Global Production and the Current Geopolitical Moment
by Federico Jensen (Copenhagen Business School)
Global Production and the Current Geopolitical Moment
The global production system is changing. In particular, doubt has been cast on China’s role as the “factory of the world.” The US government has been attempting to rebalance the US global trade equilibrium and its position in global supply chains and global trade since the Obama administration. In 2017, Trump’s “trade war” notably changed the geopolitical relationship between China and the US by shifting the risk-reward calculations of firms manufacturing in China. Under President Biden, with the passing of the CHIPS Act and the IRA (Inflation Reduction Act), the economic incentives for firms to rethink their business strategies has grown amid renewed geopolitical tensions. The use of sanctions, export bans, and other regulatory means to disrupt trade are now commonplace between the US and China. At the same time, the geopolitical conflict is affecting the trade policies of all other global players (such as the EU), which also need to react to a more uncertain environment.[1] Although much has already been said about the end of China’s time as a key manufacturing hub, this piece attempts to nuance the way we view how geopolitical tensions are affecting firms’ decisions regarding production in China. In so doing, this piece will argue that China’s position in global production is still secure, due to the lack of alternatives and the difficulties of relocating manufacturing. Nonetheless, real changes to trade relationships between China and the rest of the world are underway, and rather than leading to a retreat of globalization, they are indicative of a reconfiguration.
For the last twenty years, retailers and consumer brands have sourced cheap manufacturing from Asia, and particularly from China since it entered the WTO in 2001, given their competitiveness in regard to wages. The loss of real income sustained by consumers in industrialized countries due to the de-industrialization of the manufacturing sector in the industrialized world as production moved to Asia was counterbalanced by the reduced costs of production abroad. As a way to rebalance their economies and become less dependent on manufactured goods from China, industrial policy has come back in fashion as states attempt to increase their manufacturing output and firms relocate manufacturing activities away from China.[2] The issue is not the end of globalization as we know it, but the structural adaptation of trade relations to the changing configuration of global markets amid geopolitical tensions and other crises, such as Covid-19.[3]
In the following sections, I will first provide an overview of the main discussions surrounding the decline of China as a manufacturing hub. In doing so, I will describe emerging supply chain strategies of re-shoring, near-shoring, and friend-shoring, as well as the opportunities these strategies are providing to low- and middle-income countries. Secondly, I will attempt to nuance the overextended notions of China’s decline as a manufacturing hub by showcasing the ways in which China remains crucial to global manufacturing. Global production is going through a reshuffle – looking ahead, global supply chains are not yet out of the period of large geopolitical uncertainty, and the roles of winners and losers have yet to be distributed.
The re-making of global trade?
For businesses, this has meant a rethinking of their global manufacturing strategies and the development of new diversification strategies. Many commentators and policymakers see these shifts in trade relations between China and the US as the end of globalization as we know it,[4] but the reality is far from it.
Prior to 2017, supply chain strategies had already begun shifting toward more regional models of sourcing goods rather than purely sourcing them from China, where geopolitical tensions had risen and wages had increased. At the time, and especially as a response to rising wages, firms started relocating manufacturing away from China or automating production processes, which in some instances also meant relocation. This was particularly true of production processes that require lots of labor, such as apparel manufacturing.[5]
Currently, calls are being made in policy circles for firms to diversify, re-shore, or near-shore their production away from China. Reshoring refers to moving production facilities back to countries that primarily consume the final goods being produced – particularly, to moving production facilities back to the country where a firm is headquartered. Near-shoring refers to moving production closer in distance to consumer countries – to neighboring countries with additional qualities that make them more economically attractive, such as lower wages or preferential trade agreements.[6]
These shifts in global supply chains – and particularly the most common change, diversification – have created new opportunities for middle-income countries around the world. The intensification of geopolitical tensions between China and the US has specially aided the trajectory of industrial development in Southeast Asia. Vietnam in particular has been a large beneficiary of diversification strategies, with inflows of foreign direct investment around 1.5 billion USD annually in the 2000s, and now well above 15 billion USD annually over the last four years.[7],[8] Opportunities for other middle-income economies such as Mexico and other “nearshoring” locations are also set to improve as firms reshuffle their global supply chains to accommodate demand from consumer countries.
