Global Economy: Reducing “China-Dependence” Is Not Practical. Nor Feasible

beijingwalker · May 30, 2022

Global Economy: Reducing “China-Dependence” Is Not Practical. Nor Feasible

May 30, 2022
By Hemant Adlakha

The US fears of global economic “over-reliance” on China have failed to result in a desirable shift away from “Made in China” to “Made around China” even as the latest epidemic lockdowns have hit the Chinese economy hard. Ironically, the pandemic has forced some companies planning to move out of China to scale back investment plans and forget about lessening dependence on China. Not at all surprising what is being commonly heard in Shanghai and in most world financial centers – the evolution of the world’s economic landscape is determined not by indulging in geopolitical games but by economic rules.

Following the aggressive US trade policy since President Trump began unilaterally imposing ever-high trade tariffs on the Chinese imports in 2018, it’s been more than four years but the world is yet to see any encouraging “movement” in the evolution from Made in China to Made around China. Prolonged lockdowns in China in the past two years either due to the coronavirus pandemic or as many argue due to the country’s “zero COVID” policy, including the ongoing “shutdown” in Shanghai, the world’s largest supply chain “hub,” too have failed to push the multinational supply chains to move away.

As much as it is true that the coronavirus pandemic has not only acquired global import but has also severely impacted international supply chains, it is inevitable that the global economic activity is brought to a screeching halt. As a result, as supply chains withered, virtually all major economies in the world are suffering and have become vulnerable. Further, while it is true the pandemic started in China but it is in Europe, in particular in the EU, where the most lasting impact of the pandemic is felt. No wonder, among foreign businesses in Shanghai it is the European companies either doing business in China or have production units there that are more “excited” with the recent announcement by the Chinese authorities that Shanghai would start easing its COVID measures on June 1.

Moreover, for a large number of Japanese, European, and also US firms, what is of even greater significance is that China is not only a critical market but it also serves as an important base for exploring global markets. Two-fifths or over 2000 European businesses in China are based in or near Shanghai, while there are over 5,600 Japanese firms in Shanghai. To these European and Japanese firms, the comprehensive connection between China and the global economy in terms of both trading and industrial chain is of great significance for global businesses. In this context, a good example to cite here is the positive role China’s Belt and Road Initiative (BRI) connectivity has been playing in facilitating trade cooperation between Japan and the EU.

Europe’s “Twin” Nightmares
Already battered, the coronavirus-hit European economy since early summer two years ago, the EU – the world’s second-largest trading bloc in nominal terms, was facing two nightmares simultaneously at the time of the 23rd China-EU economic summit. One nightmare was the Russian assault on Ukraine in late February, and the other was the total shutdown of factory production and other economic activities in Shanghai a month later. Of the two nightmares, it was the latter that cast its shadow over the China-EU summit on April 1.

European analysts have argued that under the combined weight of the double whammy of the two nightmares, the EU had been forced to scrap its decades-long multifaceted, tripartite approach towards China. “This leads to the conclusion,” says Justyna Szczudlik, Research Head, Asia-Pacific Program, Polish Institute of International Affairs, “China is neither a partner nor an economic competitor.”

On the other hand, in its eighth and latest report released a month ago, the Berlin-based largest European research institute focusing solely on the analysis of contemporary China and its relations with Europe – Mercator Institute of China Studies (MERICS), has claimedthere is a growing public perception that “European dependence on China is increasing.”

At the same time, while admitting that Xi Jinping’s uncompromising “zero COVID” policy has severely hit the confidence of European businesses in China, a survey conducted by the European Chamber of Commerce in China a few days ago revealed that only about 23% are thinking (my emphasis) about shifting future investments to other markets.

