Gold Mines
What’s Driving the Global Gold Rush?, "New Quality Productive Forces" Prof. Warwick Powell interview with Professor Yan Liang, US Attempts to Sink China’s Shipbuilding,
What’s Driving the Global Gold Rush?
By Harold James
Gold has returned to the international monetary system. Over 50 years ago, US President Richard Nixon “closed the gold window” (ended the dollar’s fixed-rate convertibility into gold), and the world moved on from its obsession with precious metals. A new era of fiat currency had begun. But now, fiat money is being challenged by fiscal worries and new technology (blockchains/distributed ledgers), and the price of gold has reached all-time highs above $2,400 per ounce.
Goldbugs, of course, argue that the metal remains an ideal investment for preserving value over the long term. But it is a mistake to believe that gold is uniquely stable. On the contrary, its price measures a fever curve of discord, with spikes indicating a rush for assurance in a world where other values are endangered. The price slumped in the 1990s, when the end of the Cold War – and the “end of history” – had instilled a new sense of peace and stability. At the turn of the millennium, the price was under $300 per ounce, and its rise since the 1970s was below the general rate of inflation. But the price surged after the 2008 financial crisis and after the outbreak of the COVID-19 pandemic; and it has done so again this year.
Much of the heightened demand for gold is driven by central banks. China, which had relatively small gold reserves of 395 tons in 2000, now has 2,260 tons. Notably, it increased its stock of gold substantially in 2009 and 2015, which we now know to be watershed years for a world that was becoming more skeptical about globalization. Russia and Turkey, too, started building up massive war chests after 2015, and the same trend is also evident more recently in the European Union, where the Czech Republic and Poland have both been augmenting their reserves.
Security concerns are at the heart of the new politics of gold. When the Czech Republic joined NATO in March 1999, it immediately sold almost its entire gold stock. The message could not have been clearer: a reliable security guarantee obviated any need for a monetary defense. Yet in the last quarter of 2023, the Czech National Bank bought 19 tons, and it has signaled its intention to get that figure up to 100 tons. The message this time is equally clear: NATO membership is not enough. And with its closer proximity Russia, Poland has also made its motivations clear, so much so that the central bank building currently features a giant poster announcing that it holds 360 tons of gold.
The association of gold with security has deep historical underpinnings in Poland, where it was fundamental to the original idea of statehood. When Poland was reestablished after World War I – following the destruction of the Austrian, German, and Russian empires – its new currency took as its name the Polish word for “golden” (złoty). Then, in September 1939, Poland conducted a dramatic operation to evacuateits gold to France, by way of Romania, Turkey, and Lebanon. That sent the message that Poland still existed, despite the German invasion.
But the most remarkable use of gold as a source of stability was the Soviet experiment in 1922. Pushed by the most prominent Polish Bolshevik leader, Felix Dzerzhinsky, the chief of the secret police, the state issued chervonets (“red gold” coins) to ward off inflation.
When the gold standard emerged as the basis of monetary order in the early 1870s, it ushered in a new international political system. One country after another – including the United States, Germany, and Italy – wanted to stabilize its currency in the wake of destructive civil wars. At the same time, the previous monetary standard, silver, was receding, following France’s defeat in the Franco-Prussian War. The French had previously run a joint gold and silver system, but they were obliged to pay a costly reparations bill in silver coins. Silver flooded the market, and its price collapsed. Gold was all that was left.
The abandonment of a parallel silver currency system in the 1870s might be a precedent for the world of 2024. After all, there is rampant speculation about the imminent dethronement of the dollar, which would be the modern equivalent of the demonetization of silver. Since 2020, the US government has been amassing large fiscal deficits, and now one must consider the risk that a new Trump administration would try to devalue the dollar in order to destroy foreign competitors and create more American jobs. Moreover, one also must worry about the stability of the financial system, and about US rivals’ own efforts to replace the dollar.
The search for golden stability is thus a response to a world in flux. It reflects a growing belief that a new political order is emerging. The Shanghai-based New Development Bank (or “BRICS bank”) is actively pursuing a substitute for the dollar in the form of a synthetic currency, and more and more countries are trying to join the BRICS grouping(Brazil, Russia, India, China, South Africa, plus Egypt Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates). They regard the greenback today as the equivalent of silver in the late nineteenth century: an outdated monetary hegemon.
A century ago, as the world was going back to the gold standard after WWI, John Maynard Keynes described the metal as a “barbarous relic,” because it was the currency of conflict. When political stability returns, the gold price will fall. In the meantime, governments and central banks that have invested in gold will have bought themselves a hedge in an insecure world.
