Abstract: The global supply chain has entered a period of adjustment, driven by US domestic politics, the Thucydides Trap China and the US have got into, and the need to reduce the risk of production failure resulting from a long global supply chain as revealed by the coronavirus pandemic. Decoupling between China and the US will be costly to both countries, and China should remain vigilant against anti-China policies in the US. Despite the fact that many from the US business and financial circles do not want to decouple from China, it remains uncertain whether US politicians will concede to the business sector's pursuit of maximum profit.
I. Three drivers of the global supply chain
The concept of "globalization" and "global industrial chain" appeared in 1982 and early 1990s, respectively. The evolution of globalization and the development of the global supply chain are closely related to the emergence of new products, the development of new technologies and geopolitical changes.
First, the emergence of new products. In the past, heavy machinery manufacturing in China was completely limited to a small region. The process is far from globalized and there was no global supply chain involved. The emergence of new products such as integrated circuits made the development of global supply chain possible.
Second, the development of new technologies, which is closely related to a country's comparative advantage in the process of globalization. The "Flying Geese Paradigm" is a theory about industrial transfers among countries, especially in the western Pacific region. Under this model, Japan, China and South Korea have each developed different industries to form vertical division of labor. The development of new technologies, coupled with falling transport and communication costs, trade liberalization, and financial integration, has made the emergence of a global supply chain possible.
Third, geopolitical changes. Since the end of the Cold War, the geopolitical relation between China and the United States has changed, and their trade and economic relation has reached an equilibrium point. British historian Niall Ferguson even put forward the concept of Chimerica to describe the new norm in the China-US relationship.
II. Global supply chain has entered an adjustment period
Globalization will continue but may experience fluctuations. Now, it has entered an adjustment period, and will be followed by the adjustment of the global supply chain.
From the perspective of US domestic politics, globalization to a large extent is about uniting the haves of the world, rather than the have-nots. In the process of globalization, workers, especially those in the developed countries, have been put into a disadvantaged position and income inequality increased in developed countries. Labor unions in these countries which could have bargained with capitalists to protect workers' rights, lost their bargaining power after workers from the "Third World" entered the global labor market and participated in production. As a result, class tensions have become more acute in developed countries, especially in the United States. As the old saying goes, "diplomacy is the continuation of domestic politics". The sharpening of domestic political contradictions is bound to change US foreign policy and its attitude towards globalization. At present, the rise of trade protectionism, reverse in globalization and adjustment of the global supply chain have become inevitable.
From a geopolitical perspective, China's rise has led to the Thucydides Trap, and the US is bound to strike China down. In fact, the closer China's power nears that of the US, the harder the latter will crack down on China. This has been evidenced by a group of US politicians such as Bannon who proposed to kick China out of the global supply chain. For now, the idea to crack down on China has grown deeply ingrained in the US establishment. US producers and capitalists have their own interests, and it is not certain yet whether the politicians can play into their interests. However, what is certain is that the politicians will seek to curb the development of China.
From a technical perspective, the longer the supply chain is and the more specialized the division of labor, the better it can help improve productivity, but at the same time, risks will also be increased. Theoretically, it should be possible to determine through research the optimal arrangement of the supply chain, that is, the optimal combination of output and risk under a series of constraints, and thereby maximize efficiency. This is a critical theoretical issue and deserves further study.
The global supply chain is long and one point going wrong can cause the failure of the rest of the links. The shock that the novel coronavirus has brought to the global supply chain is a technical issue, rather than one about "decoupling". Some expert once pointed out that it was dangerous for the production of rubber gloves to be concentrated in only one region because if something were to go wrong with this region, surgical operations in other parts of the world would be forced to stop. This expert suggested adjusting the structure of the global industrial chain, specifically to shorten its length, which didn't catch enough attention back then but has real implications today.
A shorter production line can reduce the probability of failure in the production of a product, because assuming that the probability of failure is equal for every link on the production line, the more links there are, the higher probability there is for production to fail. Therefore, the structure of global supply chain must be optimized and balanced.
III. China should be vigilant against anti-China policies of the US
The Trump administration would do anything to win votes. The motto—"we lie, we cheat, we steal" revealed by Mike Pompeo also raised alert for China to remain highly vigilant. Although the scoundrel-ness of the current US administration and the danger it is posing to the world are abnormal, as the gap between the strength of the US and China narrows, anti-China policies of the US may continue even when a more civilized and clear-headed administration is elected after Trump. The only difference may be their approaches. The competition and conflict between China and the US will exist for a long time until the Thucydides trap gets fixed eventually. China should do away with any illusion that such anti-China sentiment will wane on its own and take no chances in striving for the best results.
On the other hand, economic relation between China and the US has lasted for over 4 decades and there have been large amounts of investments into it on both two sides. Although I rarely agree with the metaphor comparing China-US relationship to a marriage, I do believe there is some ground to say so because after 40 years of co-existence, it would be quite difficult for the two sides to divide their "marital properties". A "divorce" would therefore be extremely expensive. The decoupling will cost a lot, not only for China but also for businesses as well as the economic and financial community in the US. Such a reality provides China the time needed to make adjustments.
Overall, there are still many from the business and financial circle in the US who do not want to decouple from China. This is the group China could win over. While this is a favorable condition for China, what is uncertain is whether US politicians will concede to US firms’ pursuit of profit maximization.
