Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How Global Trade Is Splitting Into Two Separate Systems
Transcript
- Lucas: The trade-weighted US dollar index just hit 120.5 — that's its highest level in two decades. And if you look at the latest trade data, US imports of goods and services have surged past four point three trillion dollars, while exports are only at three point five trillion. The gap is widening. Luna: That deficit number — seventy-seven point six billion in May alone — that's a forty percent jump from where it was a year ago. So the strong dollar is making imports cheaper, but it's also crushing export competitiveness. Lucas: Right. And here's the angle I want to drill into: global trade is quietly splitting into two separate systems. One centered on the US and its allies, the other on China and the countries that align with the yuan. This isn't just about tariffs anymore — it's about building parallel supply chains. Luna: Parallel — meaning companies are actually duplicating factories and logistics routes, one for each bloc? Lucas: Exactly. Take Apple. They've been shifting iPhone assembly to India and Vietnam for years, but they still have massive production in China. Now they're effectively running two supply chains — one to serve the US and Europe, another for China and Southeast Asia. It's more expensive, but it's a hedge against disruption. Luna: Tesla's doing something similar, right? They have Gigafactories in Shanghai and Berlin, but their new factory in Mexico is clearly aimed at the US market under USMCA rules. Lucas: Precisely. And it's not just manufacturing. Look at finance. The yuan has held steady at six point seven eight per dollar while the yen weakened to one hundred sixty-two. China is actively pushing yuan-denominated trade settlement. Brazil, Russia, Saudi Arabia — they're all doing more oil and commodity deals in yuan. Luna: So you're saying the dollar's strength is actually accelerating this shift, because it makes dollar-denominated debt more expensive for emerging markets, pushing them toward alternative currencies. Lucas: That's the irony. The strong dollar is a vote of confidence in the US economy, but it's also motivating countries to find ways around it. The IMF data shows that the dollar's share of global foreign exchange reserves has fallen from about seventy percent a decade ago to just under fifty-nine percent now. It's still dominant, but the trend is clear. Luna: And the WTO — the old rules-based system — it wasn't designed for this kind of fragmentation. It assumed everyone would converge toward lower barriers, not build walls. Lucas: Right. The WTO's dispute resolution mechanism is basically paralyzed. The US has blocked new judge appointments for years. So countries are turning to regional trade deals instead — the RCEP in Asia, the USMCA in North America, the African Continental Free Trade Area. Each bloc has its own standards, its own currency preferences, its own tech rules. Luna: Let's talk about tech specifically. The US export controls on advanced semiconductors — that's forcing China to build its own chip ecosystem, which is a huge part of this parallel system. Lucas: Absolutely. China's semiconductor imports fell last year by about fifteen percent, not because demand dropped, but because they're ramping up domestic production. Companies like SMIC are making chips on older nodes, but they're closing the gap. Meanwhile, US allies like Japan and the Netherlands are tightening export controls on lithography equipment. So you have two separate tech supply chains emerging. Luna: And that has real consequences for investors. The emerging market ETFs — EEM is down a bit this week, VWO is off one percent. But interestingly, FXI — the China ETF — is up one percent. So markets are pricing in some divergence. Lucas: Yeah, and the India ETF, INDA, is flat. India is positioning itself as a neutral manufacturing hub — it's not fully in either bloc. They're attracting investment from both US and Chinese companies. That's a smart play. Luna: So what does this mean for a mid-sized exporter in, say, Vietnam? They have to decide which standards to follow, which currency to invoice in, which supply chain to plug into. Lucas: Exactly. And that's costly. The World Bank estimates that trade fragmentation could reduce global GDP by as much as seven percent in the long run. But for now, companies are making bets. Vietnam is leaning into the us led bloc — they've signed trade deals with the EU and are courting Apple suppliers. But they also do a lot of trade with China. Luna: The other big factor is the new tariff threats from Trump's trade envoy, Greer. He's hinting at tariffs on dozens of countries. That could accelerate the split even faster. Lucas: If the US imposes across the board tariffs on China and maybe even allies, you'll see more companies building dedicated factories for the US market. Mexico is already benefiting hugely from that — nearshoring is real. The EWW Mexico ETF is up a bit this week. Luna: And the flip side is that China is deepening ties with the Global South. They're building infrastructure, offering yuan loans, and creating an alternative trade network. Lucas: This is where it gets really structural. The old system had one set of rules and one dominant currency. The emerging system has two competing standards. It's not going to happen overnight, but we're living through the early stages of a fundamental reorganization of global commerce. Luna: And that's why this show exists — to help people make sense of changes like this. Speaking of which, Lucas, a quick honest thing: a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many episodes. We don't run ads, so it's a small group that keeps it going. Lucas: Yeah, and if these conversations have moved your work forward in some small way, that's the link. It's buy me a coffee dot com slash fexingo. No pressure ever, but it's how we stay independent. Luna: Right. And with that, let's get back to the trade split — because the next piece is how companies are actually managing the cost of running two supply chains. Lucas: Sure. The big question is whether the efficiency gains from globalization are worth the fragility. For decades, companies optimized for just-in-time delivery and lowest cost. Now they're adding redundancy, and that costs money. Apple's gross margins took a small hit last quarter because of supply chain diversification. Luna: But investors seem to be okay with that if it means less risk of a sudden shutdown. The market is pricing in a resilience premium. Lucas: Exactly. And that's a shift in how we value companies. A supply chain that's resilient but slightly more expensive is now seen as better than one that's hyper-efficient but brittle. That's the new normal. Luna: What about small and medium businesses? They don't have the resources to build parallel systems. Lucas: That's the tough part. They have to pick a lane. Either they focus on serving the US market and source from Mexico or Vietnam, or they focus on China and Asia. Trying to serve both is getting harder. Trade finance costs are rising because banks are more cautious about cross-border lending. Luna: So in a way, the trade split is forcing specialization at the company level, not just the country level. Lucas: Exactly. And that's going to reshape entire industries. Take pharmaceuticals — the US is trying to onshore production of critical drugs. China is the world's largest producer of active pharmaceutical ingredients. If that supply chain splits, drug prices could go up significantly. Luna: And it's not just about cost. It's about security. Governments are treating trade as a national security issue in a way they haven't since the Cold War. Lucas: Right. So the bottom line is: the era of hyper-globalization is over. We're entering a period of managed trade, regional blocs, and parallel systems. For investors, for business leaders, for policymakers — understanding which bloc you're in and how to navigate the rules is becoming the core strategic question. Luna: And the dollar's strength, the yuan's stability, the tariff threats — they're all part of that story. It's a fascinating, messy, and consequential shift. Lucas: It really is. And we'll keep tracking it episode by episode. Thanks for listening.