Three of the world’s four largest economies, the United States, Japan and the European Union, are drawing up separate plans to lure their companies out of China.
Over the space of two weeks, powerful figures from three of the world’s four largest economies have publicly announced or discussed plans to lure their countries out of China, with such rhetoric finding growing support after the supply shock caused by China’s coronavirus shutdown.
On Tuesday, European Union trade commissioner Phil Hogan said the bloc would seek to “reduce our trade dependencies” after the pandemic, Politico reported.
Last week, Japan unveiled a US$2.2 billion fund to tempt Japanese manufacturers back to the country or even to Southeast Asia – as long as they leave China – in response to supply chain disruptions stemming from the pandemic. This followed the director of the United States’ National Economic Council, Larry Kudlow, saying that Washington should pay the moving costs of American firms bringing manufacturing back from China.
“I would say, 100 per cent immediate expensing across the board for plant, equipment, intellectual property, structures, renovations,” Kudlow told Fox News, adding to his comments in January that the coronavirus outbreak would be a boon for American employment. However, the US has no formal corporate repatriation programme as yet.
Firms from the US, Japan and Europe have been moving manufacturing away from China for some time due to rising costs and the impact of the US-China trade war, but the pressure is now on to accelerate this, with the coronavirus highlighting how reliant the world is on goods made in China, particularly vitalmedical products.
Michael Alkire, president of health care resource provider Premier, has already identified 22 items of protective clothing and 30 drugs that are likely “so critical that they need to be produced” in the US, even as the coronavirus continues to tear through American cities.
Many are currently made in China, which dominates the world’s personal protective equipment (PPE) and pharmaceutical markets, as with many other manufacturing sectors.
Scott Paul, president of the Alliance for American Manufacturing, said that the idea of reshoring and decoupling is “gaining currency beyond the Navarros”, referring to hawkish White House trade adviser Peter Navarro, a hardliner on China.
“I think that the inertia is for accelerating these trends. How much of that lands back in the United States is an open question. But I think it’s much more certain that it will continue to flow out of China into other places,” Paul said.
For China, this presents a problem. While Trump administration acrimony is hardly new,relations with Japan had been thawing, thus Tokyo’s repatriation package “touched off a heated debate in the Chinese political world”, according to the Nikkei Asia Review.
Li Xunlei, chief economist at Zhongtai Securities and an adviser to the Chinese government, said while the rhetoric did not provide an immediate threat to China, it could be a serious long term challenge.
“The disruption caused by the virus forced foreign companies to look for suppliers back home, and the shortage of PPE also makes people regretful about the hollowing-out of manufacturing in developed countries,” Li said.
The outbreak originated in China, which was the first to experience the humanitarian and economic impact.
But that means it was also the first to largely recover, and has been shipping billions of masks and other forms of PPE to other countries, most of which have shortages, albeit amid some controversy over quality control.
Seventy per cent of protective masks used in the US are made in China, as well as a significant portion of its medicines.
Reducing that dependence for medicines and supplies feeds into wider concerns over China’s growing economic, diplomatic and military might, and a slew of bills have been introduced in the US Congress to counter this.
One introduced last month by Florida Senator Marco Rubio, a Republican, would require the US to reduce its supply chain dependence on China, and has attracted support from three Democratic senators. A tougher stance toward China is a rare bipartisan issue in Washington these days.
“Once our nation has recovered from this unprecedented crisis, we must take steps to address the systemic vulnerability and supply chain risk that the coronavirus pandemic revealed,” Rubio said in a statement. “It is unfortunate that it took a global pandemic to make clear the ramifications of offshoring our industrial base to countries like China.”
Another bill introduced last month by hawkish Republican Arkansas Senator Tom Cotton would ban federal funding for Chinese pharmaceuticals or Chinese ingredients and mandate strict rules on country-of-origin labelling.
The recent use by US President Donald Trump of the Defence Production Act – forcing US companies to make emergency public health products in desperately short supply and mostly imported – could spur a permanent increase in production of some items, trade analysts say.
