Stay Prepared for Global Supply Chain Reshaping

China has been integrating into the global supply chain since its accession to the World Trade Organization in 2001. In 2010, its manufacturing added value exceeded that of the United States to top the world. Nine years later, this figure reached those of the U.S., Japan and Germany combined, accounting for 28.1 percent of the world’s total.

Among the 500 major industrial products, China ranks first in the output of more than 220. Not only is the nation the largest source of major industrial products in the international supply chain, it’s also the largest market.

A central role

China overtook Germany and became the world’s largest exporter in 2009; in 2013, it replaced the U.S. as the world’s largest trader of goods. Today, it is the largest trading partner for more than 120 countries and regions across the world. According to a report issued by the UN in March 2020, around 20 percent of the global trade in manufacturing intermediate products stems from China. If overseas sales of their Chinese manufacturers dropped by 2 percent, exports of 45 major economies of the world would decrease by $46 billion.

Despite the COVID-19 pandemic, China’s status has remained unchanged; on the contrary, it has been further enhanced. It managed to take the lead in resuming economic growth, increasing the confidence of multinational corporations operating within its borders.

In 2020, China was the only major world economy that achieved positive growth, and according to the October 2021 International Monetary Fund forecast, the nation’s economic growth was set to hit 8 percent that year, ranking among the top of major world economies. The strong resilience and huge potential of the Chinese economy continue to beckon multinational corporations. In the context of a drastic decline of investment across the world, paid-in foreign direct investment in China rose by 6 percent year on year in 2020 and recorded a 14.9-percent growth in 2021, according to figures released by the Ministry of Commerce on January 13.

As the only country in the world that covers all the categories included in the UN’s industrial classification, China has one of the most efficient supply chains in the world. Since early 2020, Chinese manufacturing firms swiftly switched to the production of epidemic control materials, driving the exports of textiles, medical devices and pharmaceutical products to increase by 31 percent year on year. From January to June 2021, China’s exports of intermediate goods surged by 34 percent year on year, providing much-needed support for the economic recovery of other countries.

External uncertainties

Currently, China stands at the center of the global supply chain. This position helps it gain easier access to overseas markets, reduce production costs and improve people’s wellbeing, rendering the country an important powerhouse facilitating world economic growth and recovery.

But in the long run, the new round of technology revolution and the COVID-19 pandemic have accelerated the chain’s overall restructuring. The U.S. in particular defines China as a major strategic competitor, which will have a huge impact on the latter’s role in the global manufacturing landscape.

Since 2008, with the rise of many emerging economies and developing countries, and especially the rapid development of China, the dominant position of developed countries led by the U.S. in the global supply chain has been on the decline. In response, former President Barack Obama signed the National Strategy for Global Supply Chain Security in January 2012, confirming the guarantee of global supply chain security as a national strategy for the U.S. The Obama administration also attempted to raise the threshold for China to integrate further into the global economy out of concerns over assumed economic security threats, encouraging the relocation of manufacturing activities back to the U.S. and promoting higher standards of global trade rules to create a U.S.-dominated regional manufacturing system.

The Donald Trump administration then pursued an “America First” policy, provoking trade frictions around the world, with China as a primary target. The U.S. and its allies introduced various measures to speed up the reshoring trend or transfer manufacturing operations to their “friendly” countries, focusing on reducing dependence on Chinese production and supplies.

The Joe Biden administration has continued the main line of Trump’s policy. In February 2021, Biden signed a presidential order to review the U.S. global supply chain. The Strategic Competition Act introduced in April 2021 framed China as a strategic competitor to the U.S. and authorized to assist U.S. companies with global supply chain diversification. During the Group of 20 Summit in November 2021, Biden convened the Global Summit on Supply Chain Resilience.

The U.S. has sought restructuring the global supply chain through tax incentives, investment subsidies and other stimulus measures. Its protectionist moves go against the trend of globalization and economic laws and will disrupt the safe and stable operation of the entire system. Restricted by factors such as cost, quality, stability and industrial ecosystem, multinational corporations will now face high risks for reshaping their supply chains. The American attempt to “decouple” from China will thus immediately harm U.S. business interests.

Rising to challenges

China needs to execute a national strategy for global supply chain security to strengthen its competitiveness. It should further open up to the outside world and make itself more attractive to foreign investors. Given China’s manufacturing prowess, huge domestic market and persistent efforts to relax market access restrictions, an exodus of key players is unlikely.

The digital economy, a pivotal area in the new round of international competition, is expected to chart the course of global supply chain restructuring. Relying on its advantages in data processing and application, China should focus on making breakthroughs in core technologies and accelerating the integration of the economy’s digital and real segments.

China highly relies on developed countries in the supplying of microchips. However, in the wake of the COVID-19 pandemic and Western attempts to dominate the global supply chain, chip supply falls short, taking a toll on a large number of Chinese industrial enterprises, automakers in particular.

Against this backdrop, it is imperative to enhance innovation. Businesses in China need to strengthen their research and development to break through technological bottlenecks. Also, to counter risks from supply chain disruption, Chinese companies should become more capable of mobilizing their resources globally.

The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation.