This article was originally written by "Suning Financial Research Institute" in WeChat official account. The author is Tao Jin, Assistant Director of Macroeconomic Research Center of Suning Financial Research Institute. The first picture is from Yitu. com.
Recently, official website, the US Department of Commerce, issued a statement saying that the special relevant treatment for Hong Kong has been cancelled, including the suspension of export license exemption, and the differential treatment is being evaluated, while the export policy of related technologies to Hong Kong is being adjusted. These changes mean that the United States began to restrict its exports to Hong Kong.
Under the background of the COVID-19 epidemic, the actions of the US Department of Commerce are quite damaging to the global industrial chain system. The epidemic is wrapped in trade protectionism and continues to impact the global industrial chain system, and the risk of industrial chain interruption is accumulating.
Compared with the global economic recession is affected by short-term external events, the impact of the industrial chain is more worrying, because the destruction of the global industrial chain system is more like a long-term and more difficult to recover.
The industrial chain system has been destroyed, and the epidemic situation is only a fuse, but this fuse may evolve into a major blow to the globalization process. Today, globalization has a history of 600 years. Will it end because of this epidemic?
A brief history of globalization
Globalization originated from the great geographical discovery. During the 600 years from the 15th century to the present, globalization has been affected and hindered in various ways, but the overall trend is deepening.
1. Great geographical discovery
From the 15th century to the 17th century, European fleets appeared in the oceans all over the world, looking for new trade routes and trading partners to develop Europe’s nascent capitalism.
Sailors led by Columbus and da Gama have opened up many new sea routes, and also created the "era of great navigation", which is also called "geographical discovery" in history.
After the era of great navigation, colonialism and free trade began to appear, and globalization experienced intermittent development, reaching its peak in the 1910s, but then came World War I, when the process of globalization was paused, and then fascism appeared, which led to World War II.
2. Globalization after World War II
After World War II, many international organizations, such as GATT, have greatly reduced the barriers to international trade, especially the World Trade Organization, which evolved from GATT in 1995, has obviously accelerated the process of free trade and globalization in the past 30 years.
After stagflation and local wars in 1980s, globalization began to exert its strength in 1990s and continued until the global financial crisis in 2008. During this period, the proportion of global trade in the global economy increased from less than 15% to nearly 26%.
In 2008, the global financial crisis had a direct impact on global trade, which made countries start to consider the chain reaction of risk events brought by global contact again. However, this impact was not fatal to globalization, and trade remained large in the following years.
In addition to trade in goods and services, international capital flows are also a major manifestation of globalization. The core member and leader of the WTO is the United States. In fact, the United States has indeed exported dollars and economic hegemony through globalization, and gained a lot of benefits. In particular, American multinational companies have made use of low-cost production factors to produce and sell nearby all over the world and made a lot of profits.
Similar to international trade, the scale of foreign direct investment in countries around the world has been increasing since the 1990s. Despite the impact of events such as the bursting of the Internet bubble, the September 11th incident and the global financial crisis, the general trend of increasing capital flows has not changed.
3. Globalization and China’s Reform and Opening-up.
The accelerated globalization in recent decades has just matched the process of reform and opening up in China. China’s economic growth has experienced a rare high-speed growth in human history.
After the reform and opening up, China actively integrated into the global free trade system led by the United States, and continued to enhance its economic strength through the strategies of "export orientation" and "import substitution". At that time, the United States was busy with the cold war with the Soviet Union. After the disintegration of the Soviet Union, it was busy exporting political, military and economic hegemony, cleaning up the "backyard" of South America, fighting two Gulf wars and catching bin Laden everywhere, which made it "too busy to look east" and its attitude towards China’s integration into the global economy was open and welcome.
In the process of integrating into the free trade system, China’s trade scale has continued to grow, even reaching 4.62 trillion US dollars in 2018, surpassing the United States (4.28 trillion US dollars) to become the world’s largest trading country, which is quite a bit like "doing something for another". It should be said that China may be one of the countries that have benefited most from globalization in recent decades.
Epidemic situation impacts trade and industrial chain.
Under the epidemic, production activities in many places around the world stagnated, which directly hit trade. Since March, the increase in unemployment, the decrease in income and the suspension of production activities have caused the trade between the United States and the European Union to shrink significantly. Even Japan, which has done a good job in epidemic prevention and control, has experienced a relatively obvious decline.
