Since 2018, trade wars between the United States and China have affected the latter's position as a major source in global supply chains. This has only worsened since the onset of the COVID-19 pandemic. The shocks in demand and supply that the pandemic caused have sent the global economy into disarray, exposing weaknesses in supply chains everywhere.
One observable positive outcome of the pandemic has been the adaptability of Asian economies. Who are the winners and losers in this rapidly changing economic landscape?
US - China trade wars
The economic dispute between the US and China has seen massive tariffs being imposed by both sides. The conflict began when President Trump accused China of unfair trading practices, forced technology transfer and intellectual property theft in 2018. China on the other hand, perceives the US as trying to curb its rise as a global superpower.
This has resulted in both sides continuously increasing tariffs on the goods of the other. Due to the resulting increase in costs, many companies have had second thoughts about maintaining operations in China.
A recent survey by Gartner of 260 global supply chain leaders found that 33% of these firms had moved sourcing and manufacturing activities out of China, or plan to do so over the next 2 to 3 years. The trade war had already exposed vulnerabilities in global supply chains and raised questions about whether extensive outsourcing was sustainable. The survey found that tariffs imposed by both governments increased supply chain costs by up to 10% for more than 40% of organisations.
After a tumultuous couple of years, in January 2020, it finally appeared as though the leaders were working towards a truce, by signing the Phase One Deal. The deal officially entailed the reduction of tariffs, expansion of trade purchases, and renewed commitments on intellectual property, technology transfer and currency control.
Then, just as things were beginning to look up, the pandemic happened.
COVID-19 highlights the need for diversification
With the onset of the most severe crisis this generation has seen, worst-case scenarios suddenly became all too real. All eyes were on China, with its extended Lunar New Year closures causing massive concern over supply chain disruptions as production came to a standstill. However, right as China's economy seemingly began to recover after it sacrificed weeks of economic output, it became apparent that the rest of the world was going to be hit just as hard, if not worse.
The supply shock forced assembly lines globally to quickly adapt. Companies were confronted with their vulnerabilities, and had to decide how to make their supply chains more resilient. This would perhaps turn out to be a blessing in disguise, as the pandemic was a catalyst for companies to consider how to diversify their operations and mitigate risk.
For example, the merits and pitfalls of lean inventories and just-in-time replenishment have now been brought to light. Assistant Professor Zheng Huanhuan at the Lee Kuan Yew School of Public Policy, National University of Singapore, explains, "The pandemic has been one of the largest natural shocks to the supply chain in recent years, yet the supply of most essential goods have not been too severely disrupted, although prices have increased. In fact, in this instance, price increases are an added incentive for supply."
As has been observed in most countries, while the demand for goods such as food remains similar, the demand for goods related to health and technology — like personal protective equipment (PPE) — have increased significantly. However, as mentioned, price mechanisms tend to restore balance to demand and supply.
For example, the sudden spike in demand for masks encouraged many firms to join production and in turn, increase supply. Firms also began diversifying their products, whether by choice, or under pressure from governments. Dyson, for example, shifted their operations to producing more ventilators.
What the pandemic has revealed is that it is risky to put all one's eggs in one basket. Instead, risk should be spread across different countries. Prof Zheng adds that international investment could benefit from diversification, as it "optimises the returns through minimising risk... according to the portfolio theory."
Another concern is the effect of the pandemic on globalisation. Sharp declines in international investment and expenditure in an era of increasingly protectionist policies could signal the death of globalisation as we know it.
Despite the significant reduction in consumption, Prof Zheng believes it is just a matter of time before it picks up again, as the economy will eventually return to normal. She mentions "dual circulation," a new development pattern to prioritise expanding domestic economic output while still maintaining international trade and investment. This seems to be the strategy many countries are adopting, in an effort to be self-reliant, while still maintaining international links to keep production cost-effective.
For all of President Trump's criticisms of global supply chains, the economic incentive to outsource will still likely dominate decision-making. In fact, despite temporary setbacks in international trade flows, it is likely that many things will not change. Consumers will continue to seek low prices, especially during a recession, and thanks to competition, firms may not necessarily be able to charge more just because costs of manufacturing are higher in domestic markets. Cost efficiency is still going to be key.
Who benefits most from this shift?
Another silver lining of the pandemic has been that it forces (or motivates) firms to upgrade their technology and invest more in productivity. This is especially relevant in Southeast Asia. With the move away from China, it appears that other Asian markets such as Vietnam, India and Indonesia are the ones providing the most attractive alternatives.
Vietnam has seen more benefits in terms of low-end manufacturing production. Multiple firms choosing to invest in the country has set it on track to becoming the fastest growing economy in 2020. Industries ranging from furniture to garments have been shifting production to Vietnam, and there have been reports of Apple's suppliers such as Foxconn and Pegatron expanding operations there.
Taiwan has also benefited from the US' distancing from China. The Taiwanese government, in a chance to reduce dependence on China, has offered subsidies for Taiwanese companies that bring some operations back home. Under this initiative, Taipei has registered more than US$39 billion in investment commitments in the areas of telecom networking gear, servers and integrated circuits.
However, a few things need to be taken into account before companies shift their manufacturing operations elsewhere. Firstly, skilled labour may not be as available in countries like Vietnam. Additionally, other countries may not have the access to such an extensive network of suppliers. Lastly, apart from Malaysia and Singapore, countries in the region may not have the necessary infrastructure to support certain operations.
As Prof Zheng explains, "It takes time for these Asian countries to develop a complete supply chain to reach the efficiency of assembling highly complex products. China's exports have actually risen significantly during the pandemic, due to its relatively self-sustained, efficient and flexible supply chains."
Another issue that looms over decision-makers' heads is the political implications of moving operations away from China. Prof Zheng believes that countries that have political tensions with China are more likely to move out of the country due to the rising concerns of geopolitical risks. Moreover, those who are, or would like to, become allies of the US are likely to follow the lead of the US and shift their production out of China.
Will this cause repercussions and trigger more trade wars with China? It remains to be seen how international and regional economies will recover from this crisis. And the prospect of making an enemy out of a crucial player in the global economy is especially troubling when prospects of overcoming the pandemic anytime soon seem bleak.
(Photo credit: The Gender Agency)