New technologies, the trade war and now the coronavirus outbreak are challenging the logic of the global supply chains and China’s dominance in global manufacturing.
“The outbreak of coronavirus is changing how companies view the extended, ocean-going route of container ships carrying manufactured goods and components between the Chinese mainland and North America and Europe”, writes Rick Kelley at The Monitor. He adds: “Experts say this long supply chain is now being viewed as a liability, too susceptible to disruption from natural- or man-made disasters.”
Yet the change started even before the spread of the disease. In “Globalization in transition: The future of trade and value chains”, the McKinsey Global Institute found that between 2007 and 2017, less than 20% of the goods trade was based on labor-cost arbitrage, and in many value chains, that share has been declining over the last decade. “Goods-producing value chains (particularly automotive as well as computers and electronics) are becoming more regionally concentrated, especially within Asia and Europe. Companies are increasingly establishing production in proximity to demand.”
The coronavirus outbreak is triggering further changes and disruptions. The Financial Times reported that China’s National Bureau of Statistics released a record low figure for its official manufacturing purchasing managers’ index for the month of February and China’s customs administration registered a 17% annual fall in the value of January-February exports.
What is at stake when we talk about reshaping the global supply chains?
Bloomberg has recently published a map of possible disruptions that the coronavirus can bring to the global value chains, considering that China is currently the “world’s largest exporter of intermediate manufactured products – components destined for use in supply chains across the world”. According to Bloomberg Economics’ calculations based on OECD trade data, about 20% of global imports of those products came from China in 2015. “The longer the coronavirus curtails China’s industrial output, the bigger the risk of disruption to factories elsewhere. For countries in the Asian supply chain, the exposure is bigger – about 40% of all imports of intermediate manufactured products consumed in Cambodia, Vietnam, South Korea and Japan came from China in 2015.”
For the U.S., the exposure to the imports of the intermediate manufactured products from China is also significant – above 30%.
Besides auto-industry, metals and electronics, there is a huge dependence on China in the pharmaceutical and medical equipment sector. The New York Times reports that “Chinese pharmaceutical companies have supplied more than 90 percent of U.S. antibiotics, vitamin C, ibuprofen and hydrocortisone, as well as 70 percent of acetaminophen and 40 to 45 percent of heparin in recent years.”
According to the NYT, China is also a key producer of the chemicals that are used in the pharmaceutical industry. Based on the Food and Drug Administration’s data, the newspaper informs that 72% of manufacturing facilities making active pharmaceutical ingredients for American drugs are located overseas, 13% of them in China.
Due to the coronavirus outbreak and subsequent decrease in production, logistical difficulties or direct restrictions imposed by governments, China, India, Germany and several other countries cut their exports of drugs and pharmaceutical ingredients, face masks and other medical supplies. The NYT reports that such disruptions are forcing the U.S. government to implement measures to enable manufacturing of these products in the U.S.
It will not be possible to produce everything in the U.S., but it is clear that the pandemic crisis together with the ongoing technological decoupling from China are making the U.S. rethink its excessive reliance on China and eventually reshape its supply chains.
The renewed NAFTA (the United States-Mexico-Canada Agreement – USMCA) offers new opportunities for shifting production regionally. There is also room for expansion of trade and investments with other big regional players, like Brazil.