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Global supply chain poised to revamp

| Updated: January 24, 2019 21:15:58


Global supply chain poised to revamp

The slapping of tariffs by the Trump administration has triggered relocation of factories, beginning the process of remapping the global supply chain of the industrial economy. While businesses await further developments on US-China trade relations, they are remaining in China while boosting investments in other countries. As reported by the international media, a recent survey found companies considering leaving China are not choosing to locate in the USA or Canada, rather their preference is for other Southeast Asian countries like Vietnam, Bangladesh and Cambodia, writes M Rokonuzzaman.

The news that more than 70 per cent of US firms operating in southern China are considering moving to other countries as the trade war bites into profits has triggered a vital question: is it the starting point of remapping the supply chain of the global manufacturing industry? In the 1960s, global telecom connectivity, advancement in shipping and air transportation, and high disparity of wages between the West and East inspired trade liberalisation -- starting the process of creating a global value chain. In leveraging the emergence of the liberalised trade regime, multinational companies commenced setting up manufacturing facilities in Asia, primarily to take advantage of low-cost labour. In the first round, Korea, Taiwan, and Singapore became populated with export-oriented manufacturing facilities. In the second phase, Thailand and Malaysia joined the race. In the 1980s, China opened its economy to join. In the course of time, Vietnam, Indonesia, Bangladesh and Cambodia also became poles in global manufacturing value chain. Over a span of fewer than 40 years, China emerged as the nucleus of a new global supply chain creating the impression of a new order of the global industrial economy.

To emerge as the global factory, China made massive investment in uplifting infrastructure, ballooning the borrowing to above $28 trillion. Unlike other developing countries like Thailand, Malaysia, Bangladesh or Vietnam succeeding in being the base of labour-intensive manufacturing, albeit far smaller though, for the Western markets, China aspires to acquire technology through the process of being the factory of the world. It is said that China's aspiration is driven by the forceful technology transfer from foreign companies. It is argued that China through direct and indirect measures have compelled companies of USA, Europe and Japan to transfer technologies to Chinese counterparts, in exchange of liberal incentives and access to the lucrative domestic market. The USA-led Western countries recognised China's aspiration of going up the value chain of the industrial economy as a threat to global dominance, resulting in trade tensions.

As written by Wharton Dean Geoffrey Garrettin in an opinion piece, "Recent trade skirmishes between China and the United States are less about steel and soybeans and more about which country will be the leader in global innovation in the 21st century." Experts are discoursing that what is really going on is not about trade; it is about who will lead global innovation in the 21st century.  Steel, soybeans and solar panels matter less; electric vehicles, self-driving cars and artificial intelligence are a matter of concern for the USA to trigger the trade war. Despite having several rounds of trade negotiations, the trade dispute has already started to surface as new tariffs are being imposed on products exported from China for the USA market. As reported, the US is set to raise tariffs on $200 billion worth of Chinese goods from 10 to 25 per cent at the beginning of 2019.

The slapping of tariffs by the Trump administration has triggered relocation of factories, beginning the process of remapping the global supply chain of the industrial economy. Many of the foreign firms manufacturing in China have also production facilities in other South Asian countries such as Vietnam, Bangladesh and Cambodia. Directing works from China to other South Asian plants has already started. While businesses await further developments on US-China trade relations, they are remaining in China while boosting investments in other countries. As reported by the international media, a recent survey found companies considering leaving China are not choosing to locate in the USA or Canada, rather their preference is for other Southeast Asian countries like Vietnam, Bangladesh and Cambodia.

How long the trade tension is likely to continue is a question. It depends on the gravity of the underlying issues. It appears that the US administration has a much bigger concern than short-term trade issues.  China seems to be a very real challenge to American global dominance in the innovation economy. Rising power versus incumbent power normally refers to the growing military competition between China and the USA. But it also describes rising Sino-American competition over the future of innovation.

In one hand, China does not have an alternative other than pursuing innovation economy. The economic prosperity appears to be the underpinning of the sustainability of the existing governance structure. Upon reaching saturation of labour and infrastructure-led growth, China's leadership must unlock innovation-led wealth creation window to bring continued prosperity to Chinese people. It is the technological innovation which has the potential of opening an endless frontier of growth. Upon succeeding in unlocking innovation-led wealth creation, the Chinese government can offer a long journey of creating affluence to its citizens. As a result, China will be a prosperous country.

On the other hand, China's growth as an innovation-economy appears to be real. By capitalising on large domestic market and stable government, China is in a position to provide long-term incentives through different measures to nurture the growth of domestic technology firms. For example, just in less than 10 years, China has captured almost 60 per cent of electric vehicle battery market. Although Japanese firm Sony brought lithium-ion battery innovation in the market in 1991, China's CATL with its debut in 2011 has become the global leader. It is anticipated that with the edge in the battery, China may redefine the 21st century's global automobile industry. Moreover, China has been carefully linking commercial innovation journey with defence and homeland governance. As a result, long term financing for developing strategic technologies, particularly in artificial intelligence, has become very much within the reach of China, sharpening both commercial and military edges.

As China's rise both as an economic and military power challenging the USA's dominance in setting global order, has become a real possibility, the USA-led Western countries have virtually no option other than looking for slowdown of Chinese growth. Conventional means such as sanction or military interventions do not appear to be meaningful options. As a result, trade dispute applying punitive tariff seems to be the only option left. Arguably, although it has been hurting the US more than China, tariff measures are likely to continue in producing trade war casualty: factories shifting out of China. Over the next decade or so, it's likely that the global manufacturing supply chain would be remapped. As mentioned, such remapping offers opportunities to developing countries who should prudently take the advantage in positioning themselves as major nodes in the global value chain.

M Rokonuzzaman Ph.D is academic and researcher on technology, innovation and policy. 

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