Decoupling from China

21 September 2020

US-China relations are going through a tough time as the so-called ‘decoupling’ process enters a new phase, accompanied by the usual war of words. Rather than a straightforward trade war, we seem to be witnessing a tectonic geopolitical shift that will affect us all.

Washington is trying to lure back to the US (‘reshore’) companies that have outsourced production to mainland China. This can be seen either as President Trump’s genuine efforts to recover lost US jobs; or an attempt to slow an economic and military rival. It may even be a combination of both. Irrespective of the motives, companies which produce drill rigs, TBMs, chemicals and other supplies in China may be affected.

Japanese companies (for different reasons) are also looking to relocate and eventually it is quite possible that European companies will also look elsewhere.

However, while the US president seeks to accelerate the reshoring process, he is not the instigator: it had already begun a few years ago as China started morphing into a first-world power and the cost of its labour started to rise. Some companies have looked at setting up cheaper alternatives elsewhere, with Vietnam a number one attraction. India too could also be a winner in the scramble, especially given its generous tax breaks, growing expertise and impressive proliferation of metro projects nationally.

China naturally wants to maintain its presence on successful supply chains and so maintains that US companies are still welcome in the country. This is not as fanciful as it sounds as, even with tensions at an all-time high, trade between the two super powers remains relatively strong. Long may it continue.

But whether companies wish to remain in China is another thing. Some may have learnt to their cost that doing business with China is not what they expected, thereby fuelling their intentions to relocate. But when, or even if, they leave it is unlikely most will return home, despite a mooted US$25bn reshoring carrot which Washington hopes will lure them back. They will most likely relocate elsewhere in Asia Pacific.

Meanwhile Japan, as it seeks to decouple from China, has now established a reshoring stimulus package; some European nations could do the same.

If so, there could well be a global disruption in tunnel supply operations which will affect short-term production capacity.

But companies tend to gravitate to those destinations where labour rates are lower, especially if near growing markets. This is likely to continue until digitally-led automation and artificial intelligence have reached levels that enable significant reductions in production costs and so entice firms to return home.

But at present, that seems a long way off.