The World Needs China More than China Needs the World

As the West continues its efforts to decrease dependence on China, the state of the global economy in wake of the COVID-19 outbreak shows just how far we are from achieving this

President Trump might have done a quiet victory lap after getting China to agree upon the ‘phase one’ trade deal, ensuing months of trade war, but economists point out that at the end of it, Uncle Sam might actually have emerged weaker of the two nations. After all, we are talking about China, a country whose ruthless ways might not be acceptable to all, but has seen it register a mind-boggling double-digit GDP growth for close to three decades! A feat that is highly unlikely to be bested by any other country or for that matter, even China, in the foreseeable future. In the recent past, the wheels of economic growth may have slowed down a tad, but have continued to move in China’s direction. The unprecedented scale of the COVID-19 pandemic though, has crippled this powerhouse, and with it, virtually bringing the entire global economy to a standstill. As the world grapples to contain the spread of this deadly virus at its epicenter, its widespread global impact goes on to show just why any plans to ostracize China from global trade are improbable, if not impossible. 

What makes China the World’s Factory

Even the greatest detractors of the communist country would concede that economies of scale offered by the country simply cannot be matched by any other nation. India, touted to be the biggest threat to China, may have secured the 63rd position in the recent Global Ease of Doing Business Index, but it simply lacks the political will, vision, and ruthlessness of its communist neighbour. A relatively poor transportation infrastructure further hampers the emergence of the country as a true competitor to China. India and most of the world lacks the abundance of raw materials for most products, something that China is blessed with. Even Vietnam, which made major gains from the trade embargo on China, is far from ideal for investors, as it lacks supportive transportation and industrial infrastructure to handle massive volumes. China has very organized manufacturing clusters that function as a scaled-up assembly line, with each cluster tending to a specific function related to manufacturing of a larger product. This is one of the biggest factors that exponentially drives down production costs. Local Chinese players greatly benefit from catering not just to unceasing global demand, but to domestic businesses as well. In fact, global players have been eyeing investments in the country to get a piece of this highly lucrative domestic market. The government’s recent policy changes aimed at transforming the country from a manufacturing-led economy to a service-led one, clearly puts things into perspective for the world. This is an especially crucial change for the country to ensure self dependence, incessant efforts by the West to decrease dependence on Chinese imports. While labor costs are now increasing in China, they still are significantly low as compared to the rest of the world. Highly attractive tax rebates and zero VAT on certain products for exports, pre-built industrial infrastructure at low rates, and little to no regulations are what make the country the undisputed factory of the world. Its flourishing economy has made it a hotspot for domestic players such as Huawei, a key reason why the company has been able to sustain and flourish, despite U.S. trade sanctions. So, though theoretically there are various other countries that can collectively handle manufacturing volume, manufacturing competitiveness of China is unmatched. As hard as this may seem to come to terms with, the fact remains that the world needs China, more than it needs the world. 

China’s Influence on Global Trade

China is the second-largest economy in the world, pegged at a GDP of US$ 13.6 trillion. Around 230 Fortune 500 companies have a major presence in the country, with 119 of these being Chinese players. As per statistics provided by Future Market Insights, a premiere market intelligence solutions provider, export of goods and services accounted for nearly 20%, while imports accounted for around 19% of China’s GDP in 2018. The country is the largest trader, accounting for well over 12% of global trade. The U.S. and China may have their occasional lover’s tiff, but the former accounts for 19% of all exports from the latter. 

Data provided by the Observatory of Economic Complexity identifies the country’s major exports as broadcasting equipment (US$ 231 Bn), computers (US$ 146 B), office machine parts (US$ 90.8 Bn), integrated circuits (US$ 80.1 Bn), and telephones (US$ 62 Bn). China, arguably, forms the single most important part of the global supply chain, with well over 50% of all components or raw materials used across industries worldwide. It also is the single largest producer of rare earth minerals, with an astounding 120,000 MT mined in 2018. The country’s key export destinations are U.S. (US$ 476 Bn), Hong Kong (US$ 255 Bn), Japan (US$ 157 Bn), Germany (US$ 109 Bn), and South Korea (US$ 98.1 Bn).

Global Production of Rare Earth Minerals and Other Raw Materials, 2018

Apart from being the largest exporter, the country also is the second-largest importer of goods. China’s key imports include Integrated Circuits (US$ 207 Bn), Crude Petroleum (US$ 144 Bn), Iron Ore (US$ 59 Bn), Cars (US$ 46.8 Bn), and Gold (US$ 40.3 Bn). China’s imports are mainly from South Korea (US$ 204.57 Bn), Japan (US$ 180.4 Bn), U.S. (US$ 156 Bn), and Germany (US$ 102.26 Bn). It is the world’s largest consumer market, with retail sales estimated at US$ 5.6 trillion in 2018. 