Japanese, South Korean, and ASEAN Dependency on China
Riding high on the success of the RCEP, of which China has emerged as perhaps the biggest beneficiary, Beijing appears to have been undeterred by a spurt of economic and political activities recently in East and Southeast Asia. In fact, in spite of the unprecedented weeks-long shutdown of economic activity in Shanghai and nearby hubs, Beijing has been exuding extraordinary confidence in dismissing any threat or danger to the global economy’s continuing “over-reliance” on China as impractical. Reacting strongly to the recently held 28th Japan-EU economic summit in Tokyo, to the electoral victory of the conservative South Korean president Yoon Suk-yeol, and to the first-ever US-ASEAN leaders’ summit in Washington, a Global Times editor wrote that China has no problem whatsoever with other countries in the region seeking cooperation within or outside the region, but making issues about China under those agenda is “an ill-advised choice.”

Remember, Japan has more intertwined economic ties within Asia, with China and ASEAN economic bloc being its two largest trading partners respectively. The US and EU rank third and fourth on Japan’s large trading partners’ list. Last year Japan recorded its highest trade deficit in seven years at $42.7 billion, but its exports to China grew 14.9% to $140.8 billion, a record high. Experts in Beijing are aware of the rough tide Tokyo has been encountering in its exports to Europe. The Japanese media is filled with reports about how Brexit has profoundly and adversely impacted the world’s third-largest economy’s businesses in Europe.
Additionally, the fact that the UK has been a vital base for the Japanese business operations in Europe, and due to both a slumping European economy and the UK exiting the EU forced several Japanese businesses to shut down production units in Britain. Japan’s Nikkei Asia had reported in August 2020 how the carmaker Honda first reduced and shifted production capacity back to Japan and eventually closed the UK factory in 2021.

As mentioned, in addition to China’s colossal consumer market and China playing the role of an important base for exploring global markets – the two vital factors making the global economy increase its “China reliance” – a third vital factor the global economy can ill-afford to lessen China-dependency is China’s BRI transportation connectivity paving the way for an alternative route for multinational industrial supply chains to ship cargo from China to markets abroad. The Japan Times had reported how in recent years Japan had been exploiting the BRI transportation projects in coordinating its trade with Europe.

China-US Inter-dependency: “De-coupling” or “Diversionary trade policy”
According to the annual white paper released a week ago by the American Chamber of Commerce in China, 83% of the American businesses in China are “not considering relocating manufacturing or sourcing outside of China. The AmCham China white paper (2022) also revealed nearly 50% of the American firms believed China’s growth in domestic consumption and the rise of its growing, affluent middle class is seen by them as a top-class business opportunity. Besides, despite challenges brought by COVID-19 resurgences, the return of long lockdowns, and global uncertainties, China’s YOY actual use of foreign capital jumped 26.1% to $74.47 billion in the first four months of this year, according to China’s Ministry of Commerce. In Beijing, the MOFCOM also claimed the investments from the US surged by 53.2% year-on-year in the first quarter of this year.

Business experts in the US and China have been warning against attempts to cut China out of supply chains as this would lead to not only losing China’s huge market but also result in rising costs. Earlier, explaining some US-bound production moving out of China to Southeast and South Asia as “trade diversion” and not “de-coupling,” the IMA Asia managing director Richard Martin said new locations outside of China invariably continue to import components and materials from mainland China. Likewise, early this year, Indian media had reported how China’s loosening grip over the world textile trade was opening a door for the Indian manufacturers. On receiving an export order of 400,000 T-shirts from a large German brand, the managing director of an apparel export firm in the Indian textile manufacturing hub, Tirupur in the southern Indian state of Tamil Nadu, had said: “In the last few months, many Tirupur-based suppliers have seen increased orders from international brands and we think this is at least partly due to their lessening dependence on China.”

Finally, the US companies operating in China – just like Japanese firms and European businesses – understand it better than the political elite that switching production means huge financial costs. In the words of Hong Kong-based Aiden Yao, a senior economist and the author of the paper Preserving Made in China in the Age of Globalization, “most companies have fostered such strong supply networks in China that it will be difficult for them to move.” But above all, businesses are driven by economic benefits and not decided by geopolitics. Today, manufacturing in China is no longer about low labor costs, but more about the sophistication and scale of the country’s supply chains. Ultimately, as Yao says, foreign businesses continue to flock to China not because they are in love with China, they are there for sound commercial and economic rationalities.