Economics and finance, Trade and industry, International relations, National security | Asia, East Asia, The World

3 June 2020

As the COVID-19 crisis begins to dissipate in China, a new challenge is emerging for the country; global selective decoupling from the Chinese market, Stephen Nagy and Hasumi Tani write.

Along with being closely related to the impacts of COVID-19, the growing withdrawal of foreign businesses from China is in part related to Chinese costs of manufacturing becoming uncompetitive do to rising labour costs. The Trump-initiated trade war has also deepened pressure on businesses to leave the Chinese market, through the implementation of tariffs that are further increasing the cost of doing business in China.

These trends are being exacerbated by the COVID-19 pandemic, and are helping Trump achieve a primary policy goal, reducing economic and technological interdependence with China, and preventing a peer competitor from emerging to challenge American leadership.

The United States, at least, appears to see the coronavirus pandemic as a critical opportunity to accelerate economic decoupling with China. Senior officials in the Trump administration, such as Secretary of Commerce Wilbur Ross, have claimed that the coronavirus pandemic may help jobs return to North America sooner.

The withdrawal of American companies and the reorganisation of the global production network have been pushed up the agenda in the White House due to the pandemic and are being promoted proactively. This is being done under the auspice of economic security, but also in an effort to blunt China’s most critical form of power: it’s place at the centre of the global production network.

On 24 March, Trump argued that the United States must break its dependence on China, specifically when it comes to medical equipment and supplies.

The New York Times reported that Chinese pharmaceutical companies supplied more than 90 per cent of antibiotics, ibuprofen, and hydrocortisone in the United States, along with high percentages of other crucial drugs.

More on this: Would China extend its boycott to Australian resources and energy?

As a result, the Medical Supply Chain Security Act gave the Federal Food and Drug Administration (FDA) greater powers to demand drug and device manufacturers provide procurement information. This was ostensibly done to protect the US medical product supply chain from the impact of COVID-19.

In addition, on 19 March a new bill – the Protecting our Pharmaceutical Supply Chain from China Act – was proposed, hoping to end US dependence on the Chinese pharmaceutical industry. Soon after, the FDA launched a new Emergency-Use-Administration which states that now only six countries are accepted for respiratory products that meet specified performance standards. The US also banned the use of Chinese medical protective equipment from certain vendors, even when masks and ventilators are severely lacking for domestic use.

Further, decoupling from China has bipartisan support and concerns about China’s power have grown considerably among the general American population in recent months, according to a survey conducted in March 2020.

There are multiple ways the US is seeking to decouple from China. The Act included a plan to withdraw US companies from China at a national all-inclusive cost, and on 9 April the Director of the National Economic Committee of the White House said that a policy that sees the government cover 100 per cent of the immediate expenses of leaving the country may attract US companies to return from China.

On the same day, the US Department of Justice requested the Federal Communications Commission withdraw the license of China Telecom’s US branch.

Due to the trade war, many multinational companies have already considered adjusting their supply chain, and some have even been persuading their Chinese partners to move to Southeast Asia to avoid taxes, or no longer buy Chinese-made goods.

At the end of last year the trade war was suspended, and an agreement was signed in January as the COVID-19 pandemic was beginning to gather momentum, but with global economic activity slowing due to the pandemic, it is clear that foreign businesses were reminded of the dangers of putting all their eggs in one economic basket.

For China, what is most worrisome is that this selective decoupling is not unilateral. With the current administration in the US committed to decoupling, many other countries are feeling more comfortable taking measures designed to protect their ‘economic sovereignty’.

More on this: China and the fight against COVID-19

This could trigger dramatic changes in the global landscape, growth in foreign investment in countries other than China, and even the restructuring of global production network, and due to the impact of COVID-19, many countries may be hesitant to deal with Chinese businesses.

On 8 April, German media reported that the German Federal Cabinet decided to amend the Foreign Trade and Payment Law in order to prevent German companies that have been hit by COVID-19 from being acquired by foreign capital.

In addition to Germany, analysts believe that the United Kingdom (UK) will seek to selectively decouple from China, along with major trading partner Japan.

A recent poll revealed that 92.5 per cent of British people blamed China’s government more than their own for the scale of the outbreak in the UK.

On 7 April, Japanese Prime Minister Shinzo Abe declared a state of emergency and launched an historic economic stimulus plan, $2.2 billion of which was used to assist Japanese businesses in China to withdraw their production lines to Japan, and more than $200 million to assist Japanese companies in transferring their production to other countries.

Following the pandemic, many factories in China were shut down, and the capacity of Japan’s imports from China fell by almost half, which in turn led to many Japanese manufacturers’ necessary components for production being out of stock.

Various industries in Japan began to argue that Japanese companies should not overly rely on China as a manufacturing base, and now that the Japanese government has introduced a subsidy budget for that purpose, debate on the issue will inevitably continue to gain traction.

However, decoupling is not without limits, and a more likely scenario is selective decoupling from some countries, and a diversification of trade and economic engagement portfolios between China and its trading partners, rather than total withdrawal from the Chinese market.

The size of the Chinese consumer base, and its sophisticated, expansive, and cheap production network means that total decoupling simply isn’t feasible, nor especially attractive, even if it were possible.

China’s export partners have neither the skills nor the cost advantage to relocate manufacturing on mass to their home states. Southeast and South Asia are not viable options for either, as manufacturing networks and logistics are not comparable to China in terms of quality. This disadvantage is further magnified by the reality that their legal systems and quality control are not sufficiently developed to meet global standards.

What is most likely is not a collapse of the world market, but a selective decoupling of some aspects of economies, designed to decrease over-reliance on the Chinese economy, and all the risks that come with it.

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