How China still controls the global supply chains

China’s exports surged 32.3 percent over a year in April as global consumer demand strengthened. Exports reached USD 263.9 billion, riding on a stupendous 60.6 percent rise in the first two months of 2021. Over the last year, China had become part of the largest trade bloc in history covering 30% of world GDP, by signing the Regional Comprehensive Economic Partnership (RCEP) along with 14 other Asia-Pacific countries and finalized a major trade deal with Iran. Despite the trade war and the pandemic, China is flexing its economic muscle yet again.

Immediately after the Covid-19 outbreak, China faced global isolation and was squarely blamed for the coverup of the initial spread. The supply shocks which started in February 2020, have led many global firms and nations to rethink their overdependence on China. Global supply chain networks were expected to diversify themselves and move out of China, decelerating Chinese manufacturing. South-East Asian nations and India were touted as viable alternatives. Although a few companies have moved out, the prominence of China as the global manufacturing hub stays intact and a major reorganization in the global supply chains as the world comes out of the pandemic seems unlikely.

Trade war and the pandemic

Talks on the diversification of supply chains had started much before the pandemic. The US-China trade war which kicked off in 2018, led the investors to contemplate reducing their dependency on China. The high trade barriers imposed by both the countries on each other affected economies around the world and exposed the vulnerabilities of investments concentrated in China. Many companies have already adopted the “China plus one” manufacturing hub strategy to hedge their risk. In 2019, Taiwan passed a law to encourage its firms to build a “non-red supply chain” outside of China and offered cheap finance, tax breaks, and simpler administration to invest in its territory. A study by Japanese investment bank Nomura found that 56 companies had shifted their bases out of China from April 2018 to August 2019.

The onset of the pandemic had further intensified the discourse. In April 2020, Japan had earmarked USD 2.2 billion to fund its firms to move out of China. This policy shift came on the backdrop of Chinese imports to Japan dipping by half in February 2020 due to the pandemic, putting Japanese manufacturers in dire need of components. Despite these challenges, China still holds its ground, because global supply networks tend to play by the rules of the market rather than bowing to geopolitical compulsions.

The character holding the carton box in their hands. Globe and flag of China. Business trade with the oriental country. Asian partner and supplier of goods for shipment. Logistics and retailing male, vector in flat

How China holds its steam

Global investors can hardly ignore the fast-growing Chinese domestic market and its vast consumer base. Moreover, shifting companies across boundaries when businesses are suffering from record-low cash flows is highly unlikely. With governments already bailing out companies by raising billions of dollars, it would be unwise to raise further funds for supply chain readjustments.

The overseas trade infrastructure in China is fairly matured and time-tested. Unlike China, India and the South-East Asian nations (except for Singapore) lack efficient and high-capacity ports that can handle large container ships and direct marine liner services connecting major markets. This means the trade will require transhipments through Singapore or Hong Kong which consumes more time and money. These constraints will affect the economic feasibility of investments outside of China, at least in the near future.

There are certain political and social advantages that China alone can offer which lures investors. The political climate is extremely favorable with no periodic governmental transitions. The one-party rule ensures that companies are provided with a relatively stable and investor-friendly policy framework. The Chinese establishment is well-positioned to give continuous thrust and reliable infrastructure to the manufacturers. An abundant pool of skilled workers along with the availability of matured and deep supply networks further provides China with a much greater comparative advantage.

What future holds

China has acquired the position of global manufacturing hub only after focussed and rigorous work spanning over 30 years. It is expected to see a gradual decline in its low-end production activities in the future, which might shift to other developing nations. In high-end areas, it is still expanding its export market share. China has now put its strategic focus on sectors like energy, mining, and infrastructure development, through its ambitious Belt and Road initiative (BRI), designed to absorb its excessive manufacturing potential.

The “Economic Prosperity Network” mooted during the Trump presidency to move supply chains out of China has lost steam due to a lack of effective financial incentives. The present administration, led by President Biden, has already initiated bilateral trade talks with China. The success of the recently launched Supply Chain Resilience Initiative (SCRI) by India, Japan and Australia to reduce their reliance on China is yet to be seen.

Trade deals like RCEP had cemented China’s position as a global economic superpower. The aversion of the Trump administration to multilateralism had greatly diminished the US prospects and provided ample space for China to push its global ambitions. As the pandemic still ravages various parts of the globe, the Chinese economy is displaying its resilience. The global supply chains, at least for the time being, seem stable and grounded well in favor of China.

Wrapping up

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