particularly loved was the research you've done for the book. And you... Take us, is it Southampton Airport? I'm trying to remember which the airport was right at the beginning of the book. Bournemouth Airport, yeah. Bournemouth Airport, where you get on this sort of reconfigured, huge jumbo jet that has flown, we assume on behalf of, you know, those low-cost internet providers, Cheyenne or Taimou, but it's flown all the way from a particularly obscure part of China, filled with cardboard boxes. Just tell us the story of that, because... The other part of it, which is