Don’t believe the narrative of deglobalization
The author is a senior researcher at Harvard Kennedy School
When the Covid-19 pandemic hit, as China was blocked, countries around the world were trying to purchase personal protective equipment, and many people wrote obituaries for China-centric globalization. Given the economic nationalism of Donald Trump and Brexit and the US-China trade war, this seems to be a logical point. But there is little evidence that the pandemic has prompted companies to collectively abandon China or trigger deglobalization.
The rough measure of globalization is World Trade to World Commodities. From 1970 to the outbreak of the financial crisis, it rose sharply, and since then it has been generally sideways. The overall trade balance cannot provide us with detailed information about supply chains or globalization. However, if the company withdraws from overseas locations and moves back to China, we may expect the trade balance to shrink. The US trade deficit hit a record high, with imports reaching a record high of US$288.5 billion in September. At the same time, China’s trade surplus has exceeded its pre-pandemic level.
If the company is close to or onshore, we should expect long-distance routes to be less crowded. The busiest trade route in the world is still the eastbound trans-Pacific between Asia and North America.Port of Los Angeles see Record volume In September.
If companies exit, foreign direct investment inflows to China should decrease.But China surpassed the U.S. to become The preferred destination for new foreign direct investment last year.According to data released by the Ministry of Commerce of China, China’s actual utilization of foreign capital in 2020 hit a record high. According to the data for the first nine months of 2021, Expect to exceed the record This year.
Deglobalization should also be reflected in capital flows. According to data from the Institute of International Finance, non-resident capital withdrew from the Chinese stock market in March 2020 as part of a broader capital outflow from emerging markets. But since then, China debt and stock market There is capital inflow almost every month.
Hard data does not support the argument of deglobalization. What about survey data? According to HSBC, in September, six out of ten companies are currently expanding their supply chains in China or plan to do so next year. Respondents came from 10 countries (excluding Japan, South Korea, and Taiwan), and all had business in China or wanted to do business in China. 97% of companies said they plan to continue to invest in China, and nearly one-fifth of companies plan to invest at least 25% of their operating profits in China.
Annual meeting China Business Report Researchers from the American Chamber of Commerce in Shanghai found similar results. Among American manufacturers in China, 72% have no plans to move production out of China in the next three years. Of the remaining 28%, zero is the transfer of production from China to the United States. Nearly 60% of respondents have increased their investment in China this year.
Why is deglobalization not gaining a foothold? The company makes production decisions based on hard calculations of the medium and long-term bottom line. Building a new supply infrastructure requires a lot of time and resources.TSMC is building a semiconductor factory in Arizona Will not be put into use until 2024, E.g. Most supply chains will not be redesigned by pressing a button.
Perhaps these decisions are already in the making, but have not yet been announced. Nevertheless, foreign companies can still access complex and in-depth supplier networks, large and efficient ports, and capable labor in China. Although many people are beginning to use Chinese inputs to export, they now hope to enter a large and fast-growing economy. Auto parts manufacturers initially entered China to produce for the domestic market, but the growth of the Chinese domestic market means that they now have reasons to expand rather than leave.
China’s costs are rising, and trade tensions with the United States persist. We don’t know how China’s geopolitics will develop. More likely than deglobalization is the developing “China plus one” strategy: keep factories in China but hedge against suppliers elsewhere. Foreign direct investment in Thailand, Vietnam, and Malaysia has been growing significantly.
There is no doubt that the supply chain will be transformed after the pandemic. The just-in-time inventory system is likely to change, and China may lose some business. However, the globalization of production is very mature and has too much commercial significance to be reversed.