Don’t believe the de-balancing story

The writer is a final year student at Harvard Kennedy School

As the Covid-19 pandemic hit, as China shut down and countries around the world struggled to find supplies of personal protective equipment, many wrote obituaries for China-focused globalization. . That seems to be a reasonable view, given the economic nationalism of Donald Trump and Brexit and the US-China trade war. But there is little evidence that the pandemic caused companies to immediately abandon China or spark degassing.

A rough measure of globalization is the rate world trade with world goods. After rising significantly from 1970 until the financial crisis, this has been flat ever since. The overall balance of trade cannot give us insight into supply chains or globalization. But if companies pull out of overseas locations and move back home, we can expect the trade balance to shrink. The US trade deficit hit a record as imports hit an all-time high of $288.5 billion in September. Meanwhile, China’s trade surplus exceeded pre-pandemic levels.

If companies are nearby or operating, we should expect long-distance routes to be less congested. The busiest trade route in the world remains the eastward trans-Pacific route between Asia and North America. The Port of Los Angeles witnessed record volume in September.

Foreign direct investment inflows into China will shrink if companies withdraw. But China has overtaken the US as top destination for new FDI last year. According to data released by the Ministry of Commerce of China, FDI actually used in China reached a record in 2020 and based on the data of the first nine months of 2021, is on track to surpass that record This year.

The de-weighting should also be reflected in capital flows. According to data from the Institute of International Finance, non-resident capital left China’s stock market in March 2020 as part of a broader exodus of capital outflows from emerging markets. But since then, Debt market and Chinese stock market experienced capital inflows almost every month.

Hard data does not support de-volume narrative. What about survey data? According to HSBC, as of September, six out of 10 companies are currently expanding their supply chains in China or plan to do so next year. Respondents are from 10 countries (excluding Japan, Korea and Taiwan) and all are doing business in China or are expected to do business. Ninety-seven percent of companies said they plan to continue investing in China, with nearly a fifth aiming to invest at least 25% of their operating profits there.

Annual China Business Report from the American Chamber of Commerce in Shanghai also found similar results. Among American manufacturers in China, 72 percent have no plans to move production out of the country in the next three years. Of the remaining 28%, none have moved production from China to the US. Nearly 60% of respondents have increased their investment in China this year.

Why hasn’t the redox process been done yet? Companies make production decisions based on careful calculations of their profitability in the medium and long term. Building a new provisioning infrastructure takes time and resources. Taiwan Semiconductor Manufacturing Company is building a semiconductor factory in Arizona. will not work until 2024, Eg. Most supply chains do not redistribute at the push of a button.

It can be trained decisions, but not announced. However, foreign companies can participate in the deep, sophisticated supplier network, large and efficient ports and competent workforce in China. And while many people started using Chinese inputs to export, they now want access to a large and rapidly growing economy. Auto parts manufacturers initially entered China to produce for their home market, but the growth of the Chinese domestic market means they have reason to expand, not leave. .

Costs are rising in China and trade tensions with the US continue. And we don’t know how China’s geopolitics will play out. What’s more likely to happen than mass elimination is the evolving “China Plus One” strategy: keep factories in China but limit your bets to suppliers elsewhere. FDI is increasing significantly in Thailand, Vietnam and Malaysia.

There is no doubt that supply chains will change after the pandemic. The just-in-time inventory system is likely to change and China may lose some business. However, the globalization of manufacturing is too well established and has too many business implications reversed.

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