Abstract: In the introduction to the book Global Supply Chain Restructuring: China’s Choice, the author shares seven observations of global supply chain restructuring: 1) China-US trade tensions involve special complexities in an era of digitalization and globalization; 2) global supply chains will be more diversified, more digital, and greener; 3) China will remain both influential and vulnerable in global supply chains; 4) countries face dilemma in balancing their global competitiveness and independence of supply chains; 5) China and the US could work to reduce bilateral tariffs by increasing the exclusion rate; 6) China-US technological competition and the challenges it brings must be understood properly; and 7) China needs to decide the direction of its supply chain adjustment: outward relocation, inward relocation, and regional reconfiguration
Upon achieving the first centennial goal of building a moderately prosperous society, China has embarked on its journey toward the second centennial goal of building a full-fledged modern socialist country, entering a new phase of development. At the same time, the country is finding itself in a world with increasingly profound and complicated changes. Against this backdrop, Chinese leadership has put forward the “dual circulation” strategy, calling on a new development paradigm that takes domestic development as the mainstay, with domestic and international development reinforcing each other.
From a supply point of view, supply chain upgrading and security stand out as two key tasks in China’s pursuit of sound domestic development. Supply chain upgrading is an essential condition for economic development, while the boom of digital technology and green economy has chartered a new technological roadmap for this critical task. As for supply chain security, it has come to the spotlight in view of the escalating competition between China and the United States and the COVID-19 pandemic. Of course, supply chain upgrading and security have overlaps. For example, China-US trade tensions have not only led China to focus more on supply chain security, but also made supply chain upgrading a more pressing mission. However, while such external forces have attracted more attention to supply chain upgrading, the fundamental concern remains to be security.
In the absence of the trade war, the three factors of the pandemic, digitalization and decarbonization would have more of a neutral impact on the global supply chain. For example, digitalization, decarbonization and the new technological paradigms they bring would mostly generate new emerging sectors that challenge the traditional industries; but with the trade war, digitalization and information globalization have further eroded bilateral trust and intensified conflicts between the two biggest economies in the world. However, while bilateral tensions escalate, decarbonization has emerged as one of the few areas where China and the US share common interests and seek cooperation.
With this in mind, we focus on China-US trade tensions in our analysis of global supply chain restructuring, while also probing into the roles of the COVID-19 pandemic, digitalization and decarbonization. Our research produces seven main conclusions as elaborated below.
I. CHINA-US TRADE TENSIONS INVOLVE SPECIAL COMPLEXITIES IN AN ERA OF DIGITALIZATION AND GLOBALIZATION
Existing studies on China-US trade conflicts have generally taken note of the ideological divergences between the two countries and the possibility of them falling into the Thucydides trap. Further adding to the complexities compared with past episodes of major power competition is an unprecedentedly ambiguous boundary between military and non-military technologies amid the digital boom.
Globalization has now entered a new digital phase from the previous one characterized by trade and production integration, and information has become a new production factor in addition to goods and capital that moves across borders. In an era of digitalization, massive cross-border information flow has become a matter of national security, blurring the boundary between military and non-military technologies in both the technological and national security senses. As a result, the clash between China and the US in the digital area can hardly find any echo in past major power conflicts like those the US had with the Soviet Union or Japan.
The contradiction between increased, digitalization-driven integration and reduced bilateral trust, in addition to ideological conflicts and the Thucydides trap, has made China-US relations even more complicated and fragile. Disagreements between the two powers on traditional issues such as trade rules and investment environment have been dwarfed by the increasingly acute and hard-to-manage disputes on information that could directly exacerbate technological competition and national security conflicts and even deepen those traditional disagreements. China needs to navigate the challenges with greater wisdom and patience.
II. GLOBAL SUPPLY CHAINS WILL BE MORE DIVERSIFIED, MORE DIGITAL, AND GREENER
The pandemic has battered the supply chains of all countries to various extents. The immense uncertainties have led transnational companies to reflect upon their efficiency-oriented supply chain management strategy in the past, and turn to focus more on balancing efficiency and security. Even some of the governments, like those in the US and Japan, have placed greater emphasis on supply chain independence and controllability. They have begun to adjust, in a social cost-oriented manner, the supply chains of key sectors such as healthcare and hi-tech, building back-ups for critical domestic supply chains, bringing key industries back within borders, and shortening supply chains.
