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China-led Globalization Is Coming To An End

China-led Globalization Is Coming To An End


Talk to someone in politics or in the markets about the possibility of a second wave of coronavirus infections in the winter and they will all say if that happens, China is toast. Or at least in very big trouble with its Western trade partners. Those partnerships matter to China. They matter to the existing system of trade and finance even more.

Maybe there is a second wave, and it is not as deadly. Maybe the virus itself, as contagious as anything we have ever seen before, is not as deadly as we thought. If so, China can breathe a sigh of relief there. It suffered as much as anyone, too. Let’s move on.

Even so, moving on means moving on from China as the spearhead of global manufacturing. Those days are coming to an end.

“The companies I have heard the most from, anecdotally to me and whom I represent, are manufacturers of auto parts in China,” says John Scannapieco, a trade attorney and head of the Covid-19 task force at Baker Donelson in Nashville. “They are all really thinking about rejiggering their supply. They’re looking now at reducing their reliance on China and want to hedge their risks. To do it, they have to go somewhere else.”

For years, China’s build-out as the world’s manufacturing hub meant the need for more factories in China. More factories meant the need for more roads and bridges, railroads and airports. That meant more iron ore from Brazil and Australia. More copper from Chile.

As people left rural settings and needed to rely on the local grocer, it meant the need for China to import more food. Ports were built to import all of these commodities. China has seven of the 10 largest ports on the planet.

The entire country over the last decades of its opening up was built to be the poster child of Davos Man globalization — abundant, pliant, and affordable labor; lackluster regulations, especially for toxic industries. Got paint residue? Dump it down a river.

China is now coming closer in line with World Trade Organizations standards on matters related to labor rights and the environment, among other things, making China more expensive, and even more green. Which is one of the reasons why Chinese owned factories have been moving to Vietnam, to Bangladesh, especially the stitch-and-sew factories. But Vietnam is not built for exports like China. They don’t have the labor force. They definitely don’t have the logistics. China is still much better.

But as China-led globalization changes, and it will change, some countries will be winners, and others will be left behind to fend for themselves.

BNP Paribas recently built an index of 'resilience' to deglobalization, a trend that Davos Men like George Soros see coming down the pike post-pandemic. The index provides estimates for each country across three factors: their macro legacy into the crisis, current global linkages and the strength of domestic institutions. For BNP, South Korea and Israel are in good shape. Argentina and Egypt are not.

China is focusing inward and has a big enough market to weather the storm, but other large economies such as Brazil and Russia don’t have it. Smaller, commodity-exporting economies like Chile look like they are about to be flatlined.

“Nothing here is destiny,” says Marcelo Carvalho, head of emerging markets research for BNP Paribas. “Ultimately, how each country deals with the situation will matter most.”

Goodbye Globalization, Hello Localization

That’s what BNP Paribas calls it in a subhead in a 7-page report on what countries they think will benefit most from the shift away from a China-dominant globalization model.

Here’s an immediate example of localism — a term often used by statistics and political risk man Nassim Taleb, also an advisor at Universa Investments. The U.S. is using the pandemic as a way to force pharmaceutical companies to make a lot of its strategic drugs here in the U.S. Manufacturing plants will be built. Jobs will be created. Those were once jobs held in China: a reversal of fortunes, if you will.

Countries with diverse economies, abundant labor, diverse trade partners, strong institutions, and fairly strong economic fundamentals should be fine. Argentina, Ukraine, for example, are likely to be left behind.

Since the global financial crisis of 2008, trade was already stagnating as a share of the world GDP, in what some have called 'post-peak' globalization. With a global pandemic disrupting supply chains and leading to widespread border closures, Carvalho from BNP suspects that the coming years will pull down the share of trade in the global economy.

Trade deepening has been associated with faster per capita real GDP growth since WWII. Though correlation is not causation, and causality itself may run both ways, the empirical association looks intriguing — more trade equals more money.

Countries that will struggle as trade rejiggers tend to be poor and have high tax burdens that leave companies with less room for financing. That looks like Brazil, for instance, where the corporate tax rate is around 34%.

Some countries start out in the post-China globalized economy in better fiscal shape, too. South Korea, Philippines, and Thailand have posted primary surpluses on average in recent years and also have relatively limited expenditure and low taxes.

Peru, Chile and Russia have posted fiscal deficits, but still have relatively low debt levels and a relatively contained tax burden. Russia has also benefited from the sizable cash reserves of its state-owned companies thanks to its role as a dominant supply of the world’s most important commodities — oil and gas.

In post-China globalization, Davos Man is sad.

“Relatively closed economies with large domestic markets may hope their recovery proves less sensitive to shrinking world trade,” writes Carvalho and his colleague Luiz Peixoto, an emerging markets economist with BNP Paribas in London. “India and Brazil seem less exposed given their relatively closed economies,” they say.BNP Paribas thinks closed economies (read: China) might do okay.