This trend is expected to gain new momentum as public anger over China’s handling of the virus increases. In a survey released last month by American analytics and advisory company Gallup, US public opinion of China fell to a 20-year low with just 33 per cent of Americans holding a favourable view. These results were echoed in a survey by the Pew Research Centre, an American polling group, last week.
Already, sources say some medical staff in American hospitals are angered when presented with Chinese-made PPE. This wave of anti-China sentiment will sharpen the pressure on other sectors, particularly consumer goods, to look away from China.
According to the 2019 Reshoring Index released earlier this month by American consultancy firm Kearney, the pandemic is forcing companies to rethink their supply chains, accentuating trends already under way through and before the trade war.
“The lessons we must learn from Covid-19 are as momentous as they are harsh,” Kearney said in its report. “At minimum, we expect [companies] will be increasingly inclined to spread their risks rather than put all their eggs in the lowest cost basket, as many long did in China.”
In 2019, US imports of manufactured goods from 14 low-cost Asian countries fell to US$757 billion from US$816 billion in 2018. This was almost completely driven by a 17 per cent drop in imports from China amid the trade war, Kearney said, but the result was that US manufacturing gained as a percentage of the nation’s gross domestic product.
But this did not necessarily mean that companies were coming back to the US in any significant way, the study found. Instead, the US saw a big jump in sourcing from Mexico and Asian countries other than China, in particular Vietnam, which filled the gap left by declining Chinese imports.
Therein lies the rub. For medical supply chains, there will almost certainly be government-backed schemes to repatriate production of vital goods. Nobody wants to be caught out for a second time and these policies enjoy popular support around the world.
But for other sorts of goods, business figures discourage conflating political movements with economic realities, particularly at times of such heightened tensions.
Mats Harborn, executive director for China at Swedish heavy vehicle maker Scania, said that “there are lots of discussions going on about supply chains, about diversification, but none of these conversations are about reshoring”.
A member survey by the American Chamber of Commerce (AmCham) in Shanghai this month showed that 70 per cent of respondents were not thinking of moving their supply chains out of China due to the virus.
Many of them are seen to want to stay in China to sell to its domestic market of 1.4 billion consumers, while others have found it difficult to wean themselves off the world-class manufacturing and logistics base China has become over the last 30 years. Many have set up plants elsewhere for export, but will maintain a China base for domestic business.
“We saw Larry Kudlow’s remarks offering to pay for US companies to relocate to the US, we are just not seeing that being driven by real business needs,” said Ker Gibbs, president of AmCham Shanghai. “Relocating a company from China to the US is not like packing a suitcase and going. It’s a complicated process with a lot of different factors.”
The sort of packages unveiled by Japan and floated by Kudlow with the “fixed costs of relocating”, said Heiwai Tang, a Hong Kong University economics professor, may appeal to “companies in China operating on the margins, but they do not deal with the variable costs on the ground”, such as labour and land which tend to be more expensive in advanced economies.
An executive at a Tokyo-based optical equipment maker, speaking on the condition of anonymity, said that rising costs in China are making it “less rational for us to maintain the production base there”, but that they had yet to seriously consider the programme to relocate.
“For companies like us who had built the production base in China to benefit from cheap labour costs there, and for those who are struggling to explore the market there, this could be a good window of opportunity to review whether the strategy still pays off,” he said.
For governments serious about reshoring manufacturing, Taiwan has, in recent years, been a case study in how to do it successfully. As of April 16, Taipei had approved 180 Taiwanese companies to invest NT$751.4 billion (US$25 billion) in bringing manufacturing back from China since the beginning of last year, according to official data.
These companies were all hit by the US-China trade war to some degree and had invested in China for more than two years before reshoring. They have enjoyed Taiwanese government help in securing land, water, electricity, labour and financing, as well as tax breaks – the sorts of “variable” support others may need to consider.
But for the time being, the US appears a long way from formulating a coherent incentive programme, with the immediate focus being on responding to the pandemic. More than 26 million Americans have filed for unemployment since the pandemic struck, leaving states with their finances hammered.
As one state-level representative, speaking on background, said: “Offering state incentives in the middle of a crisis that has destroyed state budgets is not a good look.”