At the very beginning of the COVID-19 outbreak, before the name even became (in)famous and certainly well before the overwhelming majority of nations which are now battling the virus believed it would affect them, the equation in terms of the production of “essentials” (masks, protective equipment, etc.) seemed fairly straightforward: on the one hand, China was able to produce vast amounts of these essentials and on the other hand, there wasn’t all that much demand for them internationally, as country after country ignored the exponential growth risks associated with a COVID-19 outbreak.
As such, China’s decision of banning exports when it came to products such as masks was hardly criticized internationally due to a combination between insufficient demand to cause enough ruckus and… well, human nature, understanding that when a country is in dire straits as was the case with China, it makes sense to prioritize internal consumption.
Unfortunately, a supply chain disaster was looming in light of the fact that while China can produce enough masks to satisfy even ultra-increased internal demand in an epidemic situation (please note that the WHO hadn’t issued the pandemic alert at that point in time), the same cannot be said about pretty much any other country.
Simply because when it came to their supply chains for this particular merchandise, an important variable was… of course, China. Therefore, companies that sold vital equipment in other nations either imported said equipment from China altogether and even if some were capable of setting up production lines, they still relied on China for essential components. Needless to say, the companies in question ultimately found themselves unable to set things in motion in light of the fact that the supply chain equation was too complex as well as China-dependent.
“Fortunately” (for lack of a better term), China managed to bring its crisis under control by the time case growth in other nations became exponential and at that point, China found itself in a bit of a not just humanitarian but also economic predicament: should it continue banning exports so as to beef up its domestic reserves in the perspective of a second wave of infections or should it do the exact opposite and allow companies to ship to now-desperate foreign customers?
Why is this an economic predicament as well?
Simply because the role of an economist revolves around trying to think not one or two but multiple steps ahead. As the dust starts to settle in other nations as well (most likely in a less straightforward manner than in China, unfortunately, in light of the fact that few other countries can “get away with” imposing risk mitigation measures as strict as the Wuhan ones), pretty much all stakeholders will start thinking about what happened in 2020 with a clear head and especially about the lessons which need to be learned.
What does this have to do with China?
Well… everything, sing arguably the number one lesson will most likely be related to the fact that the proverbial West is excessively dependent on imports from China, at least when it comes to items relevant to national security. To put it differently, wealthy Western nations found themselves with record-breaking amounts of relief mitigation funds at their disposal but not enough supplies to spend the money in question on in light of the fact that there was a major bottleneck issue in China.
As such, a potential decision involving initiatives that have to do with moving away from China when it comes to at least essential products would be strategic more so than political… a matter of common sense, at the end of the day, especially after the harsh lessons 2020 has taught the world. Simply put, for strategic national security reasons, there would be tremendous (no Donald Trump pun intended) pressure on companies all over the world to switch to a more sustainable and especially scalable supply chain model, which:
- Relies more on domestic raw materials, even if they are more expensive
- Relies more on domestic manufacturing, even if it is more expensive
- Revolves to a greater degree on scalability, even if it is a more expensive route compared to the ultra-optimization many companies have engaged in to cut costs, an ultra-optimization model which even generated bottleneck issues in China
Needless to say, China finds itself in a very sensitive situation.
To minimize damage, it has no choice but to try and make it clear that even in extreme scenarios such as the 2020 one, China can manage to export enough in terms of volume to satisfy the ever-increasing international demand for medical supplies (in this particular case). With “try” being the operative word because as empirically proven, this endeavor became pretty much impossible.
As such, willing buyers (even at high prices) found themselves realizing that there were shortages for “the best of the best” in terms of equipment (FFP3 standard masks, for example, which were all but impossible to secure in bulk) and even when it came to more common ones (for example KN95 in China, which can be considered an equivalent to N95 and FFP2, although the medical dimension tends to involve a lot of nuances), there were oftentimes unacceptable bottleneck-generated delays involved. More specifically, medical systems from all around the world weren’t anywhere near prepared enough in terms of the very basics such as masks (more specifically respirators) and protective equipment, let us not even mention more advanced products of which there were shortages, most notably ventilators due to the nature of the disease brought about by this particular virus and theories pertaining to ventilator shortages (which, fortunately, did not pan out, at least thus far).
All in all, despite its best efforts, China found itself unable to scale properly and quickly enough in the context of an avalanche in terms of international demand and applying the precautionary principle at home, given the risk of a second wave of infections. To put it differently, China found itself fighting a battle it is impossible to “win” on all fronts logistically and it will take years for the long-term consequences for 2020’s realities/implications to become apparent. As always, the ChinaFund.com team will follow these developments closely and continue putting its expertise at the disposal of both readers and especially clients.