John W. Miller is Trade Data Monitor’s Chief Economic Analyst, in charge of writing TDM Insights, a newsletter analyzing key issues through trade statistics. John is an award-winning journalist who’s reported from 45 countries for the Wall Street Journal, Time Magazine, and NPR.
As the global economy struggles to return to normal, many corporate supply chains are not going back to where they were before the Covid-19 pandemic, according to an analysis by Trade Data Monitor, the world’s premier source of trade statistics.
The rise of risks associated with the disease, including supply disruptions and shutdowns at ports, following the spread of protectionist sentiment in the U.S. and Europe, has prompted many companies to diversify their manufacturing base throughout Asia’s factory floors.
The upshot: Covid-19 has accelerated existing trends in forcing supply chains to diversify.
At the same time, manufacturing economies around the world are evolving, changing relative wages, shipping costs, and production and export incentives.
Consider this, as an example of what’s changing: In August, Chinese shipments of textiles fell 14.8% year-on-year, off a relatively low base in 2020, to $12.5 billion, and exports of mobile phones declined 24.4% to $7.4 billion. However, sales of motor vehicles outside the country, a new growth industry for China, rose 189.8% year-on-year to $3.7 billion, according to TDM.
Companies appear to be hedging against the possibility of new U.S. import tariffs, spreading their Covid-19 risk, and fleeing China’s rising labor costs by moving production of some clothing and electronics to Vietnam, Bangladesh, and other Asian manufacturing nations. Companies are also concerned about shortages of semiconductors and other essential high-tech parts. And governments are worried that, in the case of another pandemic, hospitals won’t be able to access ventilators, masks, protective gowns, and other medical gear.
As the world’s top consumer and top import market by value, the U.S.’s purchasing decisions reflect supply chain diversification. In the first seven months of 2021, U.S. imports from Vietnam increased 38.1% to $56.1 billion, and shipments from India jumped 48.1% to $39.7 billion. By comparison, U.S. imports from China rose 22%, to $270 billion. Imports from South Korea, Singapore, and Malaysia, and dozens of other countries also increased.
At the same time, China’s industrial capacity is closer to catching up with the U.S. and Europe. The boost in Chinese high-tech exports is also in part because, under President Xi Jinping, China has been investing government funds, reportedly over a trillion dollars, in developing high-tech industries, including electric vehicles, quantum computing, and solar cells, windmills and other renewable energies.
To be sure, China remains the world’s top trading power, and, contrary to rumors floated a few years ago, the U.S. is not ready to decouple from Beijing. Instead, companies appear to be following a so-called “China-plus-one” strategy, investing in China and an ASEAN country, to guarantee security and reliability of supply.
And, indeed, China has been leading the global economy out of its 2020 slump. Overall, China’s exports jumped 25.6% year-on-year in August to $294.3 billion. Imports increased 33.1% year-on-year to $236 billion. Both numbers exceeded predictions by analysts. “We think the global economic recovery will continue to underpin China’s exports in the end of this year and in 2022,” Louis Kuijs of Oxford Economics wrote in a note. “While near-term headwinds remain, supply constraints in China have eased.” In the first eight months of 2021, exports and imports were up 34% and 35% year-on-year. China’s trade surplus, a measure of its dominance of world export markets, was $362.5 billion, up almost 30%.
And the U.S. continues to be China’s top export market. In August, shipments to the U.S. rose 15.7% to $51.7 billion, compared to exports to the European Union rising to 30.5% to $46.2 billion, and those to ASEAN going up 16.8% to $39.5 billion.
Industrial surveys have been suggesting a slowdown in growth, or even contraction. But what appears to be happening instead is a subtle change in what China makes. For several years, companies have been moving supply chains elsewhere in Asia. For example, in the first seven months of 2021, U.S. imports of apparel and clothing accessories from Bangladesh, India, Cambodia, Mexico and Italy all increased. In the first six months of 2021, exports of telephones and parts from Vietnam increased 14.1% to $25.1 billion and shipments of textiles rose 16.2% to $15.3 billion, according to TDM data.
Another sign of companies setting up more supply chains focused on China and Asian trading partners is ASEAN countries’ increased dominance of shipments of goods to China. In August, Chinese imports from ASEAN increased 26.8% to $32.8 billion, compared to a 12.4% rise to $25.3 billion for the EU. Chinese imports from the U.S. increased 32.7% to $14 billion, reflecting higher prices for essential commodities like soybeans, copper, and crude petroleum.