In the case of global recession and trade contraction, although China’s current domestic demand accounts for a larger proportion, it can resist the greater impact of external demand, but it is still inevitably impacted in both demand and industrial chain. What is even more worrying is that the contraction of foreign trade has caused a large number of enterprises in the foreign trade field, especially small and medium-sized enterprises, to go bankrupt and potential unemployment.
From the historical data, the fluctuation of China’s export growth is highly consistent with the fluctuation of GDP growth. According to statistics, if the global economic growth rate drops by 1 percentage point, China’s export growth rate will drop by 6-8 percentage points. Such a large-scale contraction of export business will inevitably lead to the contraction and even bankruptcy of a large number of foreign trade enterprises.
Because China and the global industrial chain system have formed a criss-crossing deep connection, the blow to the industrial chain also involves a very wide range of industries in China. In a large number of industries (especially automobile industry and electronics industry), China is an exporter of other countries in some links, but in other links, China is an importer of other countries. The stagnation of one link may affect the normal production of the whole industry.
Here, give an example of my personal experience to illustrate:
Once, the author took Didi, talked with the driver’s master, and learned that he was a builder working in a nearby construction site. He used to use his spare time to start Didi, but after the epidemic came, the construction site stopped working and he began to start Didi full-time.
He said that the shutdown was not due to the fact that it was not allowed to resume work at home, but because a foreign key device manufacturer stopped working. Without this device, the construction process had to be suspended.
This subverts the author’s understanding of the degree of integration of the global industrial chain, because when it comes to international trade, it is often not associated with the construction industry, but even the construction industry is now deeply bound to the global industrial chain.
In addition, there are two factors that aggravate this influence:
First, in the process of globalization, China is more and more deeply involved in the transmission process of global value chain. China’s participation in global value chains has reached 62% in 2017. Therefore, all kinds of raw materials and energy are cut off due to the global epidemic, which has also brought a big impact to China’s industrial chain.
Second, China is downstream in the global value chain. The upstream degree of China in the global value chain is 1%, far lower than the 4% of open economies and 29% of the United States (in 2017). The interruption of import supply chain of upstream products, especially energy and raw materials, will have a great impact on some industries in China.
From the import data over the years, it can be found that the import scale of raw materials, energy and primary products in China shows an overall upward trend, and a large number of export products in China are manufactured goods. It can be seen that China’s trade field is highly dependent on foreign upstream products, and the risk of "grain shortage" in China’s industrial production caused by supply shortage is still relatively high.
Behind the impact of industrial chain: anti-globalization
The impact of industrial chain not only comes from external events such as epidemic situation, but also is the result of intensified anti-globalization in recent years.
1, the epidemic is the fuse.
In January and February, after China’s production activities stopped due to the epidemic, the European and American economies were greatly affected. The supply of intermediate products and materials needed for production activities in many countries was interrupted, and more seriously, the supply of final consumer goods was interrupted, which affected the basic consumption of residents.
In March and April, European and American countries urgently needed masks, protective clothing, ventilators and other anti-epidemic materials, but suddenly found that not only did they not have the production capacity of ventilators, but even the simplest masks could not be produced, and finally they had to rely on China for export, which not only led to an increase in prices, but also failed to guarantee the supply in time. At this time, European and American countries were alert: "You can’t put eggs in the basket of China".
2. Trade protectionism is on the rise
In recent years, in developed countries, due to their own reasons, such as the solidification of social class and the widening gap between the rich and the poor, most ordinary people have not enjoyed the benefits brought by globalization, and more benefits have been divided by large industrial groups and multinational companies.
In order to safeguard the interests of the people, leaders of many countries have opposed free trade and global industrial division of labor, which has led to the rise of populism and trade protectionism, and also the phenomenon of anti-globalization. The global epidemic will inevitably lead to more intensified internal contradictions and increased social instability in Europe and the United States. This will in turn stimulate populism and trade protectionism, further aggravating the degree of anti-globalization. China has gained great benefits from globalization after its accession to the WTO, and these benefits may be reduced by the above changes in the future.
How serious will the industrial chain impact be?
Generally speaking, there are three forms of industrial chain impact: manufacturing industry moves to emerging markets such as India and Southeast Asia; The manufacturing industry in developed countries has returned and the industrial chain has been localized; Western countries’ restrictions on China’s imports and exports in certain fields.
However, these three forms of shocks either have conditions that do not fully meet the reality, or have corresponding countermeasures. In the long run, China still has great opportunities and space to meet these challenges.
