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A Positive Domino Effect
Economies must pull together to stabilize the global supply chain
By Zhang Shasha  ·  2020-04-10  ·   Source: NO.16 APRIL 16, 2020
A worker assembles children's bicycles in Shaoxing, Zhejiang Province, east China, on March 31. The company has shifted its market from Europe and the U.S. to the Middle East and South America, and its orders have increased compared to previous years (XINHUA)
As the novel coronavirus disease (COVID-19) spreads around the world, the global supply chain is undergoing severe disruption with far-reaching effects. For example, when Chinese manufacturers temporarily stopped making auto parts, it affected the automobile industries in Japan and the Republic of Korea (ROK).

Wang Xiaosong, a research fellow with the National Academy of Development and Strategy of Renmin University of China, calls it the domino effect. With globalization, if the production of an item involves multiple stages, they can be done in different countries by one or more companies. This is how a global supply chain is formed, creating more job opportunities and boosting income. "However, it also means countries no longer rise or fall alone," Wang told Beijing Review. "The global economy becomes like a game of dominoes, where a slight movement by one will affect the entire lot. China has integrated into the global value chain and is a hub of the Asian production chain. Therefore China's capacity gap amid the pandemic may have a ripple effect on the global production system."

Though the situation is now under control in China and people are returning to their work in an orderly manner, it is still hard for the industrial chain to run at full tilt, especially in the short term, since caution is still being exercised in resuming work and production to prevent a second outbreak.

New FAW Jiefang automobiles await shipping in Qingdao, Shandong Province in east China, on April 7 for delivery to domestic and overseas buyers (XINHUA)

A critical link

According to the World Bank, China's manufacturing added value accounted for 28.6 percent of the world's total in 2018. And it occupied 20 percent of the global trade of intermediate products, a report by the United Nations Conference on Trade and Development (UNCTAD) said on March 4.

However, China's Manufacturing Purchasing Managers' Index (PMI) fell to 37.5 in February, the lowest since 2004. PMI readings above 50 indicate expansion and below 50 mean contraction. The reduction in Chinese supplies caused global output to fall by $50 billion, according to UNCTAD.

"Besides being a big exporter, China also imports numerous intermediate products, such as hi-tech items from the U.S., auto parts from Germany, engines from France, optical instruments from Japan and semiconductor products from the ROK," Wang said. With the epidemic causing a short-term decline in domestic consumption, import of goods may be affected.

According to the Ministry of Commerce (MOFCOM), China's total imports and exports fell by 9.6 percent year on year in the first two months of 2020, with exports declining by 15.9 percent and imports by 2.4 percent.

In recent years, some transnational enterprises have taken measures to spread the risks to their supply chains from natural disasters, trade frictions and labor costs. The outbreak may accelerate the adjustment of the global supply chain and transnational enterprises may create new chains, Zhang Guohua, chief economist of the Shanghai Municipal Commission of Commerce, wrote in an article on March 31.

For instance, the ROK announced it would localize the production of key industrial components in response to Japan's measures to restrict the export of industrial products. The U.S. is monitoring about 20 drugs, whose core components are made in China, and trying to encourage investment in domestic suppliers to adjust the pharmaceutical supply chain. India is also trying to reduce its dependence on overseas raw materials by increasing domestic capacity.

"Chinese enterprises may face challenges as overseas clients and foreign-funded enterprises seek alternatives, but the Chinese economy enjoys strong resilience as it has the world's most complete industrial production chain and the fastest emergency response capacity to overcome risks," Wang said. The pandemic, he added, has provided opportunities for China to expedite upgrading its supply chain by extending the production chain and finding alternatives.

Some wish to take this opportunity to decouple their supply chains from China but it is not an easy task, being both complicated and costly and involving a string of factors including tax, labor, logistics and the investment environment.

"China's advantage now is not just a question of cost. It's a question of talent, creativity and innovation," Jean-Paul Agon, Chairman and CEO of L'Oreal Group, told Xinhua News Agency.

Overseas companies are showing their confidence in the Chinese market. U.S. coffee giant Starbucks on March 13 announced its plan to build a coffee innovation park in east China, its largest manufacturing investment outside the United States. Japanese automaker Toyota also plans to build a new electric vehicle plant in Tianjin near Beijing with its Chinese partner.

Solutions for all

During his recent inspection of COVID-19 control and work resumption in Zhejiang Province in east China, President Xi Jinping called for efforts to smooth global supply chains to ensure normal economic and trade activities.

Authorities at all levels in China are trying to address labor shortage, transport disruption, tight cash flows, and lack of raw materials as well as epidemic control supplies to maintain the safety and stability of the global industrial and supply chains.

Li Xingqian, head of the Department of Foreign Trade at MOFCOM, said on March 13 that foreign trade enterprises in Zhejiang, Jiangsu Province in the east and Shanghai have resumed their businesses in full swing and the contract fulfillment capacity in other regions is also improving. According to the National Development and Reform Commission, more than 90 percent of the China-Europe freight trains had been restarted as of March 8.

Wang said China should next promote resumption of work by export-oriented companies to lower the risk of the industrial chain shifting and effectively retain orders. In addition, to offset the impact of global supply chain disruptions, Chinese enterprises should seek alternatives for intermediate products, especially mechanical-electronic instruments and aerospace products.

Huawei, for example, is developing HarmonyOS, a new operating system for some of its devices, and HiSilicon, its semiconductor company, so that its supply chain remains protected, should other companies making chips refuse to do business with it following the U.S. Government putting it on a trade blacklist.

While COVID-19 has negatively impacted the global supply chain, Wang said it has also accelerated the latter's transformation into a more digitalized, intelligent and service-oriented structure.

Wei Jigang, a researcher with the Development Research Center of the State Council, emphasized the importance of digitalization in upgrading the global supply chain in an article on March 17. He said the countries participating in the Belt and Road Initiative should build a digital supply chain to optimize resource allocation and cut the cost of transactions.

Li Bo, executive head of Chunqiu Institute for Development and Strategic Studies, a think tank, told Beijing Review the digitalization of the Belt and Road will benefit the global supply chain from three perspectives.

First, cross-border digital payments will be convenient for both purchasers and suppliers as some countries lack dollar reserves. The central banks of the participating countries should be involved in the digitalization to deal with regulatory issues as digital currencies and the blockchain technologies to be used. Second, adopting a navigation system in logistics is important to strengthen purchasers' confidence and stabilize the supply chain. Third, with the development of 5G, global enterprises should innovate their communication. For example, samples can be delivered through digital drawings instead of delivering the actual objects, which will greatly enhance efficiency.

Wei also emphasized international cooperation, suggesting international organizations such as the United Nations and World Trade Organization build an emergency synergetic mechanism for the global supply chain. It's also important to safeguard free trade rules in the current situation.

At a Group of 20 virtual summit on COVID-19 on March 30, the leaders pledged in a joint statement to form a united front against the pandemic that is a common enemy and stay committed to a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment. That is the way for all the dominoes in the game to achieve a win-win result.

Copyedited by Sudeshna Sarkar

Comments to zhangshsh@bjreview.com

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