The outbreak fuels reshoring

Kim Dong-ho
The author is an editorial writer of the JoongAng Ilbo.

The global supply chain is undergoing seismic changes as a result of the coronavirus (Covid-19) outbreak in China. Most multinationals have manufacturing businesses there or export intermediary products in the world’s biggest factory. The latest virus outbreak has underscored the risk of reliance on China.

Companies and governments could do little against China wielding its newfound economic power to outright favor its local enterprises and even commit technology theft or other unfair practices towards foreign players. Regardless of the discrimination and risks, few foreign companies could forego a colossal market backed by 1.4 billion people. China ascended when the United States faltered from the Wall Street-triggered financial meltdown in 2008.

Under strongman Chinese President Xi Jinping, Beijing aimed to revive Sinocentrism with its “One Belt, One Road” initiative designed to reconstruct the Silk Road to put China at the center of global trade and infrastructure and become a military superpower by 2049.

China’s hegemonic battle with the traditional superpower, the United States, intensified under the equally sturdy leadership of U.S. President Donald Trump. His hard-line position against China had the backing from the U.S. Congress and most Americans. The inevitable face-off was forewarned in the 2015 book “The Hundred-Year Marathon: China’s Secret Strategy to Replace the U.S. as a Global Superpower” by Michael Pillsbury, a former U.S. government official who served in the Defense Department and picked up by Trump as an aide on China. In the book, he argues that China has feigned to go along with the U.S.-led trade order with a grand design of stealing the hegemony.

With his advice, Trump launched a trade war with China through a series of tariff bombardments on Chinese products from March 2018. The campaign was out to wreck the China-centered global supply chain. The New York Times suspected that Washington sanctioned the No. 1 5G wireless equipment provider Huawei Technologies to rein in Chinese hegemony in technology. The United States fears it could lose its supremacy in the global economy and military power if China gains an upper hand in high-tech, including artificial intelligence.

The trade war has not panned out in the way the United States had hoped over the last two years. It did little to shake the China-led global supply chain as it has become a fixture serving as the factory for the world. Backed by rich capital, China beat the United States in winning procurements to build railroads in Germany and ports in Italy. Even Britain, the closest ally to the United States, defied Washington’s warning and continued using Huawei equipment. The Financial Times warned that Huawei’s influence would stay intact even if Washington banned using Huawei’s core 5G equipment — because of increases in other types of the equipment. China’s hold could get stronger as wireless technology shifts to 6G and 7G. The United States inevitably would fall under the Chinese technological order.

But Covid-19 has become a game-changer. A lockout is being enforced in Italy and Spain as the pandemic sweeps around the globe. The United States has declared a national emergency and passed a bipartisan Covid-19 relief program. The global economy has been jeopardized by the outbreak.

The pandemic could further fuel trade protectionism. White House trade adviser Peter Navarro urged U.S. drug companies to “buy American” and reduce their reliance on imports by declaring “We have no allies” in the face of the outbreak as the epidemic showed that neither China nor the global supply chain is resilient enough to weather the impact of the pandemic.

U.S. multinationals have been hit hard by the spread of the novel coronavirus. Apple’s output in China has halved.

Software companies without factories in China also are forced to scale down business plans. Qualcomm said it won’t be immediately changing its business plans in China, yet indicated an inevitable adjustment if the crisis persists.

U.S. President Donald Trump, joined by members of the Coronavirus Task Force, speaks during a Covid-19 coronavirus press briefing at the White House on March 14, 2020. [YONHAP]

Korean companies, which rely on China for a quarter of their exports, face a greater threat. Household names like Samsung Electronics, Hyundai Motor and LG Electronics were all forced to suspend or reduce their operations after the virus outbreak. Business activities came to a standstill as Koreans are restricted when entering China. The Financial Times projected inevitable corporate losses due to the disruption of the supply chain in China. Jin Dae-jae — a former Samsung Electronics CEO who served as the communications minister during the Roh Moo-hyun administration — warned that Korea’s excessive reliance on China has aggravated the crisis. He advised local companies to keep their core technologies at home even if they pack out of China.

The New York Times emphasized that the loopholes of globalization have been exposed through Covid-19. The Financial Times noted that the control of drug exports by Germany, Russia and Turkey helps justify Trump’s reshoring strategy. It may not be coincidental that the virus outbreak and fatality are severe in Italy, Iran and Korea, with heavy reliance on and interaction with China.

A slowdown in the Chinese economy poses another risk. The toll will be greater on the economies with heavy dependence on China. Global institutions, including the IMF, project that Chinese growth will fall under 6 percent this year. International credit rating agency Standard & Poor’s estimates 4.8 percent growth for China — and 1.1 percent growth for Korea because 26 percent of its exports go to China. U.S. political website The Hill warned of a tipping point in the global economy from Chinese woes.

Korea must make its move. Koreans are shunned by more than 110 countries after the outbreak. China and Vietnam are home to many Korean business bases. Many big and small companies rushed to Vietnam as the alternative to China after Beijing slammed discriminatory actions following Seoul’s deployment of a U.S. antimissile system. Korea also faces trade discrimination from its closest neighbor Japan. The phenomenon calls for a reshoring of Korea Inc. When businesses return home, manufacturing jobs can be created. It is imperative to keep value-added factories at home.

The United States and Japan have been accelerating their reshoring programs. According to data from Reshoring Initiative, U.S. businesses returning to home surged to 886 in 2018 from 95 in 2010. The number spiked up since Trump came to power in 2017. The reshoring helped the United States restore its No. 1 rank in manufacturing competitiveness from China.

Korea has been inviting reshoring since 2012, but the progress has been slow. The number of returns over the last six years was 11 per year. To push the number higher, the country must turn business-friendly. Anti-market and business-unfriendly policies pose stumbling blocks to the economy. Local companies have been leaving the country under the Moon Jae-in administration after the minimum wage sharply went up and a universal 52-hour workweek was enforced. Korea’s overseas direct investment also surged by $15 billion in the second quarter of last year. Deregulatory and labor reforms are essential to reverse the trend. Without an easing of the rigidity in the labor market, Korean companies can hardly add manufacturing base here.