China’s larger role in export of intermediate goods makes coronavirus an even bigger risk to global value chain

• One of the big uncertainties regarding the coronavirus is how China’s efforts to contain it by closing factories will impact supply chains regionally and globally. This note points to China’s much larger relevance in the global value chain, especially as concerns exports of intermediate goods. When SARS hit in 2003, China manufacturing export share was only 8% and by 2018 it was 19%. By moving up the ladder, China’s has become a much more important player in exporting intermediate goods than before, which means that any disruption in China’s production capacity could affect the rest of the world more severely than in the past.
•  In our transformation of the supply chain series, we show that the world has become more dependent to China via higher imports of intermediates for exports. Meanwhile, China has managed to reduce her intermediate imports from the rest of the world, and in the process vertically integrate the supply chain except for key essentials such as commodities and high-tech goods. The dependence on China for key regions of the world, in terms of their imports of intermediate goods from China, has only increased. This is certainly the case of United States, Europe and Singapore and Vietnam. Even for North Asian economies in Asia that have reduced their bilateral trade relation with China in terms of exports and imports of intermediate goods, the exposure remains large. Beyond trade of intermediate goods, these economies have long kept factories in China in the form of FDI, even if these three economies have tried to reduce their FDI in China in favor of South East Asian economies. All in all, the longer China remains (partially) locked, the larger the negative impact on the rest of the world through their imports of Chinese intermediate goods and/or their onshore presence through FDI.
• To gauge the spillover, we estimate the impact of the closure of 20% Chinese manufacturing capacity on the GDP growth of major Asian economies. The largest negative impact is by far Vietnam. The smaller GDP impact is for Japan, partially explained by its already low growth rate. The cost for North Asia would be higher if we accounted the direct hit by disruption of production in mainland China and the indirect impact of their FDI in South East Asian economies, especially Vietnam. Digging deeper into sectors, we find the electronic, automobile, machinery and textile sectors most negatively impacted due to the size of the sectors also the high dependency on Chinese inputs.
• While the hit on GDP growth may be smaller for North Asia versus Vietnam’s, the actual economic value of the supply chain disruption is most profound for Japan, South Korea and Taiwan due to their larger size and more integrated supply chain in both mainland China and Southeast Asia as well as sectoral dependency on Chinese inputs.

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