The pandemic may pass, but the world will be left in a different place. The pandemic has had its marks on global supply chain restructuring by reshaping global political and economic thinking. We believe the global supply chain going forward will show three characteristics:
First, transnational companies will seek to build risk resilience through supply chain diversification. As a result, many companies could shift out of China (which however is different from a sheer exodus). China has to make efforts to improve its business environment and ensure the stability and predictability of its supply chain system to reassure and boost the confidence of downstream manufacturers around the world, in order to secure its position in future global supply chains. This is also an important factor when assessing China’s trade and economic ties with other countries (especially those other than with the US) and possible economic sanctions.
Second, as the global landscape for production factor endowment evolves, global supply chains, in the mid to long run, will become more knowledge- and capital-oriented and digitalized. During this process, countries will see their comparative advantages redefined: those with cheap labor may find themselves left behind in the global digital economy boom with a lack of necessary infrastructures; developed countries also face difficulties striking a balance between privacy protection and commercial efficiency. Comparatively speaking, China has remarkable leverages in terms of building a more digitalized and capital-oriented supply chain, being highly competitive in terms of R&D and especially application; but it also has vulnerabilities, especially as the US tries to tag it as a “digital authoritarian” and isolate it from global cyber and digital economy standard-making in order to weaken China’s digital competitiveness. China needs to be highly aware of such attempts.
Third, greener production with lower carbon emissions will mainly influence energy exporters and developing countries amid industrialization. Climate change and the decarbonization drive have imposed new restrictions on developing countries, making it harder to copy the export-oriented development model. In March 2021, the European Parliament passed the resolution on implementing the carbon border adjustment mechanism (CBAM), following the attempt by the US in 2008 in the form of the Lieberman-Warner Climate Security Act, which, though not passed, contains a list of three types of countries exempted from taxes in its Section 1306. These countries are relatively small economies with modest impact on the global production network, but those that are better-off than the least developed countries and still in the midst of industrial expansion, such as Vietnam and India, as well as those heavily dependent on high-carbon resources, such as oil exporters, could face additional constraints during their development. China has been less impacted relative to these countries: on one hand, China’s industrialization has passed the phase of extensive expansion and headed into the innovation-driven stage, and its exports are containing less carbon; on the other hand, while traditional sectors in China can hardly escape the shocks from decarbonization, the country has prospering green technologies, green industries and green finance market, all of which can cushion the blows.
Generally speaking, a more diversified global supply chain could benefit some of the developing countries at least in the short run. However, with the cost of capital staying low, digital technologies, as they gradually replace labor, could reshape the underlying logic of traditional competitive advantages, and the green, low-carbon transition will impose additional restrictions on developing countries. Evidence suggests that for India, Vietnam and other latecomers that are labor-intensive or heavily reliant on high-carbon resources, the historic window period for catching up with their developed counterparts could gradually close, a process that depends on how fast digitalized and green modes of production emerge. From a global perspective, the digital and green divide could further consolidate the stratification of countries, making it harder for less-developed ones to catch up. This has both positive and negative implications for China that need to be assessed in an all-round way.
III. CHINA WILL REMAIN BOTH INFLUENTIAL AND VULNERABLE IN GLOBAL SUPPLY CHAINS
Our research shows that China holds competitive advantages in the export of 80% of the world’s most concentratedly provided goods (i.e., goods provided only by a few countries), with a rather resilient supply chain. According to the classification of the United Nations Industrial Development Organization, China is the only country with all categories of economic activities. During 2017-18, the Harmonized Commodity Description and Coding System (HS) codified at 6-digit level a total of 3,556 types of intermediate goods, for 2,247 of which China ranked among the global top three exporters; China also exported 858 types of goods with high export centrality, second only to the US, among which it ranked global top three in terms of total export volume of 693 types of intermediate products (global No.1 for 444 types in both 2017 and 2018). That means China enjoyed important comparative advantage in the export of intermediate goods with high export centrality, which has been confirmed by the fact that lockdowns in China around February 2020 dealt significant blows to the global supply chain, attracting much attention of the international community. In a report in March 2020, the United Nations noted that around 20% of intermediate goods across the world were provided by China, and if China’s export of these goods reduced by 2% it would pare down the export of 45 major economies by about $46 billion, with Europe, the US, Japan and South Korea bearing the brunt of the blow.
