Tag: trade

Guest Post: China Delivers Belt and Road Project to Reshape Global Trade

Dr. Steven Harrod is Associate Professor in the Department of Management Engineering at Technical University of Denmark.

China is the world’s manufacturing heartbeat, and its“ One Belt, One Road” seeks to maintain that dominant position. China has 1.4 billion people (vs. 327 million in the U.S.) and 9.38 million square kilometers of land (larger than the U.S., and twice as large as the EU). In spite of recent U.S. import tariffs against China, many manufacturers have not “reshored” production because some processed materials and components are simply not available anywhere else in the world.

The Chinese Belt and Road Initiative (BRI) was launched in 2013, and is a comprehensive plan to, by 2049, expand and strengthen international land and maritime transportation connections. The program is criticized by some for its investments in ports and transport infrastructure in other countries, especially if those countries are financially weak.

A significant component of BRI is to expand the use of railways to trade with Europe. Already today, BMW ships one full trainload of car parts to China daily for final assembly. This is a game-changer, because since the opening of China in the 1970s, China trade was synonymous with ocean shipping. A famous HBS case, Sport Obermeyer, demonstrates the supply chain problems that follow from a 30-day transportation link. Rail service today is able to deliver freight containers to Europe in half that time, and forecasts are that traffic in the EU-Asia corridor will quadruple by 2027.

In addition to the faster speed, rail service between China and Asia offers a potentially more sustainable transport service. Even though ocean ships are very fuel efficient, they still run on fossil fuels.. Railways on the other hand can easily be 100% electric. Such a large increase in traffic from China would have a dramatic effect on the EU’s railway network, which is already operating with very heavy traffic. In response, the EU also has an infrastructure development policy for freight, called TEN-T. Together, these two economic powers, China and the EU are taking steps to bring their manufacturing and consumer bases closer, and to grow their mutual trade.

Teaching Tip: Explaining NAFTA to Your Students

Making car mats in Mexico. NAFTA put U.S. automakers in competition with Mexican workers.
Making car mats in Mexico. NAFTA put U.S. automakers in competition with Mexican workers.

Your students have undoubtedly been hearing about Donald Trump’s threat to “break” the North American Free Trade Agreement. Auto industry workers offered up some of his loudest cheers. But there are still more than 800,000 jobs in the U.S. auto sector, and The New York Times (Mar. 30, 2016) makes the case that without NAFTA (see Chapter 2), there might not be much left of Detroit at all.  To be sure, the deals to reduce trade barriers threaten the livelihood of workers in the industries exposed most directly to foreign competition. NAFTA put them in direct competition with Mexican workers earning 1/5 of their compensation.

The American trade deficit in autos and parts tripled in the 2 decades after the NAFTA deal took effect in 1994, to about $130 billion in 2013. The industry lost 350,000 jobs, 1/3 of its workers, a massive shift in a flagship industry. Still, NAFTA itself had a relatively modest impact on the size of the U.S. trade deficit with Mexico. And autoworkers in Detroit were not just competing with cheap workers in Mexico. They were also competing with American workers in the union-averse South, where many car companies set up shop. They were competing with robots and more efficient Japanese and Korean automakers.

The integration of production across countries with complementary labor forces — cheaper workers in Mexico to perform many basic tasks, with more highly paid and productive engineers and workers in the U.S. — turned out to play a central role in reviving our auto industry. The Honda CR-V assembled in Mexico, for example, uses a U.S.-made motor and transmission– and 70% of its content is either American or Canadian. This regional integration gave the U.S.-based auto industry a competitive edge that was critical to its survival. There was a concern 20 years ago that an auto industry supply chain would develop across Asia, including China and Taiwan and Southeast Asia. Now, as Chinese wages rise, almost every car manufacturer is setting up shop in Mexico.

Classroom discussion questions:

  1. Explain the purpose of NAFTA.
  2. Why is this an OM issue?