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US Attempts to Sink China’s Shipbuilding
By Li Rongqian, Du Zhihang and Denise Jia
The U.S. last month began an investigation of China’s dominant shipbuilding industry, in a move signaling increasing pressure on China that extends beyond technology and into the manufacturing sector.
Following a petition from five labor unions, Katherine Tai, the U.S. trade representative (USTR), announced on April 17 the so-called 301 probe into China’s practices in maritime equipment, logistics and shipbuilding. A public hearing is set for May 29. This marks the first industry-specific investigation by the Biden administration under Section 301 of the U.S. Trade Act of 1974 -- a tool that allows the government to enforce trade agreements and impose sanctions on nations violating norms of international commerce.
Speaking from the United Steelworkers headquarters in Pittsburgh on the day of the announcement, President Joe Biden called on Tai to consider tripling the tariff on Chinese steel and aluminum pending the conclusion of a four-year review. He also emphasized the importance shipbuilding to national security and that his administration takes seriously the unions’ petition concerning whether China’s government is using anticompetitive practices to enable the country’s shipbuilders to artificially lower prices.
“We’ve heard you,” Biden said. “And if the Chinese government is doing that and the unfair tactics to undermine free and fair trade competition in the shipping industry, I will take action.”
“The petition misinterprets normal trade and investment activities as damaging to U.S. national security and corporate interests, and blames China for U.S. industrial issues, lacking factual basis and running counter to common sense economics,” the ministry said.
As 2024 ushers in a more assertive U.S. stance towards China, the landscape of economic and trade disputes has intensified with a series of accusations, investigations and sanctions. The latest crackdown targets TikTok, the Chinese-owned popular social media and video platform. A bill Biden signed into law will require a sale of TikTok by its parent company ByteDance within 270 days or impose a U.S. ban of the app.
The mounting pressure on China extends beyond the digital realm and into manufacturing, especially in areas involving critical technologies such as semiconductors and electric vehicles. On Feb. 21, the White
House intensified its focus on maritime security, with Biden empowering the Department of Homeland Security to combat cyber threats specifically in the maritime domain. This included directives aimed at Chinese-made ship-to-shore cranes, which dominate nearly 80% of the market at U.S. ports and are alleged to pose significant cybersecurity risks.
Amid these tensions, Chinese state-owned Shanghai Zhenhua Heavy Industries Co. Ltd., the world’s leading port crane manufacturer, finds itself at the center of a geopolitical storm. A U.S. congressional investigation alleged some Chinese-made cranes at U.S. ports contain undocumented cellular modems, an accusation the company denies.
Minimal short-term impact
The investigation into China’s shipbuilders isn’t expected to impact the industry in the short-run as companies have production scheduled for the next three to four years, a senior shipbuilding executive told Caixin. But the long-term implications of the geopolitical tensions could severely harm production, sales and investments of Chinese enterprises, he said.
Yang Jianrong, a senior advisor to the Shanghai government, highlighted the escalating complexity of Sino-U.S. trade disputes to Caixin, noting a shift from localized issues to broader, more aggressive administrative tactics. In the current U.S. election year, he said he foresees increased challenges at both legal and practical levels and is advising China and Chinese companies to enhance dialogue, innovate and expand globally.
Labor unions have heightened influence in the election year, Susan Schwab, a former USTR in the George W. Bush administration, said in an interview with Caixin. She described the unusual nature of the new 301 investigation, which was launched decades after the U.S. commercial shipbuilding industry lost its global competitiveness.
The unions filing the petition for the probe are the United Steel Workers, the International Association of Machinists and Aerospace Workers, the International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers, the International Brotherhood of Electrical Workers and the Maritime Trades Department, AFL-CIO.
The National Marine Manufacturers Association, which represents U.S. shipbuilders, wasn’t involved in the petition. The trade group’s absence reflected the decades-long decline of the U.S. shipbuilding industry and its diminished number of members, Zhao Yifei, a professor and leader of the shipping industry research team at Shanghai Jiao Tong University, said.
How U.S. lost shipbuilding power
In the last two decades, China has emerged as the world’s largest shipbuilder. In 2023, the country accounted for half of global production, followed by South Korea with 26% and Japan at 14%, according to Clarksons Research, a maritime data company.
The U.S. accounts for less than 0.1% of world shipbuilding output. China and the U.S. shipbuilders have never been in direct competition, Zhao said. The decline of the U.S. industry began prior to the 1990s, independent from the rise of Chinese shipyards in the 21st century, he said.
