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August 23, 2020

Responding To: Is U.S.-China Decoupling Really Feasible?

The Supply Chain Being Threatened Is Not As Fragile as Expected

Ruihan Huang

Though fears and concerns with the decoupling of the U.S. and Chinese economies rapidly have grown in recent years, the COVID-19 pandemic has undoubtedly aggravated these fears to a peak. Since President Trump took office, he has long sought both the heavy tariffs and sanctions to agitate trade disputes toward China with the desire to compel China to abandon its trade protectionism, reduce the bilateral deficit, and revive American industry. However, just after the two countries signed the initial trade deal which was considered to be a symbol of a temporary truce in the Sino-U.S. trade dispute, COVID-19 emerged and rapidly spread across the world, and blame games played by the two countries further turned the precious opportunities, where the two countries should have cooperated with each other and enhanced mutual trust, into a catalyst further deteriorating bilateral relations.

Despite the fact that U.S.-China trade is actually increasing since the COVID-19 outbreak (U.S. exports to China rose to $8.6 billion in April, up from a 10-year monthly trough of $6.8 billion in February), Trump and his colleagues have always accused China of withholding important information in the early days of the outbreak and manipulating “mask diplomacy”, further threatening to “cut off the whole relationship” with China and railing against “stupid supply chains that are all over the world” in a recent interview. What’s more, long trade disputes also annoy other countries and motivate them to diversify the supply chain. For example, according to Reuters, the Japanese government has earmarked $2 billion to help manufacturing back from China to avoid geopolitical uncertainties.

Admittedly, some countries like France may repatriate several supply chains related to national security like medical resources. However, just as Western countries have spent nearly 40 years establishing factories and investing a lot in production resources, relocating hubs to countries other than China within a very short time is not a simple and feasible task, especially during the pandemic when consumers can not afford high-price goods and companies struggle survive. According to research conducted by Gavekal Dragonomics in May 2020, no more than 10% of U.S. companies responded that they would adjust or relocate supply chains away from China because of the pandemic, while other companies would still choose to locate their supply chain in China but may delay their investment decisions.

Actually, despite the political uncertainties caused by trade disputes and COVID-19, China is still a very lucrative place for foreign companies to locate their supply chains. In other words, although political conflicts make China no longer as attractive as before, it could be very hard for foreign companies to find another ideal place other than China to manufacture. China’s huge population still makes China remain the market with the most potential because of cheap labor costs, developed infrastructure like expressway networks, high-speed trains and airports that make it so much easier to connect upstream and downstream enterprises, as well as target markets, and improved government efficiency and services that provide foreign enterprises with a more friendly business environment. More importantly, the Chinese government’s excellent performance in controlling and preventing the spread of COVID-19 across the country and reopening the economy only two months after the outbreak further confirms that the Chinese market can be a very stable and safe place to invest and operate. Therefore, even though the political risks are so much higher than before, and trade disputes and COVID-19 could drive foreign companies to diversify their supply chains outside China so as to put eggs in different baskets, it is not feasible for foreign investors to totally ditch China.

Though political risks generated by recent disputes and the pandemic would not finally and fully decouple foreign companies’ supply chains from China in the next few years, China would manage to reduce its reliance on global supply chains, so China could achieve a closed-loop supply chain to be self-sufficient and avoid attacks and uncertainties brought by global sanctions. As the Chinese old saying goes: to thrive in calamity and perish in soft living, China really took painful lessons from recent disputes, especially U.S. decisions to cut Huawei and ZTE off from semiconductor suppliers. What’s more, Western countries’ accusations and accompanied sanctions toward the Chinese government on Hong Kong, Taiwan, and Xinjiang issues also have made the Chinese government lose face and further give up its illusions and reliance on western countries. As the only country with all industrial sectors, China hopes to be able to achieve independent research and development in key areas and also be self-sufficient to avoid foreign countries’ sanctions. In order to achieve this goal, the Chinese government formulated the “Made in China 2025” plan and also invested a lot in advanced manufacturing technologies, especially in China’s weak research fields. For example, in the field of semiconductors, China aims to produce 70% of the semiconductors it uses by 2025 and in July 2020, China’s leading chip maker SMIC also prepared a $6.55 billion stock offering in order to shore up its semiconductor capabilities to catch up with rivals TSMC and Samsung Electronic, two leading chipmakers in the world.

It should also be noted that being self-sufficient does not necessarily mean China would eventually and completely decouple from global supply chains. As the founder and CEO of Huawei Zhengfei Ren said, “Huawei is willing to continue buying products from U.S. companies, but “We don't see much impact of sanctions on what we are currently doing,” because “we are very confident in our ability to use components made in China and other countries.” This is also the same logic for the Chinese government: embracing global supply chains can bring cheaper goods with high quality to the Chinese market, but self-reliance can help China minimize potential geopolitical risks. Thus, decoupling from the global supply chain is not the Chinese government’s goal, but an affordable and not difficult option of responding to an unfavorable and harsh environment in the future.

All in all, though the fears that political dissent and uncertainties would drive foreign companies to relocate its supply chain away from China are valid, China would still be one of the most lucrative and attractive places in the world to manufacture and maintain its status of world factory for a very long time. Political dissent and uncertainties could incentivize foreign companies to diversify their supply chains, but supporting infrastructure and enormous potential consumers make it very hard for them to totally shift their supply chains away from China. However, the pressure exerted by western countries on China in recent years would definitely motivate the only country with all industrial sectors in the world to seek self-reliance without any hesitation. Whether Western countries’ sanctions toward China achieve their goals of hindering China’s development or actually boosting China’s development, we will see.

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