1. Manufacturing industry moves out.
Now it seems that the destination of manufacturing migration is nothing more than India, Vietnam and other markets. However, there are more or less three fatal problems in these markets: First, although the labor cost is low, the scale and quality of the labor force cannot be compared with China in the short term, the economies of scale are not obvious, and the production efficiency is not high; Second, poor infrastructure conditions, poor transportation, production equipment and other facilities, production quality can not be guaranteed; Third, the lack of producer services can not provide high-quality supporting services for the manufacturing industry. Therefore, in the short term, these countries cannot effectively undertake large-scale manufacturing.
2. The return of manufacturing industry in developed countries.
After the outbreak, Japan plans to allocate 243.5 billion yen from the economic stimulus plan to adjust its production line in China, of which 220 billion yen will be used to help Japanese enterprises move their production lines back to China.
Developed countries, such as the United States, have been calling on their manufacturing enterprises to move back, but the effect is not very satisfactory. Because this kind of relocation faces two problems: first, because foreign capital has been invested in China, the cost of relocation is very large. Of course, this "moving fee" enterprise is unwilling to bear, and even the government will feel great financial pressure; Second, the cost and benefit evaluation often does not support relocation. Under the huge relocation cost, the cost of local manpower and supporting services after relocation is obviously higher than that of China, and the products produced are sold to China, and there is an extra tariff out of thin air, which is not cost-effective.
In addition, for China, after the economy developed to a certain level, the proportion of service industry increased, while the proportion of manufacturing industry decreased, and the overall impact brought by the relocation of manufacturing industry was also discounted.
3. Western countries’ restrictions on China’s imports and exports in certain fields.
This may be the most intractable problem facing China in the short term, and the US Department of Commerce’s actions against Hong Kong fall into this category. However, China has a relatively complete industrial system, which can resist this risk to some extent.
In the United Nations industrial classification, all industries can be divided into 39 industrial categories, 191 medium categories and 525 subcategories. China has 39 industrial categories, 191 middle categories and 525 sub-categories, making it the only country in the world with all the industrial categories listed in the United Nations Industrial Classification, and all the industrial categories listed in the United Nations Industrial Classification can be found in China. Among more than 500 major industrial products announced by the United Nations, China ranks first in the world in terms of output of about 220 kinds.
Therefore, it is preliminarily judged that the impact of global supply chain interruption on China’s industrial production can be controlled in the field of foreign trade, and the risk of spreading to internal larger-scale manufacturing industry is still controllable.
How to deal with it?
Although in the long run, the impact of industrial chain can be effectively alleviated, but in the short term, China’s economy, especially China’s enterprises, still have to face the challenges of trade and industrial chain turmoil. In addition to the government’s hedging and rescue policies, China enterprises can adjust their business and development strategies in the face of increasingly harsh internal and external environment in order to tide over the difficulties through the following methods.
1. Streamline business and shrink the development front.
Faced with the shrinking demand and the interruption of supply chain, enterprises need to strictly control the business content, strengthen the management of the main business, and at the same time shrink the development front, so as to avoid more potential risks. If enterprises increase investment against the trend and implement diversified development, they may face operational risks in many fields. For example, failure in a specific market often leads to a chain reaction, which breaks through the cash flow of enterprises, resulting in damage to the main business.
Streamlining business, at the same time, also means "reducing expenditure", strictly controlling investment, eliminating redundant phenomena, and even involving appropriate downsizing and salary reduction, so as to retain more concentrated energy to develop major businesses and enhance core competitiveness.
2. Adjust the target market to meet the change of market direction.
In a worse external environment, a large number of foreign trade enterprises are facing the challenge of exporting to domestic sales. Fortunately, the domestic demand market in China is constantly expanding, and new market demands are constantly emerging. Enterprises need to seize these opportunities, find the right market direction on the basis of their own operating advantages, and actively cater to the future development trend of emerging industries, such as offline to online, and seize opportunities such as Internet and platform transformation.
3. Maintain cash flow and persist in survival.
China’s role as a safe haven for financial assets is more obvious. Under the logic of economic development, China’s economy and assets are more attractive than before, and foreign capital continues to flow into China. It is obviously less difficult for China to stabilize its economy than other countries. Once the economy stabilizes, it is still possible for China to upgrade its position in the global economy, and continue to maintain the first position in the global consumer market scale and economic activity. At that time, China enterprises will also have broad demand again.
This article was first published on WeChat WeChat official account: Suning Financial Research Institute. The content of the article belongs to the author’s personal opinion and does not represent Hexun.com’s position. Investors should operate accordingly, at their own risk.
(Editor: Dong Yunlong)
