Slow fuse burning

Posted by Ed 27 days ago

It is, perhaps, easiest to blame all of Britain’s ills on Brexit. Failing this, the global pandemic – and our response to it – is a good candidate for blame as the economic consequences of global lockdowns and restrictions begin to emerge. There are though, slower and deeper processes which are also coming home to roost; and which will undermine the UK economy even further.

Brexit is by far the least of our worries. As Britain’s former EU trade advisor Sir Ivan Rogers once put it; “Before Brexit, Britain was half in and half out of the EU. After Brexit it will be the other way around.”

On Friday 13 December 2019, Brexit ceased being a political issue and became instead, a technical matter. Just over a year later, Britain’s formal exit from the EU marked not the end of a process, but the beginning of an ongoing series of negotiations through which the trading relationship between the UK and the EU will evolve. In this respect, any disruption is temporary, and any serious disruption will be given priority in future negotiations.

Our response to the pandemic is far more disruptive; and is about to have far more profound consequences. On the one hand, our behaviours have been changed permanently – home working and online shopping, for example, will not be returning to December 2019 patterns when the various restrictions are finally lifted. Public transport, air travel and cruises are also unlikely to attract the same volume of travellers than had been the case before the pandemic.

On the other hand, the pandemic restrictions have served to amplify trends which had already begun long before SARS-CoV-2 was a thing. Global oil extraction, for example, reached its all-time peak sometime between November 2018 and December 2019. The addition of new, smaller and harder to reach deposits and a new round of quantitative easing funding of fracking might, perhaps, have cushioned the blow for a few more years had it not been for the lockdowns.

By squeezing twenty percent of the demand for oil out of the global economy however, the lockdowns and restrictions resulted in a dramatic shutdown of oil extraction, transportation and refining. This infrastructure is not like a kitchen tap that can be turned on and off at will.
Prolonged shutdown or slowdown does enormous damage, and will require considerable maintenance before returning to 100 percent production. And, of course, the expensive wells, least profitable refineries and already scrapped tankers are not going to be able to take up the slack when governments attempt to restart their national economies.

In April 2020, as demand for oil plummeted, the WTI oil futures price fell to just $17 per barrel – well below the break-even price for producers. At the end of this week, the price had risen to $66, as futures traders began to price in the anticipated shortages later in the year. This is because it will take a good six months to bring production back up to where it would have been were it not for the lockdowns and restrictions.

The one saving grace is that insofar as we are less minded to fly, go on cruises or commute to work, our demand for oil may prove to be lower than it was in 2019. Nevertheless, you don’t need a crystal ball to see increased fuel prices at filling stations in the near future.

Less obvious long-term trends can be teased out of current news of disrupted supply chains and the accelerating retail apocalypse. As with gathering oil shortages, these are trends which predate the pandemic – and Brexit – but which our recent actions have dramatically worsened.

Among the concerns exercising Britain’s metropolitan middle classes this weekend is a shortage of garden furniture. This is particularly concerning as one of the first stages in relaxing Britain’s current lockdown involves being permitted to meet selected family or friends in your garden (assuming you can afford one). As Leanna Byrne at the BBC explains:

“People hoping to spruce up their gardens, ready for when we can socialise in them again, may face problems with their seating plans due to a lack of outdoor furniture…

“The Leisure and Outdoor Furniture Association, which represents 70 manufacturers and wholesalers, said all of its members are having problems with garden furniture supply…

“Ikea says the shortages have been caused by both a huge rise in demand through the pandemic, as people spend more time at home, and problems with its global supply chain. However, the retail giant says it hopes to have things back to normal by the time its stores re-open.”

Garden furniture is just the latest example of supply chain disruption resulting from the pandemic restrictions. However, the underlying cause of the problem can be traced all the way back to December 2001, when China was admitted to the World Trade Organisation. China’s “economic miracle” in the ensuing twenty years was built upon the West’s waste.

That is, its primary energy source – coal – was largely unwanted in western economies which had offshored manufacturing and switched to gas to generate electricity. In addition to this, China chose to import the West’s garbage as the cheapest means of accessing the additional raw materials its growing economy demanded.

While you and I were signalling our virtue by putting plastic, glass, cardboard and paper in the green bag to go off for recycling, most of us did not realise that it was being shipped off to China for processing. At the time, China was prepared to put up with a large quantity of unusable waste because the proportion which could be re-used was of value. In any case, by far the biggest form of waste sent to China was metal waste – particularly crushed vehicles – which became the steel for reinforcing the concrete in China’s gargantuan infrastructure building.

All good things come to an end though. As China’s need for recycled resources waned, its desire to act as the western world’s garbage disposal evaporated. On 16 August 2017, China announced that it would no longer import 24 categories of waste; including several types of post-consumer plastic scrap, one grade of unsorted paper, several types of used textiles and metal slags containing vanadium. The waste import ban is expected to be extended to all waste from this year.

The obvious headache here is that European states like the UK lack the facilities to recycle waste; lack the land to dump it; and face public hostility to burning it to generate electricity. Instead, western states have begun dumping their waste in poorer Asian states such as Thailand, Malaysia, and Vietnam.

This though, does not resolve the less obvious economic consequence of China’s import ban. One of the reasons China was able to emerge as the global economy’s manufacturer of choice is that the price of its exports had been subsidised to an extent by the recycling trade.

That is, by paying for filling shipping containers full of waste, China was subsidising the return journey of a 27,616 mile sea voyage from Shanghai to Europe. This helped keep the cost of Chinese exports to Europe far lower than would otherwise have been the case. 

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