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China entered the WTO in 2001 and tweaked globalization in its favor
Globalization and supply chain interdependency has been the go-to mantra for multinational corporations in the 21st century. One small albeit lethal virus could potentially change that for good. In a report published in May 2020, the Economist Intelligence Unit has stated that the COVID-19 pandemic and successive lockdowns could make companies rethink globalization and hasten the shift towards regional supply chains. Ever since China entered the WTO two decades ago, its dominance in global trade has grown by leaps and bounds. The EIU report says that this singular event was momentous in the recent globalization wave, as multinational corporations rushed to take advantage of cheap labor and a booming billion plus market in the Asian giant. This scenario was probably too good to last though.
Global opinion souring - is China’s peaceful rise theory a myth?
The recent US-China trade war coupled with rising wages in China has already made some organizations reduce their dependence on the country by relocating their supply chains elsewhere. According to a Pew Research Center survey conducted in March 2020, 2/3rd of the American population had an unfavorable view of China - one of the highest negative ratings since the Center began taking the survey. While economic factors such as the trade deficit and job losses are major concerns, environmental degradation and China’s human rights are also an issue. In addition, China’s initial handling of the COVID-19 outbreak and the lack of information coming out of the country severely dented its global image. While China did try to salvage this by providing Personal Protective Equipment (PPE) and medical professionals to affected countries, it was a case of too little, too late. This sentiment is not restricted to the US alone, as similar surveys conducted in the EU, Japan, India, and Australia paint a similar picture. Could this be the domino effect that topples Chinese supply chains?
Moving out of China an arduous marathon - tech giants lead the way
Naturally, it is not an easy task to upend decades of investment in China overnight as the country has a 900 million strong workforce that provides scale virtually unmatched anywhere else. Nonetheless, the tech giants Google, Microsoft, and Apple have already declared their intent to slowly transition away from China. By the end of 2020, they are on track to move segments of their production to Thailand and Vietnam - intriguing alternatives to China’s manufacturing might. A few other companies relying on Vietnam include Intel, Adidas, Samsung, and Nike. While it is highly unlikely that companies will completely shift their production in the short run, companies have begun to rapidly realize the risks of putting all their eggs in China’s manufacturing basket. Some governments such as that of Japan have even earmarked roughly USD $3 billion to encourage domestic companies to move out of China.
Regional supply chains could be the new normal post COVID-19
A new trend that could potentially emerge after the COVD-19 lockdown is regional supply chains. European telecommunications behemoths Nokia and Ericsson have begun to expand their manufacturing operations in Poland and the US. American companies can look at Mexico as a recent Forbes article described it as the ‘China of the Americas’. The Heritage Foundation estimates that approximately USD $1.7 billion in manufactured goods and services cross the US-Mexico border daily, highlighting the vitality of North American trade partnerships. American imports from Mexico have grown by roughly 15% in the last three years, especially in industries directly hit by the US- China trade disputes. All of this ties in nicely with the American plan to reduce their massive trade deficit with China and foster regional supply chains through the US Mexico Canada Trade Agreement (USMCA). Unfortunately for the EU, this is easier said than done as the continent has relied on the ancient Silk Route trade for centuries. While there have certainly been attempts to nearshore to Eastern Europe and North Africa, neither region can match China’s labor availability and excellent infrastructure.
To summarize, a move to diversify product assembly away from China will be quite challenging as the country’s allure of efficient and entrenched manufacturing is almost too good to resist. It will necessitate a concerted effort from both national governments and manufacturers working in close consultation to establish regional supply chains. While the US, Australia, Japan, India, Vietnam, South Korea, and New Zealand have already taken the first steps, much more needs to be done to truly make regional chains feasible.
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