Countries that are heavily integrated in global supply chains could suffer from deglobalization, but the net impact may not be so simple to calculate.

In some cases, countries that could use a boost from trade could benefit as corporations diversify suppliers within other emerging markets.

For example, nearshoring by corporations large and small in advanced economies could benefit their closest developing country allies. Think Hungary, the Czech Republic and Poland as a manufacturing hub for eurozone countries looking to move supply out of China.

Mexico will benefit if U.S. companies opt for suppliers closer to home and away from Asia. “It’s already happening. You can see it in the trade flow,” says Lori Ann LaRocco, a senior editor for guests at CNBC and author of “Trade War: Containers Don’t Lie.”

Chinese partners in Southeast Asia could also gain from China’s shifting global allegiances — perhaps less U.S., more Europe. Or less Australia, more Russia.

Whatever the direction, the wind is no longer blowing the same way. The East is rising, yes. But China’s one way street is now riddled with potholes; potholes that will not be easily paved over barring a total caving in Washington and Brussels to China’s style of state-centered, managerial capitalism.

Is that really plausible?

“There is no way we get a return to status quo after this crisis is over,” says Jamie Metzl, a senior fellow at The Atlantic Council in Washington. “The U.S. and China are connected to each other because we both play very important roles in the world economy and will maintain a significant commercial relationship for a long time,” he says. “But the nature of that relationship will be fundamental changed. It will never go back to what it was. It’s too early to tell how this will play out.”

Comments

  • The problem with localization is more expensive goods and services.  But this is the problem with relying on a communist govt.   Communism is always wrong. 
  • hellraiser2.hellraiser2. PEx Veteran ⭐⭐

    Coronavirus speeds up American suppliers' exodus from China


    The COVID-19 pandemic is giving fresh energy to corporate plans to move supply chains out of China, according to a new survey.

    Seventy-six percent of finance chiefs whose companies have manufacturing in China indicated in a survey by Swiss lender UBS that the pandemic has reinforced their company’s goal of moving at least some of that production elsewhere. Thirty-four percent of the more than 450 executives surveyed represent companies with manufacturing in China.

    U.S.-based firms weren’t the only ones looking to move: 85 percent of North Asian firms and 60 percent of Chinese manufacturers also said they were planning to move at least some production from the mainland, where COVID-19 was first identified late last year.

    Together, the three surveys found up to 30 percent, or $750 billion, of China’s $2.5 trillion of exports might be relocated.

    “There could be a sizable rebalance as China's share of world exports has jumped 10 percentage points since the early 2000s to about 14 percent, much higher than the U.S., Germany and Japan,” wrote UBS’ global macro strategy team, led by Keith Parker.

    The COVID-19 pandemic, which originated in Wuhan, China, and has infected more than 8 million people worldwide, ravaged supply chains as companies were forced to temporarily shutter operations amid stay-at-home orders aimed at slowing the virus’ spread.

    The outbreak has led to increased scrutiny of America’s reliance on China for not only key medical supplies but production capacity in general. China is the world’s largest producer of personal protective equipment, including masks and test kits, and also manufactures electronics, apparel, electrical equipment and many other products.

    Of the firms surveyed, 92 percent of healthcare companies and 89 percent of consumer staple firms have already moved capacity out of China or are planning to do so. Technology (80 percent) and consumer discretionary (76 percent) producers were also more likely to leave than industrials (69 percent) and materials (57 percent) manufacturers.

    Meanwhile, eighty-two percent of U.S. firms surveyed said they were looking to bring production home while also considering Canada (38 percent), Japan (29 percent) and Mexico (23 percent).

    Japan, which was the most preferred destination for North Asian and Chinese companies, would be the biggest beneficiary from a supply-chain exodus, followed by Vietnam and the U.S., according to UBS.

    The push to bring supply chains home, long a priority for President Trump, has gained momentum in Washington amid escalating tensions between Washington and Beijing.

    White House economic advisor Larry Kudlow told FOX Business’ Stuart Varney last month that the Trump administration would be willing to foot the bill for companies that bring their supply chains back to America.

    “We welcome any American companies in Hong Kong or China mainland. We will do what we can for full expensing and pay the cost of moving if they return their supply chains and their production to the United States," he said.

    The 2017 Tax Cuts and Jobs Act, backed by the Trump administration, provided another incentive, allowing U.S. companies to bring assets home after paying a one-time levy of just 15.5 percent on cash and 8 percent on everything else.

    The pandemic “revealed to everybody the limits to our digital superiority and our software and all the things that we've innovated in technology,” Sen. Marco Rubio, R-Fla., told FOX Business' Maria Bartiromo in April.

    “You still have to be able to make things,” he added. “You still have to have industry and industrial capacity as a country. And we've given a lot of it away.”

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