RESHAPING GLOBAL SUPPLY CHAINS

THERE are several events that no one saw coming: the United States-China trade war, the Covid-19 pandemic, the Russia-Ukraine war, and the rise of India and Vietnam.

In the realm of global affairs, certain unforeseen events, often termed “black swan events”, can exert profound influence on China’s growth trajectory. Consider, for instance, the disruptive nature of the US-China trade tensions, which escalated swiftly, disrupting established global trade routes and supply chains.

China, a pivotal player in manufacturing and trade, found itself navigating through a period of uncertainty, with tariffs imposed by the US impacting exports and investments, thereby potentially dampening economic growth.

Deterioration of US-China relations

The trajectory of US-China relations has shifted significantly over recent years, transitioning from a phase of cooperation to one marked by competition and, alarmingly, potential conflict. What began as a period of cooperation, characterised by diplomatic engagement and economic collaboration, had gradually eroded amid growing tensions and diverging interests.

Economic issues, including trade imbalances and intellectual property disputes, have fuelled competition, leading to trade frictions and the imposition of tariffs. Additionally, strategic concerns, such as territorial disputes in the South China Sea and differing visions for regional influence, have further strained relations between the two global powers. Moreover, ideological differences regarding human rights, democracy and governance models have exacerbated mutual distrust and ideological competition.

As a result, the relationship between the US and China has become increasingly adversarial, with both sides adopting assertive stances and engaging in reciprocal measures. This escalating rivalry raises concerns about the potential for conflict, whether in the form of economic coercion, technological competition or even military confrontation. Efforts to manage and mitigate these tensions are crucial to prevent further deterioration and promote stability in the broader international system.

The years following 2020

Then, the emergence of the Covid-19 pandemic presented another formidable challenge. China, implementing stringent measures to contain the virus, witnessed disruptions across production, consumption and international trade. While the nation’s quick containment efforts were commendable, the ensuing global economic downturn inevitably affected its export-driven economy.

Moreover, the Russia-Ukraine conflict, though geographically distant, introduced geopolitical complexities with implications for global stability and economic relations. Such rising tensions underscored the importance of China’s access to key resources and markets.

Concurrently, the ascendance of India and Vietnam as burgeoning economic powerhouses posed a dual challenge and opportunity for China. While maintaining its dominance in global manufacturing, China faced heightened competition from these emerging economies, necessitating innovation and industrial upgrading.

Conversely, China’s Belt and Road Initiative and expanding economic engagements in neighbouring nations offered avenues for collaborative growth and infrastructural investments.

Amid these multifaceted challenges, China’s resilience, coupled with proactive economic reforms, emerges as a crucial factor in navigating through uncertain terrain. Adaptation and diversification strategies become imperative for China’s sustained growth amid an ever-evolving global landscape.

Deglobalisation, nearshoring and friendshoring

The concept of deglobalisation has gained prominence in recent years as countries reassess their economic strategies and priorities in response to various geopolitical and economic challenges. Deglobalisation refers to a trend away from interconnected global markets and towards more localised or regionalised economic systems. Factors such as trade protectionism, nationalist policies, geopolitical tensions and disruptions like the Covid-19 pandemic have contributed to the acceleration of deglobalisation trends.

In the context of deglobalidation, the “China Plus One” strategy has emerged as a response to concerns about over-reliance on China as a manufacturing hub. Many companies are diversifying their supply chains by maintaining their operations in China while also establishing additional production facilities in other countries. This strategy aims to mitigate risks associated with disruptions in the Chinese market, such as trade tensions, regulatory changes, or supply chain disruptions.

Nearshoring and friendshorsing are related concepts that involve relocating production or outsourcing services closer to the company’s home country or within friendly neighbouring countries. Nearshoring focuses on moving operations closer to the company’s domestic market, often within the same region or continent, to reduce transportation costs, improve supply chain resilience and enhance operational flexibility.

Friendshoring, on the other hand, involves outsourcing to countries with which the company shares strong diplomatic, cultural, or economic ties, fostering collaboration and mutual benefits.

Brazil, with its large and diverse economy, abundant natural resources, and growing consumer market, has emerged as an attractive destination for nearshoring and friendshoring initiatives for American corporations. Another beneficiary of this US strategy is Mexico. These two countries offer competitive advantages such as a skilled workforce, advanced manufacturing capabilities, and proximity to major markets in North and South America. Additionally, both Mexico’s and Brazil’s strategic location and trade agreements with neighbouring countries further enhance its appeal as a manufacturing and outsourcing destination.

Overall, deglobalisation trends, coupled with strategies like China Plus One, nearshoring and friendshoring, are reshaping global supply chains and economic dynamics. Companies are increasingly seeking to diversify their operations and reduce dependencies on single markets or regions, with Brazil and other emerging economies playing an increasingly important role in this evolving landscape.

It’s important to approach assessments of China’s economic data with caution, considering the complexities inherent in collecting and reporting statistics in such a vast and diverse economy.

Rapid economic growth, technological advancements and evolving market dynamics pose unique challenges to data collection and analysis. Therefore, while doubts may linger, acknowledging the ongoing efforts and collaborations aimed at enhancing data quality is essential to understanding the complexities of China’s economic landscape.