An article by the South China Morning Post (SCMP) has ignited a question which many of us have been trying to avoid in the middle of the COVID-19 pandemic. Focusing on China in its report, the article has highlighted the risk of reshoring among foreign corporations from the country — following the unprecedented COVID-19 pandemic which revealed the collective deficit of European countries to manufacture adequate masks, personal protective equipment (PPE) and basic chemicals of pharmaceutical products for themselves.
As consecutively urged by German Chancellor, Angela Merkel, French President, Emmanuel Macron, EU Trade Commissioner, Phil Hogan and EU Internal Market Commissioner, Thierry Breton, the whole pandemic called for the EU’s economic sovereignty of critical industries (especially medical supplies) that can be achieved through erecting a ‘pillar of domestic production’ for these crucial products. Having said that, such security threat to individual nation-states also goes beyond medical-related needs.
Perhaps the first nation to announce its strategy to shift its manufacturers out of China, Japan has been earmarking ¥220 billion to bring back companies to its shores while at the same time, allocating another ¥23.5 billion for its companies to relocate elsewhere (in particular, Southeast Asia). As revealed by the panel on Japan’s future investments in early April, such scale of active intervention is about reducing the Japanese companies’ over-dependence on China for its manufacturing parts, a situation which has prevailed for more than a decade. With the interruption of imports of these manufacturing parts due to nationwide lockdown in China two months ago, it is clear that such reshoring drive is urgently required to secure Tokyo’s strategic manufacturing parts (such as critical auto parts) in its shores in order to keep its exports uninterrupted in the future.
Last but not least, the US, a critical party of China’s trade status since trade war erupted last year, has been encouraged by the Japanese move thus far. According to White House’s National Economic Council Director, Larry Kudlow, Washington should emulate the Japanese model by paying the costs for American companies to move out of China back into the US. Among all, the payments in consideration include plant and equipment relocation expenses, intellectual property costs to expenditures related to renovation of new bases. Despite not having any coherent plan for the reshoring of American companies (unlike the Japanese), it is not difficult to understand that COVID-19 pandemic provides a rare opportunity for the Trump administration to achieve what it has been trying to achieve (albeit partly) since the trade war last year: reduction of the country’s reliance on the Chinese manufacturing hold.
Scepticism of the Globalists
As expected, the latest Japanese move as well as the calls from both European and American political figures, have ignited responses from the globalists who are generally sceptical of any unprecedented level of reshoring among these multinational corporations (MNCs). The main premise of the argument remains to be based on the economic principle of comparative advantage that includes labour cost reduction, lower land expenses and so forth. As highlighted by President of AmCham Shanghai, Ker Gibbs, he does not feel Kudlow’s proposal is rooted on the business needs on the ground. Moreover, according to Gibbs, there are different reshoring factors which have been overlooked by Kudlow in his proposal to encourage American multinational companies to return to the US.
Meanwhile, Hong Kong University’s economics professor, Tang Hewei, put an even forthright argument than Gibbs. Despite the unprecedented proposal from Kudlow, the relocation costs are calculated with fixed values and virtually failed to consider the variable costs on the ground. This point is further taken up by Zhang Jun of Fudan University, who is of the opinion that China’s competitive advantages in areas such as electronics, machinery and equipment manufacturing, will continue to place the country in a competitive position vis-à-vis its neighbouring countries. Given such comparative advantages, Zhang sees post-COVID era as no obstacle for China to continue climbing up the value-added supply chain and boost its domestic consumption in the nation’s course to reduce foreign demand for its exports.
Zhang’s optimism, however, is not fully shared by his Chinese counterpart, Sun Yunguang, who believes that there will be still significant reshoring of industries that concerned the security of their countries of origin (Japan, Europe and the US). That said, Sun predicts that those foreign companies producing daily necessities, textiles and toys will continue to remain in China since the country’s manufacturing ecosystem is a facilitative factor unparallel by other countries. Like Zhang, Sun also foresees post-COVID era as an opportunity for China to accelerate its goal of producing high-quality and high value-added products reminiscent of the German and Japanese experiences in the past.
‘Securitisation’ Process of Globalised Economy
With COVID-19 pandemic overturning the normality of the whole globalised economy, one thing is for sure. The globalisation as had happened in the pre-COVID era, will no longer be functional after the end of the pandemic. In fact, globalisation drive will undergo a fundamental restructuring in which the security needs of major investing countries such as Japan, US and EU, will triumph over the globalisation drive of their MNCs. As such, companies which produce medical supplies, food and crucial products (such as autoparts and high-precision components/goods) in which their economic prowess are rested upon, will be tightly regulated in a way that they have to reshore to their respective countries of origin instead of maintaining their full production facilities in China. In other words, the globalised economy will undergo the ‘securitisation’ process spearheaded by these major investing powers.
As the COVID-19 pandemic has amply demonstrated, cross-sectorial technological use and digital economy have become vital components of the world’s next normal age forcing any country avoiding or resisting such trend to bear heavy socio-economic costs. The “securitisation” of globalized economy means that developed countries will move their critical and vital industries and precision technologies back to their own countries or somewhere they deem safe. On the other hand, for the developing countries at large, such ‘securitisation’ process is bound to affect them as they remained to be the host countries for these foreign MNCs. These developing countries will now have to be able to adapt by developing their own technologies and digital economies. After all, we are witnessing the birth of a new world, a world where globalization will not be business as usual.
*ANBOUND Research Center (Malaysia) is an independent think tank situated in Kuala Lumpur, registered (1006190-U) with laws and regulations of Malaysia. The think tank also provides advisory service related to regional economic development and policy solution. For any feedback, please contact: [email protected].