Is ‘Deglobalisation’ the New Answer?

China as the world’s largest exporting economy

Three decades since 1978, China has seen exponential economic growth, transforming it into the world’s largest manufacturer and goods exporter. Today, China is a major actor in global value chains, accounting for nearly 20 percent of global manufacturing trade and an even greater share of many intermediate global value chain inputs that are essential for production. Technology, retail and automobiles are just some of the industries relying on China today.

China’s Zero-Covid policies

In light of the virus that has plagued the world since 2019, China has remained firm on maintaining its aim of eradicating coronavirus in the whole country through its Zero-COVID policies. This means immediate lockdowns on entire cities whenever COVID-19 cases surface, and major export hubs such as Shenzhen and Ningbo are no exception.

The Port of Ningbo, the world’s largest port and the third-busiest port by container volume, is the latest Chinese trade hub to see an impact from the policies due to a lockdown after a COVID outbreak there. The terminal, port and warehouse closed and the overall slowdown in operations led to a phenomenon known as port congestion — where cargo ships are unable to load or unload their cargo and must wait in line. As a result of the slowdown in activity, demand for China products to be transported via sea shipping has declined greatly, and logistics managers are expecting the number of cargo orders arriving from China to the US to go down by 40 to 50%.

These interruptions snowball into notable disruptions in the supply chain globally. Furthermore, logistics costs are factored into product prices, so issues like these raise the costs of goods and add inflationary pressure on the consumer from the supply side.

Why implement the policy at all?

Adopting the Zero-COVID policy since the beginning of the pandemic has meant that an abrupt relaxation of the current policy would risk breaking the balance between COVID-19 and non-COVID-19 patient’s healthcare needs and potentially overstretch the underdeveloped healthcare system.

The healthcare systems across the regions have a "physician-hospital bed mismatch" issue - regions with a higher physician count per thousand people may have insufficient hospital beds, and vice versa. Additionally, China has a rapidly growing aging population, and it is also this demographic that has the lowest vaccination rate among the nation. As such, easing on the Zero-COVID policy could lead to resurgence of the virus on an immense scale, placing greater stress on healthcare resources.

Furthermore, there is strong political incentive to keep the policy for pandemic control, as any failure to contain COVID-19 would be much more threatening to the careers of regional politicians’ than an economic slowdown.

Impact of the policy

Coupled with the US trade tariffs imposed since 2018, there has been a hunt for alternative sourcing locations to China. According to Senior Vice President of Products, Asia Pacific at SEKO Logistics, while recent China lockdowns don’t impact vessel operations or the terminal itself, there remains impact on other highly dependent parts of the supply chain like trucking and CFS warehousing.

On a national scale, the impacts can be felt in its faltering GDP growth rate for the first time in decades. In the recent 20th National Congress of the Chinese Communist Party (CCP), however, President Xi was silent on whether the country’s stringent Covid policy would end or continue.

China’s Covid controls helped the country quickly return to growth in 2020. But the controversial controls on business and social activity tightened this year, prompting investment banks to repeatedly slash growth estimates for China. The World Bank cut its forecast for 2022 GDP growth to just 2.8 per cent, from a previous forecast of 5.5 per cent. GDP growth in 2021 was 8.1 per cent.

Alicia García Herrero, chief economist for Asia-Pacific at Natixis stated that the state of China’s economy in 2023 highly depends on whether it will open up.

China Plus One

As a result of the disruptions in the global supply chain caused by the COVID policies, many countries are seeking alternative sources for goods.

China is losing more manufacturing to countries such as Malaysia, Bangladesh and Taiwan; and export market share in key consumer goods primarily to Vietnam.

The compounding impact of Covid lockdowns in China has seen an increase in firms hedging their sourcing geographies, especially with countries like Vietnam—which are close in proximity to China and cheap in labor. This is the ‘China Plus One’ strategy that an increasing number of companies are implementing.

For companies with a large portion of business relying on the Chinese market, it would be impractical to relocate all of that as it would mean additional costs and changes to product quality. As a result, many companies are choosing the ‘China Plus One’ plan instead, where they seek to diversify their supply sources and reduce overreliance on one source in the event of complications such as what we’re seeing now.

How is China reacting to this?

Seemingly unfazed by this gradual withdrawal by companies, China plans to strive for further independence—turning its focus internally toward its domestic market and reduce reliance on exports. Elements of China’s 14th Five-Year Plan (2021-25) are devoted to cultivating manufacturing clusters in key industries such as integrated circuits, aerospace, and advanced power equipment, to encourage local economic development. The goods from these clusters would support the aim of greater domestic consumption while also increasing external circulation via increased competitiveness in the global export market.

Conclusion

This move of reducing reliance on China, which some are calling deglobalization, would likely lead to short-term supply shocks and higher prices, which are similar to the current economic climate. In the long run, the outcome is likely to be lower economic growth due to lost efficiencies, higher costs and supply bottlenecks. With this, it seems more beneficial if foreign companies could be able to maintain the benefits of deep economic integration with China instead of heading towards a bipolar world.

References

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