Meanwhile, we need to remain soberly aware that China’s supply chain also has vulnerabilities. China is not very competitive in terms of 20% of the world’s most concentratedly provided goods, and its production of many of such goods needs large volume of intermediate goods imported from other countries. According to the composite indicator for vulnerability at the product level we have designed, electrical machinery and equipment and parts thereof, sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such (HS 2.85), nuclear reactors, boilers, machinery and mechanical appliance, and parts thereof (HS 2.84) and optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus (HS 2.90) are the three sectors where China’s supply chains are most vulnerable. Of particular note, the first sector (HS 2.85) has a composite vulnerability index over 3 times that of the rest two sectors, and is worth heightened attention regarding its supply chain security. We have also constructed an indicator system, and put the total of 3,285 types of intermediate goods that China imported in 2018 into the following four categories:
First, 62 types of intermediate goods with high global export centrality that China imports from the most concentrated sources of supply, which have been the most vulnerable to external shocks like the China-US trade war and the pandemic. Their backups are also the hardest to prepare. China needs to pay special attention to these goods, especially those with national security and strategic implications, and formulate planning for them at both national and industrial levels to ensure their supply chain security.
Second, 812 types of intermediate goods that China imports from rather diversified sources while the world at large relies on a more concentrated array of suppliers. While China’s supply chains for these goods are not highly vulnerable now, there’s a possibility that the situation could worsen in the future. Of particular note, key products and technologies that are at the moment imported on a small scale from various suppliers could pose greater challenges in the medium to long term when China needs to import much more of them from more concentrated sources. In that case, these goods could join the first category of high vulnerability. China needs to take a long-term view and plan ahead for the supply chain security of these goods.
Third, 759 types of intermediate goods with low global export centrality that China imports from rather concentrated sources. China could consider diversifying the sources of supply for these goods. Specifically, 39.8% of goods with highly vulnerable supply chains that China imports are bought from a concentrated group among a much wider array of suppliers, including the three types of goods (HS 2.85, 2.84 and 2.90) mentioned above. There is a lot of room for China to diversify the supply chains for these products and thus for improving their security.
Fourth, 1,652 types of intermediate goods that are exported by many countries around the world and imported by China from diversified sources. This type of products has rather resilient supply chains and a relative stable position in terms of export and import centrality. These products account for over 50% of all types of intermediate goods that China imports and 48.2% in terms of the total import value, and thus serve as a stabilizing factor for China’s import supply chain.
Of course, our study has several deficiencies: first, the HS categorization of goods is not perfect; second, China’s actual imports never contain products that are strictly prohibited by the US from export; third, at first glance, it seems it’s the products that “choke” China’s competitiveness, but in reality, the true bottlenecks are the patented technologies, basic theories or even international standards behind these products. We are also probing into these dimensions in depth.
IV. SUPPLY CHAIN DILEMMA AND ITS TRADE-OFFS
Through industrial and national cases, our research reveals the dilemma in supply chains, that is, the contradiction between a nation’s global competitiveness or influence and its independence from imports.
First, the supply chain dilemma could be validated in case studies of major economies. Even developed economies, traditional industrial powers, and those at the frontier of the global technology scene are in fact just as heavily dependent on global production networks. In country studies, we find that the more competitive the industry of a country, the more dependent it is on imported intermediate goods and the more vulnerable it is. For example, the semiconductor industries of Japan, South Korea, and the United States are all highly competitive, but it is precisely the HS 2.85 sector (electrical machinery and equipment and parts thereof, sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such) that ranks first in terms of vulnerability; the machinery manufacturing of the United Kingdom, France, Germany, and Italy are competitive, but their HS 2.84 sector (nuclear reactors, boilers, machinery and mechanical appliance, and parts thereof) ranks first in terms of vulnerability; France is a producer of Airbus aircraft, but its HS 2.88 (aircraft, spacecraft, and parts thereof) products are ranked third in terms of vulnerability.
Then, by analyzing data of Chinese manufacturing sub-sectors, we verify the supply chain dilemma in China's technology-intensive industries, but not in labor-intensive industries. In this empirical study, we create an indicator of the dependence of Chinese manufacturing sub-sectors; we also use the University of International Business and Economics' Global Value Chain Indicator (UIBE-GVC) to portray the industries’ global competitiveness. After controlling for the effects of other variables, we find that in technology-intensive industries, when a Chinese industry in the GVC rises, its dependence also tends to rise. It is worth noting that this paradox exists only for technology-intensive industries, not for labor-intensive industries. This may be because labor-intensive industries have shorter supply chains and can be more easily cycled within a country.
