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Where Will the Global Supply Chain Go?

Mar 27, 2020
  • He Yafei

    Former Vice Minister of Foreign Affairs

As the coronavirus envelops the globe, the pneumonia known as COVID-19 poses a severe challenge public health systems, the world economy and supply chains.

Since the 2008 financial crisis and economic downturn, all countries have been perplexed by the intricate changes in globalization, non-traditional security threats and geopolitical tensions.

Varying approaches to development and different political and economic systems have different impacts on economic development and social governance, which has become the focus of reflection and comparison around the world, especially among governments and scholars.

The response to COVID-19 varies greatly from country to country, revealing the importance of national governance systems and approaches to development in responding to non-traditional security crises.

In recent years, at least two things have raised concerns about the global supply chain, a vital economic network.

One is that the United States has been working to decouple from China in technology and is suppressing Huawei and other Chinese technology companies. Specifically, it has boycotted Huawei’s 5G equipment and obstructed China’s Belt and Road Initiative.

The other is that the recent outbreak of COVID-19 has temporarily broken global supply chains, thus increasing downward pressure on the world economy, roiling capital markets and causing stock and bond markets to plummet.

After the end of World War I, large-scale Western industrial production and global trade gave rise to the first round of capitalist globalization. Over the past few decades, globalization has driven the allocation of production factors such as capital, resources, personnel and information. Economies have gradually formed supply chains for products and services by virtue of their comparative advantages. They occupy different positions in the chain, so there is a global supply and consumer market where economies are interdependent.

Different economies have vastly different positions in globalization and the global supply chain. The conditions of each economy are very different for historical reasons, as well as their natural conditions, sizes and populations.

On the strength of their natural resources, core technologies, monopoly position, big markets or other advantages, some countries control the global supply chain and the hubs of all networks, and take a competitive posture that matches them. So they obviously benefit more from globalization than other countries.

After World War II, by setting up the Bretton Woods system, the United States established the U.S. dollar hegemony based on the gold standard and the oil standard, and it took control of the world’s financial system. In the 1970s, the Society for Worldwide Interbank Financial Telecommunications (SWIFT), an international financial transaction system, was established to build a U.S. dollar clearing system. This has tightened the U.S. grip on global capital flows up until today.

With the popularity of the internet, no more than 10 internet giants have been left standing following sharp competition. In the first decade of the 21st century, cloud computing was concentrated in the hands of several major technology companies, including Amazon and Microsoft. Today, artificial intelligence has become the new focus of high-tech development and competition. Any country that is more advanced in this area will be able to be the core hubs for economic and military competition and the new global supply chain.

The United States is precisely using its control over the core hubs of the global financial supply chain to weaponize the U.S. dollar system and wantonly sanction countries and companies that deviate from the U.S. model or are disobedient. In the eyes of the U.S. Treasury Department, the most effective weapon now is not aircraft carriers but financial sanctions.

After the coronavirus outbreak, and on the strength of the socialist system’s capacity to mobilize resources and execute plans, China quickly activated its public health emergency mechanisms from the national to the community level and adopted powerful and effective measures, thus effectively controlling the spread of the epidemic.

In addition, the Chinese government promulgated fiscal and monetary policies in a timely manner, did everything it could to support companies in their orderly resumption of work and worked to ensure that supply and industrial chains fully functioned. These measures have already achieved initial results and have also stabilized foreign investment in China.

When the global financial crisis of 2008 pushed countries to the brink of collapse, China worked with other major economies against the financial tsunami and economic recession. It stood out conspicuously in the international arena, especially the G20 platform, as a global power.

In response to the ongoing onslaught of COVID-19, China has once again fully demonstrated its governance system’s strong ability to pool resources for major missions and has shared useful experience with other countries about fighting the epidemic.

At the same time, other countries have adopted measures to control the virus, as recommended by the World Health Organization. At present, the epidemic in Italy, Iran, the United States, Japan, the Republic of Korea and others is going from bad to worse. Many countries have increased the level and scope of their emergency response.

Nobody knows where the epidemic will go. So far, different countries have adopted different measures to respond to COVID-19 with varying results. This partly demonstrates whether a country’s economic and political systems can effectively and methodically respond to crises, are able to mobilize resources and are prepared to make sacrifices.

As it stands now, the short- to medium-term measures adopted by various countries to control COVID-19 have indeed partially restricted the free movement of production factors, including products and personnel, demonstrating that the global supply chain — and especially its major hubs — is vulnerable to the gray rhino and the black swan.

China’s key position in the global supply chain, the so-called China factor supply chain risk, is the most hotly discussed topic now. To some extent, all countries are mentally prepared for and able to stand the temporary impact on the global supply chain, but they are obviously worried whether they can hold out in the long run.

Of the Fortune 1000 companies, 163 have first-tier suppliers in China with which they have a direct business relationship, while 938 use Chinese second-tier suppliers as their first line. In a survey of 109 U.S. manufacturing companies in the Yangtze River Delta conducted by AmCham Shanghai, one-third of the respondents said that if the factories could not resume production, they might move out of China.

In fact, since the United States imposed more tariffs on Chinese imports and began to work for decoupling in science and technology, some countries with close economic relations with China and the United States have begun to worry about whether the global supply chain will be reliable in the long run, once the two countries heat up their rivalry again.

The onslaught of COVID-19, a gray rhino event, has further revealed that interdependence in the framework of globalization  that is conducive to the global supply of products and services may become the participants’ chains in the crisis. Such participants will lose out because of their long-term dependence on hubs. Companies will not be able to operate normally.

In addition, the economic and financial risks of various economies will increase sharply as a result of their turbulent capital markets. This will lead some countries to rethink deep-seated issues such as globalization and global supply chain restructuring.

To keep the world economy safe, how should the global supply chain be consolidated and adjusted to adapt to the new non-traditional security challenges of the coronavirus and public health? Is it necessary to establish parallel or self-contained supply chains? That is, are upstream and downstream plans necessary? These are also major issues that China needs to seriously study as the global manufacturing leader.

The administration of U.S. President Donald Trump has targeted China as a major strategic rival and has actively promoted the “America first” policy. It has already begun to seek decoupling from China, starting with a technology blockade.

Now some China hawks in America can’t wait to use COVID-19’s short-term impact on the global supply chain as an excuse for a new international economic architecture and new supply chains in an attempt to find a basis for their continuing to seek decoupling. U.S. officials such as Secretary of State Mike Pompeo and Secretary of Commerce Wilbur Ross point to the COVID-19 outbreak in China to encourage American manufacturers to leave China and return to U.S. soil. They have also used the temporary disruption of the supply chain wrought by the coronavirus as an excuse to continue advancing their decoupling strategy. They are urging American and other Western companies to find alternative suppliers.

All this departs from the general principle of economic globalization and amounts to a hegemonic country suppressing and containing an emerging power out of geopolitical considerations, which is a destructive and dangerous move. Although it is difficult for the United States to complete decoupling from China within a genuine framework of globalization, if geopolitics were to be used to poison globalization and the global supply chain, globalization would become distorted and the global supply chain would be derailed.

To successfully respond to non-traditional security challenges, all countries must cooperate. This is a major test of the global governance system and the governance systems and capacities of each country. It has also triggered discussions about the advantages and disadvantages of different systems and models.

It seems that discussions about the global supply chain and China’s role in it will continue. China should wait and see, while planning ahead and thinking deeply about the possibility of a supply chain restructuring and how it should take place.

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