Long Time Coming

At the end of last year, the coronavirus slipped through China’s borders. Now, Washington wants U.S. firms in China to do the same, evidenced by the Trump administration’s recent announcement of a whole-of-government initiative to move U.S. production and supply chain dependency away from China. This week, lawmakers are expected to introduce White House-backed legislation that would give subsidies to U.S. manufacturers who leave China. The White House, which in the midst of its trade war last year explicitly called for U.S. firms to come home, is also reportedly imposing new tariffs on imports from China and gradually expanding its list of Chinese-made products deemed a national security risk.

Washington is not alone in feeling that Chinese consolidation of supply chains for many essential goods was exposed by the coronavirus as an intolerable threat. In early April, Japan unveiled a $2.2 billion funding package to shift key supply chains away from China, and Germany has called for an EU-wide effort to bolster continental manufacturing of essential health care goods.

Meanwhile, alternative low-cost manufacturing hubs are waiting with open arms. India, for example, is reportedly courting more than 1,000 U.S. firms in China and setting up special economic zones twice the size of Luxembourg to house them. With the U.S. apparently warming back up to multilateral trade and investment blocs in the form of its proposed “Economic Prosperity Network” – essentially a repackaged and expanded Trans-Pacific Partnership – the prospects of a coordinated effort to construct a more stable global trading system are increasing.

But if the U.S and China are indeed moving toward an economic divorce, it’ll be the sort of “it’s complicated” breakup where neither side really has the stomach for the legal fees or the emotional strength to remain estranged. And the coronavirus pandemic will in some ways make the break up even more difficult. In short, volatility in the global trading system isn’t going away.

The U.S.-China economic relationship was rocky even before the outbreak. The seeds were sown nearly half a century ago, when Western firms began rerouting their supply chains through East Asia and thereby igniting a boom in global trade and prosperity. Following China’s accession to the World Trade Organization in 2001, the centre of gravity of global manufacturing shifted firmly to the Middle

Kingdom, where a bottomless labour pool allowed foreign firms to unlock unimaginable economies of scale. China became the world’s largest exporter in 2009. Until about a decade ago, the U.S. heartily supported its efforts. It developed a taste for low-cost imports and fell head over heels for Chinese consumers and investors. It nurtured hopes that China would be disinclined to challenge the global system if it was integrated with that system. At times, the U.S. and China’s commercial relations stabilized their broader bilateral relationship.

The trade-offs of this system crystallized after the 2008 financial crisis, which in the U.S. exposed how the middle class had been gutted by the loss of manufacturing and revealed the structural problems that fuelled inequality. Beijing, stung by the brief collapse in Western demand and under immense social pressures of its own, figured it had little choice but to more aggressively move into high-value industries that more advanced economies have dominated for decades – even if it had to renege on its WTO commitments and antagonize countries whose consumers fuelled China’s rise. Many in the U.S. believed they had underestimated China’s ability to make the leap into more advanced manufacturing, and underestimated just how much leverage Chinese consumers and manufacturers would give Beijing – and how willing it was to use its leverage over foreign firms and foreign governments. China’s external vulnerabilities, meanwhile, compelled it to see just how much its newfound economic and military heft could be used to reshape the regional order around its needs.

In other words, the change from competition to confrontation between the U.S. and China has been a long time coming. The launch of the U.S.-China trade and tech wars in 2017 merely announced its arrival. COVID-19 kicked it into overdrive.

The pandemic did this, in part, by exposing just how much China had become a single point of failure in supply chains of essential goods in critical sectors like pharma. For example, China produces around 80-90 percent of the global supply of active ingredients for antibiotics. Chinese export restrictions and bottlenecks led to shortages of personal protective equipment, test kits and vital medical equipment, including products made by U.S. firms in China. The pandemic also exposed chronic quality control problems in China, with several embattled countries having to discard much-needed shipments of faulty Chinese masks and test kits. (To be fair, the global rush to source pandemic supplies has created a profiteer’s paradise just about everywhere.)

But if the issue were merely about making the system