As such, at least one of the effects of the possible decoupling of the Chinese economy from other high income economies thus far has been to broaden opportunities for low- and middle-income countries to enter into global production networks. This could be considered a net positive, given the impossibility to compete with China, which crowded most other countries’ manufacturing industries out of global markets.[9]
China maintains its influence over global manufacturing
However, none of what has been discussed above means the end of China’s dominant role in the global supply chain. In fact, the contrary may become true. First, although global brands may claim to be moving business out of China, the strategy so far has been what supply chain scholars call “China +1” or “China plus +n.” In other words, rather than fully shifting away from China, companies focus on maintaining stable supply in case of a disruption in China by diversifying their portfolios of suppliers and their geographical and jurisdictional locations.[10]
These strategies were already in place before the pandemic and the increased geopolitical tensions concerning China, largely due to the fact that wages in China have increased over the last decade and the Chinese government’s support of certain types of lower-end manufacturing activities has decreased. However, even when firms decide to leave China as a manufacturing hub, finding a similar supplier with the same technological, managerial, and logistical capabilities is no mean feat. This is due to the path dependency built up over two decades of manufacturing in China, which have provided Chinese firms with strong technological capabilities, managerial skills to produce quality goods in a timely manner, and the logistical prowess to process and deliver the goods produced. Despite the focus on diversification away from China, we see an internationalization of Chinese suppliers, particularly in Southeast Asia. These actors seek both to realize larger profit margins as wages in China increase and to avoid the penalty levied by global supply chains for being based in China.[11] In a sense, China’s role in global production is changing, not disappearing, and Chinese companies remain central to the economic development of Southeast Asia.
Perhaps contradictorily, it is in part the Chinese state, through its major global infrastructure investment initiative, the Belt and Road Initiative (BRI), that is opening the path for consumers in industrialized countries to decouple from China. The BRI mobilizes Chinese state finance and state-owned firms to build transport and digital infrastructures in low- and middle-income countries.[12] As mentioned above, Southeast Asia has been a major beneficiary of diversification: China has spent billions on energy, transportation, and digital infrastructure across 95 different projects in the region.[13] These infrastructure investments are a precondition for successful industrialization in the region and the diversification of supply chains. Thus, China remains embedded in the global supply chains as a central node in its role(s) as a producer, financier, consumer, and builder of global trade.
Geopolitical uncertainties continue
Geopolitical tensions have led to a further reconfiguration of supply chains beyond the diversification to the rest of Asia and near-shoring discussed above: trade is slowly concentrating on “friend-shoring.” This indicates the politicization of supply chain planning, suggesting a return to Cold War-style trade systems where trade is conducted purely among allies and countries with similar ideological tendencies. This is particularly true of the reduced trade dependence relationship between Europe and Russia after Russia’s invasion of Ukraine. However, it is also happening between China and the US. In parallel, these shifts have also meant that China and Russia are trading more with each other and the US and Europe are also increasing their bilateral trade.[14]
This does not mean a pure separation of economic relations in the long term, per se. For example, a recent survey from the European Chamber of Commerce in China shows that 75% of their member firms had revised their supply chain strategies, with 24% realizing some form of decoupling from China, either by diversifying production (moving away or opening new factories in other countries) or primarily by administrative means (separating the Chinese subsidiary from the general corporate structure), as a way to reduce risks in a more uncertain global economy, but without decoupling from China as a trading partner.[15]
The ruptures that are occurring in production and supply networks challenge some of the basic logics and assumptions of globalization and globalized trade. The notion that we live in a world where international product flows cannot be stopped or prevented is misguided. The current form of globalization, the international division of labor, and the vertical disintegration of production processes have made companies vulnerable to uncertainty and crises. Global supply chains are currently experiencing a moment of rebuilding as they try to tackle these uncertainties, and it will not be easy or cheap.
