Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Is decoupling causing supply-side inflation?

A recent Bloomberg article is responsible for the question in my blog title: China Premier Warns Decoupling Will Lead to ‘Destructive Spiral’. My 2 April 2024 blog questioned a related topic: Inflation: from supply-side to demand-side? Like my 4 April 2023 blog, I concluded that “we are stuck with supply-side inflation.”

My 2023 and 2024 blogs did, however, not include the issue of coupling vs decoupling. I suppose that I viewed decoupling as a political issue with economic consequences (eg, supply-chain transformations). I failed to see the relevance towards supply-side inflation.

The recent Chinese warning opened my eyes but only after giving that warning some further thought. Too often, China (and Russia) are using reverse psychology by blaming others to defend themselves against Western criticism. Self-blame is rare for them, unlike recent Joe Biden comments.

Before this warning, I viewed supply-chain transformations (a.k.a. factory relocations) as tools to prevent (new) factory disruptions (eg, zero-Covid in China). I suppose that I viewed the incremental cost as temporary. What-if the incremental cost of supply-chain transformation is not temporary??

“The U.S.-China trade war and the supply and demand shocks brought on by the Covid-19 crisis are forcing manufacturers everywhere to reassess their supply chains. For the foreseeable future, they will face pressure to increase domestic production, grow employment in their home countries, reduce their dependence on risky sources, and rethink strategies of lean inventories and just-in-time replenishment, which can be crippling when material shortages arise.”

Source: Harvard Business Review (2020): Global Supply Chains in a Post-Pandemic World

The HBR quote above may well suggest that (i) supply-chain transformations are complex, (ii) the incremental cost is (very) high, and (iii) future cost-savings require new technologies (eg, artificial intelligent robotics). AI cost-savings will, however, take about a decade; see my 2024 blog AI economics.

Hence, (political) decoupling must contribute to (economic) supply-side inflation. Probably, the impact of decoupling is long and substantial.

I suppose that politicians in Europe and USA consider the long-term benefits of decoupling (eg, HBR-2020) more important than the short-to-medium term disadvantages of inflation. Quite probably, the recent Chinese warning implies a “destructive spiral” within China. The following quote may explain Why:

“I think the Chinese have miscalculated,” Ambassador Nicholas Burns told Bloomberg Television on Thursday. “I actually think the Chinese did not understand the core value that we place in our current world on peace and unity in Europe itself.”

Sources: a 26 June 2024 quote by US ambassador to China Nicholas Burns (eg, Bloomberg, the Diplomat)

Hence, I reiterate my earlier conclusions: “I suppose we are stuck with supply-side inflation.”

Stuck In the Middle with You (1973) by Stealers Wheel
band, lyrics, video, Wiki-band, Wiki-song

[Verse 2]
Yes, I’m stuck in the middle with you
And I’m wondering what it is I should do

Note: all markings (bolditalicunderlining) by LO unless in quotes or stated otherwise.

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