COVID-19 Trend Booster: US-China decoupling – or perhaps just social distancing

The COVID-19 pandemic has exposed an overreliance on China, galvanising critics especially in the US, who have started to push for decoupling from the second largest economy.

Global supply chains have been providing low cost products through high efficiency and low cost labour, benefitting manufacturers and consumers alike. The trade-off of efficiency has been resilience, which had come under scrutiny previously, though rarely has it laid bare its vulnerabilities quite as COVID-19 has. Thus, while it is not a new phenomenon entirely, it has found renewed salience under the Trump administration and was exacerbated by the fallout of the pandemic, exposing the incredibly central role of China in global supply chains, with Beijing’s cover-up efforts only adding a bad aftertaste to it. US-based critics of China have long been highlighting the US’ diminished competitiveness and its exploitation and have been calling for the re-shoring of supply chains, with president Trump as one of its most vocal advocates.

As argued in the first instalment of the COVID Trend Booster series, globalisation as such is not facing an imminent end. However, globalisation as we know it is also no longer feasible in the current political climate, where economic concerns increasingly translate into national security threats. Where once it was considered a liberating force, it is now increasingly becoming a point of contention, vulnerability and competition. Global supply chains seemingly went from being links of networks to chains of dependency for major economies, galvanising its critics with the virus outbreak. Nonetheless, the unprecedented level of economic integration makes a complete and comprehensive decoupling virtually unthinkable and fantastic, degrees of it, on the other hand, are quite real, possible and underway.

Decoupling

Decoupling describes the process of deliberate dismantling of existing supply chains and eventually re-creating them elsewhere. The world’s overreliance on China cannot be overstated and has not gone unnoticed either. According to a McKinsey analysis, global value chains in 16 out of 17 industries have been contracting over the past decade and further revealed varying degrees and patterns for supply chain fragmentation. While the clothing sector was described as “footloose”, the automobile industry was regionalising and the electronics remained primarily rooted in China (producing over 90% of mobile phones). Companies like Apple are still heavily dependent on China, however, Samsung Electronics started manufacturing half of its smartphones in Vietnam and Adidas manufacturing in China has also sharply decreased to 16% in 2019, from 39% in 2010, which are mostly aimed at Chinese consumers. Meanwhile, its production in Vietnam and Indonesia reached 71% in 2019 from 53% in 2010.

Regarding the argument that China’s rising middle class is also increasingly becoming a market rather than just a production machine, the argument is that other emerging economies can substitute it collectively; e.g. a more youthful India and Indonesia are projected to generate 21% of middle-class consumption by 2030 (China’s is 22%), while Africa, Latin American and the Middle East would contribute another 13%.

Spheres

Trump administration is talking of rolling out an “Economic Prosperity Network” of like-minded countries, organisations, and businesses, so even if jobs cannot return to the US per se, they could link up with US-friendlier nations such as India or Vietnam. However, as Michael Witt writes for Harvard Business Review, “if history is any guide, proximity is one key parameter in predicting which countries become members of which economic blocs, even against their will”, suggesting that firms ought to look beyond East Asia, possibly India and Mexico. Amid bipartisan works to reduce dependency on China, the Trump administration is maximising efforts and might even see the creation of a semiconductor plant by its global leader, TSMC of Taiwan, in Arizona and break with Huawei. An area China lags at least five to ten years behind the US. Despite pushes from Beijing for its advancement, it finds itself handicapped in its manufacturing, a crucial element in advanced electronic architecture.

China for its part, while cultivating highly efficient global economic ties has simultaneously been operating rather insularly in certain areas for years and more recently promoted efforts to create its own sphere. Its ambitious Belt and Road Initiative seeks to link several economies together that lead back to Beijing; it has been walling off its internet from the rest of the world and launched “a massive campaign of cyber espionage to steal tech from around the world”, preventing tech giants such as Google from entry and created grounds for domestic alternatives, e.g. Alibaba, WeChat; it has been pushing a dual and duelling technology playing field, especially in mobile phones, pursuing campaigns to “develop more advanced technologies at home and rely less on US and Western suppliers”; all while also introducing its Made in China 2025 programme, aimed at making AI and information technologies part of the next industrial transformation.

Still strong ties

While the rhetoric is dramatically sharpening, other measures suggest a different picture and suggest deepening integration. China’s recent relaxation on restrictions on ownership has seen a surge of US and other financial institutions in China, such as PayPal (acquiring 70% stake in Chinese GoPay), making it the first foreign company to provide online payment services in China; Goldman Sachs received approval for its JV, so have Morgan Stanley, JP Morgan, and American Express, given China’s size they “stand to generate large profits”. These are in addition to growing cross-border capital flows of FDI, portfolio capital, and a March 2020 survey conducted by the American Chamber of Commerce in China, stating that 80% of US companies are not considering relocating manufacturing out of China. Taking into account that China is also the second-largest US creditor, holding more than $1trillion in US debt, it is fair to say that they are still intimately bound in certain areas and there are still opportunities to be had. Decoupling will certainly become a reality for certain sectors such as medical supply, advanced technologies affecting telecommunication and semiconductors that are relevant for national security, however, many links will prevail despite increasingly hostile and adversarial tendencies.

Much of the globalisation created over the past decades rests upon consequences and lessons drawn from the last time countries were retreating and insulating themselves after the first age of globalisation contributing to years of wartime. Efforts to widen and deepen economic ties with the intention to intertwine countries to create a large network and symbiosis supporting political stability, often championed by the US itself, have now resulted in economic concerns equalling national security threats. That is not to say the world will be engulfed in global military conflicts soon; it means the fundamental narrative behind the original purposes have shifted away from stability through interconnectedness to economic warfare with distinct spheres of influence, fuelling it with a newly won momentum with greater challenges and acutely different risks depending on who is wielding power. If economic ties have been at best slowing belligerent advances, won’t cutting them make the case for consensus and cooperation even less compelling?

Source: Transport Intelligence, July 23, 2020

Author: Dila Cebeci

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