The American think tank Rhodium has attempted to answer the question of how real it is now to become independent of China, to diversify elements of global industrial chains, sources of supply. Is this even possible, given the benefits and tremendous size of this country, and the scale of the economy, the most crucial of which is production. The Rhodium squad concluded its conclusions in the report: "China Diversification Framework Report", for which American companies are the mention point.
Further shocks caused by the "trade war" between the US and China, the Covid-19 pandemic, the Russia-Ukraine war, and another events, specified as the blockade of the Suez Canal by the Evergreen container ship, have highlighted the sensitivity of global supply chains and the risks resulting from the fact that a large part of contemporary goods are originating in Asia and, above all, China. So they appeared in public space with the slogan decoupling, derisking, friendshoring... However, the size of the Chinese market, the investment boom in the manufacturing sector taking 4 decades and the increasing geopolitical power of China make these slogans stay declarations and their implementation faces immense problems. There is talk of moving production from China to another countries. But even if these countries display features that have made China so attractive (low costs, easy access to decently qualified personnel, etc.) and are at the same time seen by the US as not threatening the safety of the United States, replacing them with possible potentials China can be very difficult, if possible.
The Rhodium study assesses the possible for “diversification”, which is defined in the study as “the relocation of economical activities (trade, investments, R&D, workers, etc.) from China to another economies in order to alleviate excessive commercial or political dependence”, presents how these objectives are presently being implemented and explains the reasons why the explanation is lacking in practice. The main conclusions of the study are as follows:
- In general, diversification takes place, as shown by China's decreasing share of US imports and abroad direct investment (FDI) over the last 7 years.
- Diversification has so far focused on only a fewer countries (especially Mexico and Vietnam), which poses a hazard of capacity constraints and expanding costs and thus slowing down this process.
- Diversification focuses only on respective sectors (mainly textiles, electronics and automotive) and in the assembly segment. It does not happen in the supply chains of higher quality and technology. Moving companies proceed to trust on the production and/or sourcing of natural materials from China. Any full withdrawal of production will take place in stages and in the long term. It can yet (there are already specified cases) be abandoned by quality problems and rising costs in fresh locations.
- The changes in the structure of American imports, read as a diversification effect, are frequently not due to American business activities, but to the activity of non-US companies, the largest group of which – ironically – are Chinese and Taiwanese companies, relocating their production from China.
- In addition to Mexico and Vietnam, beneficiaries of the thought of diversification, despite the higher cost of operating there, may be states with converging views with the US, specified as Japan, Australia and the Philippines. Meanwhile, Canada, Taiwan, Germany and South Korea increase trade with China and increase their investment in China.
- The discrepancy between diversification possible and the actual level of diversification has many causes, but 2 are peculiarly important:
- the availability of a skilled workforce from basic to advanced, and
- the function of advanced quality cross-border economical agreements.
For example, the US-Mexico-Canada Agreement (USMCA) determines that Mexico is so powerfully attracted to companies that want to become independent of China. China's cross-border agreements with the members of the Association of South-East Asian Nations (ASEAN) are crucial for the economical growth of its neighbours, especially Vietnam, as a US trading partner.
- Reduction of excessive dependence on China is not impossible. However, economical costs and risks are real and not all worthwhile. Rhodium analysis helps explain where it can be profitable, even at specified an early stage, and where government policies and actions can aid open the way to the goal.
Rhodium recommends that Western business leaders take a deep look at the situation and carefully make decisions before moving towards decoupling.
Based on: rhg.com;
Author: 梁安基 Andrzej Z. Liang, 上海 Shanghai, 中国 China
Email: [email protected]
Editorial: Leszek B.
Email: [email protected]
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