Finally, the US's handling of the supply chain dilemma is a good practice for China to learn from. How does the US efficiently obtain a balance? Our research finds that the US achieves supply chain security through political relationships and national alliances. If only economic factors are considered, China's supply chain risk is lower than that of the US, but if considering political relations and the ability to withstand a supply shutdown, China's supply chain risk is significantly higher, but the risk faced by the US does not change much. China's supply chain risk is more susceptible to political factors than that of the US. In the case of the US, supply chain security and competitiveness can be achieved at the same time under certain conditions, and thus a breakthrough in the aforementioned dilemma can be achieved.
We note that the White House released the 100-Day Review Outlines Steps to Strengthen Critical Supply Chains on June 8, 2021. The report again mentions the need for the US to strengthen political relations in order to maintain supply chain security. This indicates that the US is also aware of the importance of political relations to supply chain security and concerned about the potentially damaging effects that deteriorating political relations could have on the US supply chain. It is evident that China also will need to create good political relations with major countries and strengthen supply chain ties with countries that are vulnerable to supply disruptions in order to balance the security and competitiveness of its supply chains.
V. TARIFF: PROMOTE CHINA-US TARIFF REDUCTION BY INCREASING THE EXCLUSION RATE
Currently it is difficult for the Biden administration to remove the tariffs on China.
(1) The top concern of Biden's international economic policy is to maintain the technological gap and ensure supply chain security. Since the Biden administration took office, it successively issued presidential executive orders to strengthen the Buy American Act and reviewed the supply chains of four key products to reduce the US's dependence on imports. US Trade Representative (USTR), Katherine Tai, also made it clear during her Senate nomination confirmation hearing that the US is not yet ready to cancel the tariffs on China.
(2) There is a strong political demand for protectionism in the US. In a political environment where both parties in the US have unanimously viewed China as a strategic competitor, any compromise in policy towards China is seen as absolutely harmful.
(3) At the tactical level, the Biden administration has to reserve leverage for China-US trade and economic negotiations. Even American free-trade advocates, such as former US Treasury Secretary Hank Paulson and the US Business Roundtable, while calling for tariff cuts on China, also believe that cuts should be exchanged for China's concession in other areas in a new round of China-US trade negotiations. Katherine Tai has also hinted at her support for this economic and trade strategy with China.
In this context, increasing the exclusion rate of tariffs would be an option.
First of all, the Biden administration applies a "small yard, high fence" strategy toward China, so comprehensive tariff measures are not the first choice. Biden’s primary goal is to maintain the technology gap and ensure supply chain security through the more selective approach dubbed "small yard, high fence". While tariff measures cover a wide target range, they could also bring huge losses; though they will not and cannot be canceled in the short term, they are not the first choice. Biden clearly opposed the use of tariffs to resolve the trade conflict with China when he was running for president, but he retracted that statement due to political pressure. Various policy orientations since Biden took office show that the policy focus of the administration is not tariff measures.
Second, the use of tariffs by the USTR faces little resistance. The Biden administration has repeatedly emphasized that it does not intend to engage in a comprehensive "decoupling" or a "new Cold War" with China, but instead maintains cooperation in specific areas in the competition with China, urging China to act in accordance with the western version of international rules, but domestic political pressure ties Biden up. Tariff exclusions have already been implemented by the USTR, and it is less difficult to level up the exclusion measures.
Third, the US has a lot of policy room to increase the exclusion rate of tariffs on China. As of January 2022, the US retains tariffs on $370 billion of Chinese exports to the US, with 25% additional tariffs on List 1 ($34 billion), List 2 ($16 billion), and List 3 ($200 billion) goods, and 7.5% additional tariff on List 4A ($120 billion) goods. Compared to Lists 1 and 2, the exclusion rates for Lists 3 and 4A are significantly reduced. According to our paper published in the International Economic Review in 2020, among the applications of exclusion from Lists 1, 2, 3, and 4A, 33.8%, 37.4%, 4.9%, and 6.5% of the applications were approved respectively. The commodities in Lists 1 and 2, such as automobiles and parts, instruments, etc., are given priority in the USTR exclusion criteria because it is difficult to find alternatives in a short period of time due to complex production technologies and longer supply chains. As for the commodities in Lists 3 and 4A, such as leather products, clothing, shoes, etc., the exclusion rate is low because simple production technology and shorter supply chains allow these products to be more easily replaced, although the US is more dependent on these Chinese goods in terms of the import value and the tariff could cause more damage to the welfare of American consumers.
