A post in February title “Coronavirus, Global Economy and Redundancy” discussed the implications of dependence on China and possible disruptions. The post had pointed up in the pre-pandemic days, China accounted for nearly a fourth of global manufacturing. Economies ranging from Japan to India to Serbia to Africa all depended in varying magnitudes on China for their production requirements. The post had posited a need to develop redundancies in supply chain management. The post had opined that if there were to be outbreaks of fresh pandemics, production activities would be the first to be hit in a globalized world. It was felt that firms will have to factor the production fat tail distributions and risks associated with the same. Further the post argued the while the risk of production dislocation and disruption might be small yet given the fat tail nature of production facilities probability distribution, the adverse consequences might be very high. In fact as discussed in the post, the disruption on the global economy has been manifold something unprecedented in recent times.
Furthermore, the sheer Chinese belligerence in the wake of pandemic has provoked hostility in many a quarters. Electoral compulsions are perhaps US towards looking away from China for sourcing its supply chain needs. Japan has already offered incentives to its firms interested in relocating supply chains from China to other parts of South East Asia and Japan. Australia has been a target of China with reference to its agricultural exports. China has been provoking India on its borders. The Indian reaction has been to ban Chinese apps including the hugely popular Tik Tok among others. The US too has been threatening China with banning its apps and financing of these apps. The European countries seem to follow at least in stated terms on their possible economic shifts away from China but given the deep Chinese state embedded in Europe, it is unlikely that Europe will take any significant action against Chinese firms and imports.
Yet, as the world grasps the functioning of the Chinese economy underpinned by party capitalism, it would be time for the rest of the world to develop China alternatives. A discussion on the phases of Chinese economic structures and globalization can be found in this post. The world for long has viewed what is in the public domain as the real characteristic of Chinese economy. Yet digging deeper, these public faced features were mere camouflage for the Chinese Communist Party to spread its tentacles through the global economy besides developing a deep state across many a country.
A recent report in Bloomberg talks about the possible supply chain collaboration between India, Australia and Japan. The report suggests possible negotiations between these three countries to build supply chains that seek to counter the Chinese hegemony. Apparently, Japan seems to be more enthusiastic along with Australia with India yet to take a final decision. As a matter of fact, supply chain pacts would have to factor in both the US and the European Union. UK and ASEAN countries too would have to be part of the pact as should be South Korea, Taiwan and Israel. Yet, ASEAN like European Union seems to be in the grip of China and is unlikely to spell out any decision that would apparently go against the Chinese interests. Yet an individual level, both Indonesia and Vietnam have been signalling a movement away from China while Philippines seem to be mercurial. It would be interesting to see how ASEAN would maintain consensus in its strategy on China.
The supply chain pact must factor in redundancies. The over-dependence on China has cost the world significantly. This seems to be an extension of the agreements between India and Australia seeking in principle diversification of supply chains beyond China. Experts are suggesting the expansion to include US and EU. Yet, these supply chains rather being a pure economic driven but are linked to geopolitics. Chinese growth has been primarily due to its ability to attract supply chains to itself and further profiting from it. Given the penchant for cost reduction, itself a product of consumer’s desire to obtain goods at the lowest price, China was able to position itself as low cost manufacturing destination. The low labour costs accompanied by monoposony market structures made the West turn a blind eye to Chinese practices. The size of Chinese market was too tempting for the MNCs to trade-off some amount of independence to the Chinese government. Yet this pandemic originating in Wuhan has demonstrated, China is willing to leverage any global disruption for its profits. Its objectives seem very clear and to it, apparently the ends matter and not the means. In this context, the new movement on non-China supply chains assume significance.
China need to be imposed certain costs for its actions. Yet given the Chinese dominance in global trade and political calculus it is not very easy. China is a veto welding permanent member of the UN Security Council and thus able to prevent any discussion on COVID-19. In fact, China has virtually captured World Health Organization (WHO) as evident its stance in January at the early outbreak of the Wuhan virus. The key mechanism to impose costs on China would have to hit its economic apparatus. The economic structure is explicitly party owned. The economic impact would be on the Communist Party. The Communist party must be made to pay its costs. In this context, as the supply chains shift towards other countries, the impact on the Chinese industry would be significant. Yet there is a rider. As China accumulates huge current account surplus, it has to be balanced by a capital account deficit. In other words, Chinese investment in the rest of the world must be very high. This translates into Chinese capture of global companies through increased equity stake or as a bond holder. This is evident in many instances. Alongside the supply chain pacts, there must be a shift in the ownership and debt patterns of the firms in the rest of the world. The proposed pact between India, Australia and Japan is perhaps the baby step in the long haul battle to reduce global dependency on China. Yet, as with any start, this must be welcomed.
Thoughts on Theory and Practice 