China faces economic hit as countries seek to bring factories back home

China economic hit factories trade COVID-19 products industry
The COVID-19 pandemic has rattled China’s trading partners, which are reliant on Chinese manufacturing for vital products.

Some say it’s the end of globalisation. If not, it’s — at the very least — possibly the end of China’s role as the factory to the world.

First, Beijing had to deal only with US President Donald Trump and his trade war with China.

In 2019, Chinese exports to the US were down 17% on 2018 sales due to controls and tariffs imposed by Washington.

Now, not only are the Americans — having imposed tariffs— now doubling down with talk of repatriating manufacturing and rebuilding their own supply chain, but so are the Europeans and Japanese.

Japan has committed ¥243.5 billion (A$3.54 billion) to help its manufacturers ship plants out of China.

The COVID-19 virus and, in particular, China’s dissembling on the origins of the pandemic, have set off a severe political reaction in the developed world.

The European Union is talking about being “strategically autonomous”.

What has rattled China’s big trading partners was the sudden realisation that they were reliant on Chinese factories for so many vital health products and drug ingredients.

US legislators seek new rules on China products

Bills are in the US Senate to turn that around.

Senator Tom Cotton, a Republican from Arkansas, is proposing that federal funding and subsidies be withdrawn on any pharmaceuticals or ingredients that have been manufactured in China.

Senator Mario Rubio, a Republican in Florida, has legislation to require certain supply chains be based in the US.

Taiwan has become the poster child for how to contain COVID-19 with just six of its citizens dying of the virus.

Less well-known is how the island has also written the textbook on controlling one’s own supply chain.

So far, 180 Taiwanese companies have brought manufacturing back from Mainland China, investing NT$751 billion (A$39.01 billion) on the island (of which its official name, by the way, is still the Republic of China).

One of the reasons for doing is because manufacturing in Taiwan is not affected by the US tariffs on China.

Europeans worried about foreign takeovers of key industries

The Australian Government has already declared it is ready to block foreign takeovers of assets in a distressed state due to the COVID-19 lockdown.

Europe is also aware of the danger.

European Union trade commissioner Phil Hogan has unveiled proposals to reshore, not only in pharmaceuticals, but in battery technology for electric vehicles.

Mr Hogan, who is from Ireland, said there is a need for discussions on ”what it means to be strategically autonomous”, which will involve building “resilient supply chains, based on diversification”.

Supply chain China manufacturing COVID-19
Countries around the world have become reliant on China in their supply chains.

In mid-April, he was telling member countries that Brussels was ready to take on monitoring any takeover bids from outside the EU.

“Economic vulnerability could result in a sell-off of critical infrastructure or technologies,” Mr Hogan added.

Governments in Berlin, Paris, Rome and Madrid have all recently increased their powers covering vetoing non-EU investment in their countries.

The EU is also to screen takeovers for security implications, according to news reports. However, that is not just China-related – this year alarm bells went off after there were reports that a US bid was to be made for a German vaccine research company.

Chinese dumping has also rankled EU officials; some 93 anti-dumping measures have been imposed on Chinese products, compared with 10 for Russia, seven for India and six for the US.

However, while there has been mounting concern in Europe about supply chains being in Chinese hands; any move will depend largely on Germany’s agreement.

Berlin has a great deal at stake with trade being a two-way street; Germany’s exports to China are greater than those of France, Italy, Spain, Britain and the Netherlands, combined.

Trump administration mulling paying for reshoring

US National Economic Council director Larry Kudlowhas said Washington should pay the moving costs of US firms bringing their manufacturing back to the US.

“I would say 100% immediate expensing across the board for plant, equipment, intellectual property, structures, renovations,” he told a television interviewer.

One leading healthcare producer in the US has identified 22 types of protective clothing and 30 drugs that should be produced in America to ensure security of supply.

The move by US companies to China (as well as Mexico and other low-wage jurisdictions) has not only seen millions of jobs disappear, but trade deficits mount.

Problems ahead for China

The COVID-19 virus has lain bare to leaders around the world (Australia included) the vulnerability of their supply chains.

In this country, for example, for weeks it was nigh impossible to buy a thermometer — important as fever is one early symptom of the virus.

But, China now faces what Japan went through — the hollowing out of its manufacturing base.

In the 1990s, the Japanese industrialists sought low-wage countries to escape high salary costs at home.

Now, China has become a problem, not for cost, but geopolitical and strategic reasons.

Export industries employ 180 million Chinese workers.

Beijing’s immediate problem is that, while it has “re-opened for business”, its customers have not.

Its longer-term problem is if it turns out that globalisation is dead — because it was globalisation that allowed Beijing to become the factory to the world.

And it depends on globalisation continuing for China’s manufacturing supremacy to endure.

It’s not money talking now. It’s politics and national interests.

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