Nonetheless, this piece has argued that there is continuity within change, and the technological and regulatory innovations that spurred globalization in the first place continue to drive globalized forms of production and global markets. In the end, although this geopolitical moment may provide opportunities for low- and middle-income countries to participate more broadly in global production, disembedding China from globalization is currently more of a lofty goal than a practicable strategy.
[1] See: Curran, L. & Eckhardt, J. (2023) The EU’s COVID-19 policy response and the restructuring of global value chains. Global Policy, 14(Suppl. 3), 30–39. Available from: https://doi.org/10.1111/1758-5899.13165
[2] See for instance; Aiginger, K., and D. Rodrik. (2020). “Rebirth of Industrial Policy and an Agenda for the Twenty-First Century.” Journal of Industry, Competition and Trade 20 (2):189–207. doi:10.1007/s10842-019-00322-3. Chang, H.-J., and A. Andreoni. (2020). “Industrial Policy in the 21st Century.” Development and Change 51 (2):324–351. doi:10.1111/dech.12570. Jewellord T. Nem Singh (2023): The advance of the state and the renewal of industrial policy in the age of strategic competition, Third World Quarterly, DOI: 10.1080/01436597.2023.2217766
[3] See: Miroudot, S. “Reshaping the policy debate on the implications of COVID-19 for global supply chains.” Journal of International Business Policy 3, 430–442 (2020). https://doi.org/10.1057/s42214-020-00074-6;
[4] See: https://www.cnbc.com/2022/10/20/china-factory-of-the-world-is-losing-its-manufacturing-dominance.html or https://asia.nikkei.com/Spotlight/Caixin/How-bad-is-China-s-manufacturing-exodus or https://www.businessinsider.com/china-trade-war-covid-companies-moving-supply-chains-2022-12
[5] Tilman Altenburg; Xiao Chen; Wilfried Lütkenhorst; Cornelia Staritz; Lindsay Whitfield (2020) Exporting out of China or out of Africa?: Automation versus relocation in the Global Clothing Industry. Bonn : Deutsches Institut für Entwicklungspolitik 2020, 98 p. (Deutsches Institut fuer Entwicklungspolitik).
[6] See: Curran, L., & Eckhardt, J. (2023). “Global Value Chains in a world of interventionist industrial policy: Are we moving to a new paradigm?” Global Policy Blog. https://www.globalpolicyjournal.com/blog/07/03/2023/global-value-chains-world-interventionist-industrial-policy-are-we-moving-new
[7] See: https://cepr.org/voxeu/columns/bystander-effect-us-china-trade-war
[8] Data from: https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=VN
[9] Behuria, P. (2019). “The Politics of Late Late Development in Renewable Energy Sectors: Dependency and Contradictory Tensions in India’s National Solar Mission.” World Development, 126, [104726]. https://doi.org/10.1016/j.worlddev.2019.104726
[10] See: https://assets.kpmg.com/content/dam/kpmg/vn/pdf/publication/2019/South%20East%20Asia%20Manufacturing.pdf
[11] See: https://www.atlanticcouncil.org/in-depth-research-reports/report/china-and-the-new-globalization/
[12] See: https://thediplomat.com/2022/10/will-the-bri-survive-economic-decoupling/
[13] Zheng 2022 – https://www.iseas.edu.sg/articles-commentaries/iseas-perspective/2022-57-assessing-the-belt-and-road-initiative-in-southeast-asia-amid-the-covid-19-pandemic-2021-2022-by-wang-zheng/
[14] See UNCTAD: https://unctad.org/news/global-trade-growth-returns-outlook-2023-poor.
[15] See: https://www.europeanchamber.com.cn/en/press-releases/3529/european_chamber_report_finds_significant_deterioration_of_business_confidence_in_china