In 2023, China exported more than half of its new seagoing vessels to Asia, followed by Europe at 9.1% and Latin America at 8.9%, according to the China Association of the National Shipbuilding Industry. Exports to the U.S. equaled about 5% of production.
The U.S. was a shipbuilding powerhouse during the two world wars. The industry’s decline in the world market is partly attributed to long- standing protections, such as the Jones Act passed in 1920. The law -- which requires that vessels engaged in the domestic transport of goods must be built in the U.S. and owned and crewed by U.S. citizens -- led to higher costs and reduced motivation to compete globally.
By the 1980s, with the elimination of subsidies under the Reagan administration, U.S. shipbuilding capacity plummeted, resulting in the closure of numerous shipyards and a drop in global market share. Now the country lacks the shipyard capacity to maintain or repair its fleet of Navy vessels, according to the U.S. Naval Institute.
Various U.S. studies show that the nation’s shipbuilders lost their competitive advantage many years ago due to over-protection, while the growth of China’s industry resulted from tech innovation and participation in market competition, as well as its fully-developed manufacturing system and vast domestic market, Lin Jian, a spokesman for China’s Foreign Ministry, said at a press conference on April 19. “Blaming U.S.’s own industrial woes on China lacks a factual basis and economic common sense,” he said.
The unions’ petition calls for an assessment of a port fee on Chinese- built ships that dock at a U.S. port and the creation of a shipbuilding revitalization fund to help the domestic industry.
Among the more than 10,000 Chinese-manufactured cargo vessels tracked by maritime data provider Lloyd’s List Intelligence, only 9% docked at U.S. ports between this year through March 18.
Even if the U.S. imposes punitive tariffs on Chinese shipbuilders, the impact is expected to be limited, several of the companies told Caixin.
If a port fee is imposed on Chinese-built vessels, it may influence future plans by shipowners, Zhao said. Meanwhile, the increased costs would be borne mainly by international shipowners, who would oppose the fees, or lead to higher shipping expenses for U.S. businesses, he said.
The common practice among international shippers of registering their vessels in tax havens rather than the shipowner's country, coupled with the tendency to lease ships rather than own them outright, significantly complicates the task for the U.S. in determining the country of origin and ownership of ships. This complexity makes it challenging for the U.S. to collect port fees effectively.
Maritime industry experts have voiced concerns regarding the proposed port fees on Chinese-made vessels in the U.S. While the Section 301 investigation typically results in tariffs, current U.S. law does not explicitly allow for such fees, making the unions’ request legally contentious, according to Zhang Chen, a senior partner at Beijing Yingke Law Firm.
Additionally, such a tax could exacerbate inflation -- a scenario Biden would likely want to avoid given its political and economic implications, Zhang said.
In response to the potential new levies, China’s Ministry of Commerce has proactively engaged with major domestic shipyards to assess the impacts and countermeasures, including the formation of a specialized legal team. Zhao suggested that China should enhance dialogue with major U.S. importers like Walmart to mitigate the potential spike in sea freight costs.
If the investigation results in the USTR imposing a fee on Chinese-made ships docking at U.S. ports, China could contest the measures as discriminatory and potentially bring the issue before the World Trade Organization (WTO), said Schwab, the former USTR.
If China appeals, the WTO will most likely find that the 301 investigation violates WTO rules, said Zhang from Yingke Law Firm. But in practice, the WTO cannot take coercive measures to interfere with the U.S. tariff measures.
Who will benefit?
Amidst a push to curb China’s manufacturing dominance, the U.S. is courting its key allies Japan and South Korea, urging them to invest in the beleaguered U.S. shipbuilding industry.
In February, U.S. Secretary of the Navy Carlos Del Toro met with leading Japanese and South Korean shipbuilding executives in an attempt to attract their investment in commercial and naval shipbuilding facilities in the U.S. During his East Asia trip, Del Toro visited the Yokohama shipyard of Japan's Mitsubishi Heavy Industries Ltd. and the shipyards of South Korea's Hanwha Ocean and HD Hyundai.
Hanwha Ocean’s board has approved the creation of a holding company in the U.S. to acquire shares in overseas shipyards and maintenance service companies, according to the Korea Economic Daily.
However, reviving America’s shipbuilding industry would require closing a technological gap with Asian competitors and overcoming a dearth of domestic expertise, Zhao said.
Japanese and South Korean shipbuilders would most likely benefit from potential sanctions on Chinese-built ships, but they are unlikely to bring much-needed capital and technology to a country with a shortage of workers and unguaranteed orders, said Vincent Valentine, a transport economist at the United Nations Conference on Trade and Development.
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