Judging from the list of tariffs imposed on China, the earliest List 1 and List 2 are most in line with the original intention of USTR's Section 301 investigation, closely related to "Made in China 2025", less dependent on China, and less detrimental to American economic welfare. Therefore, in the medium and long term, it is difficult for the US to expand the exclusion of Lists 3 and 4A.
At last, the mounting inflation pressure poses a dilemma for the Federal Reserve. America’s inflation went beyond expectation in 2021, reaching 7% at the end of 2021, a 40-year-record. The spread of COVID-19 is still highly uncertain and the US economy is not yet back on a firm footing, while the US labor force participation rate is significantly low under the strong support of the stimulus policy, which to a certain extent makes the unemployment rate likely to be overestimated. In addition, the excessive government debt also makes it more difficult to phase out the easing policy. These factors put the Fed in a dilemma in dealing with inflationary pressures. If a significant increase in the tariff exclusion rate helps to suppress domestic inflation, this should be a measure for the US to consider. The US and EU have agreed to end the trade war at a bilateral summit on June 15, 2021, with a resolution agreed upon and announced on October 30, 2021, but the amount of bilateral trade involved is only $18 billion, far less than the amount involved in the China-US trade conflict, and the impact on easing inflationary pressures in the US is extremely limited.
VI. TECHNOLOGY COMPETITION: IDENTIFY CHINA-US TECHNOLOGICAL COMPETITION AND CHINA CHALLENGE
The study provides a comprehensive assessment of China's position in global technological competition in terms of patents. Based on the global patent data over the past 20 years, we find that China's international patents are characterized by (1) huge numbers, (2) a low proportion of core patents, (3) rapid progress over the past five years, and (4) concentration in digital communications. A comparison of the sectoral distribution of core patents between China and the US also shows that although China has the most PCT patents in the world by 2020, it still lags behind the US and Japan in terms of PCT core patents at both national and sectoral levels. China should identify this gap and the relationship between independent innovation and international sci-tech cooperation, and actively participate in global governance and cooperation.
The new trends and driving forces of the China-US technological competition come from two sources: the rapid development of new technologies in the digital age, and the different philosophy of the Biden administration from that of its predecessor. Regardless of who is in power in the US, there is no doubt that the US sees China as its biggest rival in the digital arena, and this strategic competition will continue for decades to come. In this respect, Biden administration has something in common with Trump. However, Biden’s approach to containing China in the tech sector is different from that of its predecessor.
On February 4, 2021, in his first foreign policy address, Biden defined China as America's “most serious competitor", saying it challenges its "prosperity, security, and democratic values", but that the US is prepared to work with China as long as it is in the interests of the US. Specifically, the Biden administration has become more concerned about the negative effects of technology containment policies. Biden has received widespread support from technology companies in his presidential campaign, with Google, Microsoft, Amazon, Apple, and Facebook making up 5 of the top 10 contributors to his candidacy (while Trump's top 25 contributors include no major technology companies at all), and Vice President Harris has even closer ties to Silicon Valley. The Biden administration is bound to take full account of the negative impact of tech curbs on the US and make adjustments to the lose-lose tech policy towards China of the Trump era.
Looking back at Trump’s technology containment towards China, its negative impact has been evident in three aspects. First, the overly broad export controls on China have harmed the commercial interests of US high-tech companies, thereby affecting their R&D investment. Second, overly restrictive personnel exchanges with China have also undermined US human capital for R&D in specific high-tech fields. Third, the position of US as a center for international sci-tech cooperation has weakened. China-US sci-tech cooperation has cooled since the trade war, but China-EU and China-Japan sci-tech cooperation has increased, partially compensating for the decline in China-US cooperation. During the 12th Five-Year Plan period (2011-2015), the combined share of joint patent applications between China and Germany, the UK, France, and Japan was 23.7%, which was only half of the share of China-US cooperation, while in 2018 this share reached 38.3%, comparable to the share of China-US cooperation.
Against this background, the Biden administration is more concerned about the negative impact of its policy on the sci-tech competition with China, and therefore the following three features of its policy framework are expected to become more evident: (1) increased US investment in its research, (2) precise stifling policy characterized by "small yards, high fence", and (3) "circle of allies" against China in key technology areas with the purpose of reducing China's diplomatic maneuvering space.
We have three predictions on China-US technological competition during Biden Administration.
