Trade Cases

Leibowitz on Trade: Shock After Shock Is the New Normal

Written by Lewis Leibowitz

For the first four months of this year, the US and global economies have endured one shock after another. It’s hard to know what to expect whether you are running a business, regulating an industry, or feeding a family.

This past week, the government announced that the US economy shrank in the first quarter at an annual rate of 1.4 percent, the first slide in GDP since 2009. The Dow Jones Industrial average declined last week by 2.4 percent, including a 939-point drop (2.7 percent) on Friday alone.


Supply chain woes for the global economy persist, with the dislocations and worker shortages aggravated by city-wide lockdowns in Shanghai and Beijing. Indeed, the Chinese government’s doubling down on a “zero-Covid” policy could paralyze Chinese industry and transportation for weeks or months to come.

Food shortages now threaten the world, in large part because of the Russian war on Ukraine. Ukraine in 2021 produced about 33 million tons of wheat (5 percent of global wheat production), not far behind the United States’ 44 million tons. It is unlikely that Ukraine will produce much wheat in 2022 considering the difficulty in planting fields in the middle of a war. Russia, which produced about 75 million tons of wheat last year, will have its exports crippled by comprehensive sanctions, resulting in huge supply effects around the world. Ukraine is also a leading producer of sunflowers and honey. Food price inflation looms for the world – when wheat prices rise, so do meat and dairy prices.

Energy inflation is also roaring ahead, with oil and gas prices surging. Oil and gas producers like high prices, of course, but that does not fully explain what is happening. Traditional supply lines, such as Russian sales of oil and gas to Western Europe, have been disrupted. Russia cut off natural gas to Poland and Bulgaria last week. And Germany and the EU generally are racing to find alternatives to Russia for supplies. After the end of the fighting (whenever that happens), there will be the matter of reconstructing Ukraine. The economic damage from the war on Ukraine is approaching $700 billion (seven times the damage caused by Hurricanes Katrina and Rita in 2005). Who is going to pay for this? If Russia does not pay, sanctions against Russia, with their global disruptions, will go on.

All this uncertainty is taking a toll on the US economy and, of course, the stock market. April 2022 was the worst week in financial markets since March 2020, the pandemic meltdown. One can only hope that better days lie ahead. But hope is increasingly hard to count on.

Underlying this bad news are challenges to the global order. Russia’s invasion of Ukraine, which really began in 2014, has called into question a basic tenet of post-World War II geopolitics—big countries should not change boundaries or invade small countries.

There is no question that this rule was not uniformly followed, even before 2014: the US invasion of Iraq, the Arab-Israeli wars of 1967 and 1973, India’s invasion of East Pakistan (now Bangladesh) in 1971, etc. Those conflicts could all characterized as violations of this rule. Each had its own causes and its own effects. The difference this time: The Russia-Ukraine war is one of the first that involved a nuclear state that is also one of the five permanent members of the UN Security Council. That adds an unprecedented layer of complexity to this crisis.

The Ukrainian armed forces continued to make an impressive defense of their homeland. Fierce Russian attacks continue. This looks to many observers like a long and bloody conflict. How it ends is still up in the air.

A number of steps to help the Ukrainian economy have surfaced, including suspending Section 232 steel and aluminum tariffs on imports from Ukraine. One of the largest steel plants in that country – Azovstal, located in battle-torn Mariupol – has been in the news because it has been the scene of fierce fighting and has been nearly destroyed as a result. Production at Ilyich, also in Mariupol, is unlikely to resume anytime soon either. That means any concessions to Ukraine on Section 232 would have mostly symbolic value and limited impact on the US steel market.

Inflation casts another long shadow on resumption of a “normal” economy. There are only a few known tools to rein in inflation. Central banks can raise interest rates, which the Federal Reserve has already started to do, and expects to continue to do. Raising rates will strengthen the dollar and make cheaper imports more attractive to consumers. Wringing out inflationary pressures will be complex because inflationary pressures are not just in the US. Foreign producers have similar pressures in the current global economy. Already, food and energy prices are increasing everywhere, making inflation a presence for the near future.

And it’s important not to overlook the steep toll of China’s “zero Covid” policy on the rest of the world as well. Lockdowns are stressing supply chains already. If these lockdowns continue, global integration will suffer lasting damage, again increasing inflationary pressures.

Political leaders here and elsewhere extol the virtues of increasing production at home. But encouraging local production and keeping out foreign goods will increase inflationary pressures because cheaper imports will be replaced by more expensive domestic production of everything from semiconductors to steel. Thus, there is no easy fix for inflation or for the fallout from the Ukrainian conflict.

The uncertainty for business spans all major aspects of management – labor shortages, supply chain disruptions, inflation, rising interest rates, pandemics. Business needs to plan for continued disruptions, like the Fed raising interest rates. Planning requires restructuring supply chains for goods, services and financing so that no one source of anything is indispensable. Striving for diversity requires adaptation – new relationships with new risks. “Just in time” can be perilous in uncertain times.

All readers will feel these impacts for some time to come and will need to adjust their operations to account for them. How businesses react to these unprecedented changes will affect our economy and our psychology for years to come. I hope that soon patterns will begin to emerge that will give all of us a better picture of how all these changes will play out.

Humans are almost infinitely adaptable – those that adapt best will thrive.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz

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Lewis Leibowitz, SMU Contributor

Lewis Leibowitz

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