From the beginning of the Russia-Ukraine war, and with the latest omicron outbreak in Shanghai, many companies, both foreign-invested and locally owned, as well as investors have been asking the same question — how will the trade and business relationships between China and the West change in the future, and how will these changes affect them? We explore some possibilities here today.
As we all know, the world at large is experiencing mega changes and uncertainties. China, being one of the world's largest trading nations and one of the largest markets for many industries and products, besides being a major hub for global supply chains, also cannot escape from its implications.
Since the beginning of the U.S.-China trade war, the trade and business relationships between China and the U.S. have undergone fundamental changes. Basically this has started the beginning of the end of the globalization process that began in the 1990s. However, unlike the cold war between the U.S. and the former Soviet Union, China and the West have become highly integrated in many aspects after more than 30 years of globalization. One may even say that China and the West have become mutually blended so much that it may be impossible for one to completely separate from the other.
Despite this high degree of integration, some are calling for "decoupling" – a total separation of two systems, one led by the U.S./West and another in which China will play a major role. These people have called for separation of supply chains, technologies, telecommunications networks and even separation of the Internet into two.
Notwithstanding these calls, China's foreign trade volume continues to increase. Before the omicron outbreak in Shanghai, China's total volume of imports and exports had reached 39.1 trillion yuan ($5.7 billion) in 2021, a year-on-year increase of 21.4%. Additionally, China's inward foreign direct investment (FDI) has also broken all records and reached $173.5 billion in 2021, surpassing the U.S. China has now become the world's largest recipient of foreign capital.
Some may say that this is because of China’s resilience. I will start by analyzing what factors will pull China and the West apart, and what will continue to push them together, or at least will not allow the relationship to worsen.
In terms of negative factors, geopolitics certainly plays an important role, and the reason is obvious. The Russia-Ukraine war has stoked the West’s suspicions of countries that are not within their group of allies. Sanctions imposed by the West on Russia have inevitably impacted China too, both directly and indirectly.
Ever since the outbreak of the pandemic, global supply chains, especially the China-centric ones, have been severely disrupted. This has in turn affected supplies of many raw materials and products. For some industries, some degree of “decoupling” has already taken place due to geopolitics, one example being the supply chain for advanced semiconductor chips. Another example is the automotive industry, where the Chinese and the American governments’ ways of digital infrastructure investments have diverged since several years ago, and the divergence is widening. How the vehicles will interact with the surroundings as they move around will drive the designs of the vehicles. As such, the patterns of development and innovation for intelligent, connected and ultimately autonomous driving for vehicles in the two countries have many commonalities, but their respective paths will diverge according to their specific contexts.
According to the AmCham China Flash Survey on Covid-19 Business Impact in May, 56% of respondents reported negative impacts on their businesses due to supply chain disruptions. 68% said they have partially restarted operations recently, while 50% still think supply chain disruptions remain the top challenge.
On the positive side, China is the world leader in many industries and products. Many foreign-invested companies are doing well in China, and some very well. Additionally, China is the hub for global supply chains for many industries, especially those that heavily rely on extensive supplier clusters and efficient human resource allocations. Moreover, China is a leader in innovations in various fields such as digital economy, “new energy,” intelligent manufacturing, artificial intelligence, and 5G, with strong motivation and gradually integrating ecosystems. Increasingly more multinational companies have come to the realization that they have to be in China to learn and absorb the core of innovations here and apply them in and outside of China. In some areas, China is evolving from being a follower of standards to one setting new standards.
At a more macro level, before the major changes caused by international geopolitics, most people had fully accepted the concept of globalization and believed in its benefits. With technology being the main driver, people are looking forward to a more connected world, with more frequent people-to-people interactions building a “network that will do good for humanity.”
However, such a vision may not materialize in the short term, given today's situation. In practice, we can expect three possible scenarios for China and the West (especially the U.S.) in the near future:
I will call the first scenario “One World, Two Systems.” The world will evolve into two blocs, one led by the U.S. and the other where China shall continue to play a critical role. These two different and distinct systems would truncate global trade and investments, supply chains, and movement of talents. Under this scenario, multiple separate cross-border financial payment systems will emerge.
At the other extreme, we may enter a new era of “Globalization 2.0” wherein China will continue to be the main supply source of products for the West, and will also become a key source of demand, forming a “dual circulation” of domestic economy and international trade. Regional trade blocs such as RCEP will strengthen China's trade and supply chain positions. While SWIFT may remain the key payment system in the world, China's CIPS too will become increasingly more influential.
Between these two extremes, there could be a scenario of “Entangled Relationships.” While some decoupling would happen in some cases, recoupling and some new couplings could take place, depending on specific situations. China’s role as a hub for global supply chains will by and large stay. However, some degree of “reshoring” of supply chains to the West/U.S., some new manufacturing capacities getting built in the West/U.S., and some “regionalization” and “localization” of supply chins will happen. Production of certain categories of products may also be shifted to new locations like Vietnam, but that is unlikely to replace China in a wholesale manner, especially for sophisticated and cluster-based manufacturing. While SWIFT remains a key payment system, other systems will also emerge.
These scenarios will pan out differently in different industries. In some highly-sensitive industries, such as tech, some degree of decoupling is certainly possible. On the contrary, industries such as consumer goods, retail and food are most likely to see "Globalization 2.0". And for many other industries, "Entangled Relationships" is the most likely scenario, at least in the immediate term. And even within a certain industry, the way the scenarios may unfold would depend on what segments or even sub-segments we are talking about.
How will these scenarios evolve over time? I have had a number of conversations with foreign-invested and Chinese company executives, think tanks and research institutes on this. It is clear that people's opinions vary, and by definition, they all consider their own positions to be correct.
Personally speaking, I believe, by and large, the “Entangled Relationships” scenario will become a mainstream situation going forward, at least for a little while. Beyond that, what will happen is anyone’s guess. And, the manner of its evolution will depend on industry and specific segment, so it won’t be a smooth process. My personal view is that over time, China (including RCEP) and the West will gradually shift towards the "Globalization 2.0" scenario, but it will take some time to sort things out. The timing and manner of this scenario materializing will also depend on if and when some "defining moments" occur.
In any case, business executives and strategists need to analyze the potential upside, and understand the risks prudently, amid the many changes and uncertainty we are witnessing. China’s fundamentals remain strong but the country is not immune from external and internal shocks. Based on what I can see, the Chinese leadership is committed to more of opening up and reform in the course of addressing the current challenges. The government will issue new policies and measures to ensure the vibrancy of its economy can be sustained. Making rational and objective judgments about the future is the most basic input for formulating strategies going forward.
Edward Tse is founder and CEO, Gao Feng Advisory Company, a strategy and management consulting firm with roots in China.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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