Chinese supply chains withstand global shocks and pressures

Author: Ka Zeng, University of Arkansas

Over the past two decades, multinational corporations have invested heavily in China to reduce production costs and capitalize on the rapidly growing domestic market. In the process, they have turned the country into the world’s factory and a global supply chain hub.

But the ongoing US-China trade war and the COVID-19 pandemic have highlighted the vulnerability of complex global supply chains to the structural changes underway in the global economy resulting from rising costs of labor force, automation, protectionism and geopolitical tensions. These developments have led to a critical reassessment of existing approaches to global sourcing and manufacturing activities to increase supply chain resilience and reduce external risks.

The extensive supply chain links that China has developed with partner countries can be seen in its links both upstream and downstream of the global value chain (GVC). Backward linkages are the share of foreign value added in China’s gross exports. Backward linkages correspond to the share of domestic value added in the gross exports of the foreign exporting country. China’s upward linkages with most regions declined gradually between 2005 and 2015, while its upward linkages with GVCs increased over the same period. This reflects a shift in China’s trade patterns from processing trade to higher value-added activities that strengthen its ability to engage in industrial modernization and move up the value chain.

It is not yet clear how the trade war and pandemic affected China-centric supply chains, but there is preliminary evidence that the impact has not been uniform across sectors. On the contrary, the adaptation strategies of firms and industries may depend heavily on their relative ease of adaptation to external changes.

To be sure, the pressures on supply chain adjustments, especially those generated by the Fourth Industrial Revolution, predate the trade war and the pandemic. The magnitude and speed of recent global shocks have accelerated existing trends, forcing companies to respond faster and more effectively to abrupt changes in the global political and economic climate in order to weather the storm.

Integration into the Asia-Pacific region’s value chains is an important factor for China’s rapid recovery from the pandemic. Compared to other regions, Asia-Pacific has retained its importance for China’s global supply chains, with China’s upstream and downstream GVC links with APEC countries reaching over 11% by 2015.

China became closely integrated with ASEAN after the signing of the ASEAN-China Free Trade Area in 2001. Its aggressive pursuit of regional initiatives such as the Belt and Road Initiative may have further increased its appeal in China. as a trade and investment partner for regional economies. Deepening regional supply chain integration may have cushioned the impact of a major global crisis, even if it hampers allocation efficiency and limits companies’ ability to adapt to changes. shocks originating from a specific country or region.

Given the uncertainties generated by recent developments, what can be done to ensure the smooth functioning of supply chains and increase their capacity to withstand the impact of future global crises?

Companies have already begun to research strategies that will allow them to balance the priority of improving operational efficiency with the need for contingency planning. In addition to accelerating the pace of adoption of new technologies, many have sought more actively to cultivate alternative sourcing, manufacturing and transportation options and to prioritize localization and regionalization of relations of the supply chain.

Some have resorted to relocation, near-shoring or the China + 1 strategy to diversify supply alternatives and mitigate the risk of supply chain disruptions. The China + 1 strategy has emerged as an attractive option for China-based multinationals as it allows them to maintain their existing trade ties with China while shielding themselves from pressures to decouple from the center of global manufacturing activities.

But politics also have an important role to play in ensuring the resilience of the supply chain. With global shocks and growing protectionist pressures in major economies threatening global supply chains, it is important for governments to be sensitive to the diverse characteristics, preferences and demands of firms, and to adopt complementary policies to exploit market forces.

It is more essential than ever that governments refrain from pursuing protectionist or mercantilist policies and instead strengthen regional economic cooperation to provide the institutional framework necessary for the expansion of global supply chain networks. The negotiation of new regional trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) are positive steps. Both target barriers to the movement of goods and services. The CPTPP sets high standards in areas such as intellectual property rights, investments and subsidies, which increase the transparency and predictability of business activities in member countries.

While the rise of regional trade agreements is in part a response to companies’ desire for a more stable trading environment, it also risks creating a cumbersome set of international trade rules that undermine rather than facilitate the ease of doing business at home. transnational level. International coordination needs to be intensified to revitalize the rules-based multilateral trading system, reintegrate and harmonize disparate national and regional standards and regulations, and prevent the balkanization of regional economies.

Ka Zeng is professor of political science and director of Asian studies at the University of Arkansas.

An extended version of this article appears in the most recent edition of Quarterly East Asia Forum, “Reinventing World Trade”, vol. 13, n ° 2.

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