China in a Possible Global Supply Chain Complexity Reduction Scenario

Regardless of how you feel with respect to the medical dimension of the coronavirus or, more specifically, covid-19 situation, there is no denying that it has unleashed consequences that are impossible to ignore when it comes to the economic dimension.

In light of the fact that the ChinaFund.com team does not consist of epidemiologists or even medical specialists, it would be pointless to share our opinion with respect to medical elements/topics. As such, we simply… well, won’t. What we do specialize in, however, is the economic sphere and it is worth noting that “paradigm shifts” in terms of trade-related thinking are anything but out of the question at this stage in the game.

One such paradigm shift pertains to the possibility of worldwide leaders embracing a trade model which revolves around less complex global supply chains, for reasons such as:

1. The fact that in scenarios that bring about an urgent worldwide need for certain products (protection masks, for example), weaknesses become apparent. For example, the overwhelming majority of masks that are sold in the United States represent imports from China and even if the (sub-par) manufacturing facilities of the US were set in motion, the required materials would still need to be imported. As such, what happens if there is a proverbial run not on banks but on masks? Simple, the nations capable of producing them en masse prioritize drastically, with the needs of their citizens coming first. The same principle is valid when it comes to let’s say Switzerland needing to import German masks en masse, yet Germany deciding not to allow the shipments in question to go through in the context of (highly) increased domestic demand
2. The fact that even well before virus-related fears, voters placed a great deal of pressure on politicians to bring as much of the supply chain back home as possible. As such, there are significant political incentives associated with bringing back at the very least production of goods that are considered essential… perhaps (much) more
3. The fact that even in the absence of game-changers such as the coronavirus/covid-19 one and even in the absence of political incentives, the current trade tensions which exist worldwide (with the China – United States one representing a textbook example to that effect) may very well end up being conducive to, once again, a global supply chain complexity reduction scenario

The list could continue for quite a while but the bottom line is this: there are multiple powerful forces at play which “encourage” significant complexity reduction when it comes to the global supply chain. Does this mean that the days of buying components from Country A, B and C, then assembling in Country D and finally selling in Country E will be gone?

No.

It simply means there are strong forced at play which might push society in this direction. On the other end of the spectrum, however, we need to understand that there are also powerful forces at play which revolve around status quo preservation.

Why?

Primarily because the current supply chain status quo didn’t just magically appear out of thin air for no apparent reason. On the contrary, we have it due to the fact that despite its shortcomings, it represents or better stated represented an acceptable compromise for pretty much all stakeholders involved or, to put it differently:

1. Components are bought from Country A, B and C because they are better positioned to create them than other nations
2. The manufacturing process has been outsourced to Country D because it can get the job done more effectively than everyone else
3. As a result of this equation, Country E can focus on selling products (or, empirically speaking, especially services) that it is better at than other players, oftentimes high value-added products/services which tend to bring about superior economic growth compared to scenarios that revolve around selling resources, selling simple components, simple manufacturing and so on

The idea some opinion formers tend to push that this entire globalization-oriented system was somehow a “scam” right from the beginning (one aimed at transferring wealth from the proverbial West to other countries) is nothing short of ludicrous. For all the right reasons, globalization makes sense in a “rising tide lifts all boats” framework.

Does it have its limitations?

Of course.

Have there been let’s say “spoiled children” of globalization (countries that have benefited more from globalization than other players)?

Once again, of course.

Is China one of them?

Yes, as explained in detail through a dedicated article which can be accessed by clicking HERE.

But this doesn’t mean today’s status quo was the result of some kind of a grand conspiracy. Instead, it was simply a matter of seeing things in a complex “win-win” manner, with developed nations focusing on higher value-added products/services, under-developed nations being able to escape poverty and civil unrest which might have led to global consequences and so on.

Would China stand to lose if the status quo is meaningfully altered?

Most definitely.

At the end of the day, fair or unfair, those who are exposed to Chinese assets or are interested in gaining exposure to them need to understand that scenarios involving large-scale supply chain complexity reduction need to be taken seriously. Such scenarios will, without a doubt, impact your portfolio in a more than observable manner and for this reason alone if nothing else, it makes sense to keep your proverbial ear to the ground as far as this topic is concerned.

Right now, we are still in the “murmurs” stage and meaningful action has not yet been taken, not even on the legislative front. It remains to be seen if this discussion topic is simply a short-term one which emerged as a result of worldwide panic and will die off just as quickly as it appeared or if there is status quo-altering substance behind it. As always, the ChinaFund.com team will monitor these developments carefully and share its findings both publicly through the articles we publish and especially privately, with clients who choose to take advantage of our consulting services.