Spillover of China’s Coronavirus Crisis on Global Trade

The COVID-19 pandemic has created a global health crisis of unprecedented scale and severity, with over 4,300 related deaths reported from across the globe. As the death toll rises, Chinese authorities have clamped down Wuhan and neighbouring cities to prevent further spread of the deadly virus. While direct and conspicuous effect of the pandemic may be largely restricted to the Chinese mainland and small pockets across the globe, the indirect effect on global trade from shutting down of major manufacturing units in the country is just as ominous. Wuhan is a key industrial zone, especially for the automotive sector. Needless to say then, temporary shutdown of businesses and industrial activities in the city will certainly dent economic output. Most major global manufacturers have suspended operations in the country in wake of the pandemic. Flights and cargo ships bound to and from China have trickled down to just a handful, mainly bringing in essential supplies and ferrying global healthcare experts to monitor the situation. The country is in a virtual state of lockdown.  Most countries received shipments in advance from China back in December, in anticipation of the long holiday season to celebrate the Chinese new year. Come April though, if the situation in China persists, every fathomable sector, right from healthcare to aerospace, will feel the pinch from low to no supply of raw materials and finished goods. 

Automotive 

China is the world’s largest automotive manufacturer, accounting for over 30% of all vehicles produced. That’s more than the combined production in Japan and the U.S. Major car makers such as Daimler, Tesla, and Ford, among others, have shut down their facilities in the country, and uncertainty looms over when these would resume operations. Some of the world’s largest car manufacturing facilities in Japan and South Korea have been forced to suspend operations due to lack of automotive parts from China. 

Healthcare 

An estimated 97% of all antibiotics in the U.S. are imported from China. The country is the largest exporter of raw materials for vitamins and antibiotics. As per FDA estimates, around 13% of the world’s API production facilities are in China, though the volume of active pharmaceutical ingredients coming in from the country is disproportionately high. China is also among the largest manufacturers of medical and therapeutic devices.The country is among the world’s largest producers of penicillin and vitamin-C. The shutdown of production facilities in China have led to healthcare bodies across the globe scrambling to secure their reserves of antibiotics and vitamins, mainly sourced from the Asian giant.

ICT 

China is the world’s largest hub for smartphones and other electronics manufacturing. Global smartphone production has slumped by 12%, as the country currently battling with the COVID-19 crisis accounts for 70% of global smartphone production. Several key components used in OLED and LCD modules are also mainly produced in the country. The shutdown of all production facilities in China has resulted in nearly 20% reduction in total capacity utilization for LCD fabs. With the WHO declaring COVID-19 a pandemic, GSMA cancelled the Mobile World Congress, the world’s biggest mobile trade show that was scheduled for the last week of February. Even E3, the world's largest gaming event, was cancelled due to the outbreak. Apple's much awaited annual showcase too will now be moved online, without much fanfare.

Chemicals 

China accounts for the largest share of global exports of chemicals, valued at US$ 80 Bn. It is the largest producer of sulphuric acid, one of the most widely used chemicals. The world is largely dependent on China for sulphur and ammonia as well. The chemicals industry in the country has a high level of automation, which would soften the impact of the pandemic to a certain extent, though there are bound to be delays. The most likely scenario may not be as grim, with drop in demand leading to decline in prices. The chemicals industry in India though, which is highly reliant on China for raw materials, may take a hit in the immediate future.

Other Industries

China is the world’s largest producer of fruits and vegetables, though most of it is mainly for domestic consumption. It is the world’s largest producer of wheat, rice, and potato. The country is at the center of cotton production, and is the proverbial capital of the global textile industry. The world is largely dependent on China for supply of fertilizers and pesticides. Disruptions in the supply chain would have a detrimental effect on associated industries, resulting in delays and increase in prices of end products. Various sports events such as Premier League and EFL have been deferred till April, London Marathon has been moved to October, while uncertainty looms over Tokyo Olympics originally scheduled for July 2020, in wave of the the deadly disease spreading like wildfire the world over.

In China, inflation rate has soared to an 8-year high, with food prices in the country skyrocketing by over 20%. While domestic and global markets would make a recovery in time, once the threat dies down, shutting down of the world’s factory for this brief period will have a cascading effect on every other sector across the world. With China accounting for 17% of global GDP, Goldman Sachs projects a decline of up to 0.3% in global economic growth in 2020, as a direct result of the pandemic. Uncertainty may exist over how and when the world emerges from the threat of this deadly virus, but there’s no uncertainty about how the world continues to depend on China for pretty much everything, in ways big and small. Extreme measures taken up by the Asian giant have paid off in curbing the impact of COVID-19, so much so that it may well be a case where the country imposes restrictions on visitors from other countries in the near future. So, while China tries to limp back to normal, it's the world at large that would perhaps need much longer to come to grips with not just the severity of the pandemic, but the economic implications of a slowdown in the world's factory.