Are China’s days as factory to the world numbered?
Over the several decades, China has had a pretty good run. Since putting in place a variety of trade and investment reforms in the late 1970s, China has boomed. Opening to the world saw its real GDP growth average nearly 10 per cent annually for almost three decades which the World Bank described as the “fastest sustained expansion by a major economy in history.”
This growth has lifted hundreds of millions of Chinese people out of poverty and made China an economic superpower.
On the trade front, China has become a powerful net exporter to the world and runs massive trade surpluses with virtually all of its trading partners. At the end of 2020, China’s global trade surplus was valued at $78.2 billion (USD) including a whopping $310 billion (USD) surplus with the U.S.
However, the COVID-19 pandemic has shined a light on China that it hasn’t had to deal with in many years as it largely flew under the radar and grew to near superpower status. As the origins of the pandemic have moved from conspiracy theory to legitimate debate, China is under the spotlight like never before for its human rights abuses, its intellectual property theft and its military incursions into the South China Sea. Now, its status as factory to the world may also be under threat.
For starters, the U.S. tough-on-China stance remains in effect under the Biden administration. New U.S. Trade Representative Katherine Tai has stated bluntly that “very large challenges” remain in the bilateral relationship which is largely focused on trade policy. President Biden is seeking to unite the G7 in common cause against China and his tough talk is virtually indistinguishable from the anti-China rhetoric that regularly came from Donald Trump.
Similarly, Japan is taking steps to lessen its reliance on the Chinese market. The Japanese government has created a subsidy program to finance projects that boost domestic production or shift it to ASEAN countries, the pact of Southeast Asian countries that is strengthening trade and investment ties around the world.
Since the program was launched, over 80 projects have been funded that move production of goods such as medical equipment and auto parts to Vietnam, Thailand, Malaysia and other ASEAN countries. The policy doesn’t name China directly but the objective is clear.
Just as Donald Trump sought to ‘re-shore’ U.S. manufacturing, other countries may follow suit as deeper trade and investment ties with China – once sought by virtually every country in the world – are now officially in neutral if not moving in reverse.
China’s competitive advantages which include favourable currency differences, lax regulatory policies and low labour costs may no longer matter in a world that is focused on “building back better”, creating agreements that put a floor on corporate tax rates and no longer willing to turn a blind eye to many of the concerns China critics have been talking about for decades.
In the post-pandemic world, it is very possible that the new normal won’t be businesses as usual when it comes to China.