First, the cyberspace competition will intensify and there are more likely to be parallel systems. As a core field of major power competition, geopolitical confrontation has made the concept of national security extremely generalized. Supply chain security and data security have become the focus of today's major power competition. Due to increased competition, countries are less willing to cooperate and multilateral governance mechanisms less effective. With strong push from the US, the prospect of two parallel systems will rise.
However, the two countries have profoundly interacted with each other in the global supply chains, which may hinder the emergence of two parallel systems. Our research shows that the US export control policy that has sanctioned Huawei has also significantly hit Huawei's US suppliers. Moreover, responses from the financial market to the sanction have not only affected suppliers, but also created a diffusion effect. Among the nine industries of Huawei's suppliers, at least three industries have strongly felt the impact, covering 16 of the 24 suppliers. This kind of spillover can prompt industry associations to take actions and trigger stronger responses of the affected suppliers to export controls. For example, the Semiconductor Industry Association (SIA) intervened in the implementation of export control policies. Suppliers that were hit by export controls reacted with a series of measures, including speeding up exports to Huawei before the policy actually took effect, moving related production lines overseas, and putting pressure on the government.
Second, future China-US technological competition will enter an era of integrated national strength competition in the whole-of-government and whole-of-society model. On the one hand, the information revolution has permeated all aspects of economy, society, politics and security, and all the sectors will have to re-adjust; on the other hand, the rising Internet companies have shared part of the government power. Cooperation of all parties is required for either industrial development or network security. Whichever country can more effectively integrate its national power in various fields and project it in the cyberspace will win in the new round of technological competition.
Third, China and the United States will face more intense competition for international rules and discourse power. In the past two years, European and American countries and various departments of the United Nations negotiated international rules and legal frameworks for cyberspace. In this field, new norms are constantly created and replaced, but now it has come to an important stage where the emerging norms are being implemented. As such, major powers will enter into more fierce competition over who gets to steer the formulation of international norms.
VII. CHINA’S SUPPLY CHAINS: OUTBOUND OR INBOUND RELOCATION, OR REGIONAL RECONFIGURATION
With competition from the US, Vietnam, Europe and Japan, as well as the difficulties of industrial upgrading, China's supply chains are under pressure to consolidate, optimize and upgrade. From a geographic point of view, there are three directions of supply chain adjustment: outward relocation, inward relocation, and regional reconfiguration. Each scenario can have outcomes both for and against China.
From the perspective of unfavorable situations: (1) Excessive industrial relocation can lead to industrial hollowing-out. (2) The relocation of industries to the inland regions led by excessive policy intervention will result in inefficient allocation of resources. (3) Regional restructuring of the supply chain led by the United States may drive its production network to North America, and other countries in the Asia-Pacific region may further reduce their dependence on China in order to control risks (this situation cannot be ruled out according to our research).
From the perspective of favorable situations: (1) Desired industrial relocation is a natural process of industrial upgrading, and it helps to form the international division of labor network with China as a key node. (2) The integration of international and regional supply chains promoted by China's market and technological advantages will contribute to regional economic integration and facilitate the integration of the Chinese economy into the international and regional division of labor. (3) Relocate supply chains to central and western regions can help these regions level their comparative advantages.
Taking Vietnam as an example. We made observations of the outward migration of China's supply chains and studied its nature. In 2020, Vietnam surpassed South Korea to become China's third largest export destination country. Taking this phenomenon as an entry point, we broke down China's rapidly growing exports to Vietnam, thus exploring the composition and nature of China's industrial transfer to Vietnam. Our research shows that China's exports to Vietnam have two characteristics. First, most of China's exports to Vietnam are intermediate goods, not to meet Vietnam's final demand. Second, the direct investment and industrial transfer made by Chinese enterprises is an important reason for the increase in the export of intermediate goods to Vietnam.
In fact, China's direct investment and industrial transfer to Vietnam have made the relationship between China and Vietnam closer in the international division of labor. Some of China's surplus with European and American countries has turned into China's surplus with Vietnam and Vietnam with Europe and the United States, which alleviated China’s overly concentrated imbalance of international payments. It can be seen that the current China-Vietnam economic and trade relationship is more similar to the previous Japan-China one: China has become a central node in the global value chain, and Vietnam has the potential to become a secondary one. However, as mentioned above, in the long run, the digitization and greening trend of global supply chains will pose certain challenges to Vietnam's development.
Here are four policy suggestions for consolidating domestic supply chains and having the central and western regions be prepared to undertake some industrial transfer: (1) China can implement graded tax incentives. The central and western regions can learn from the experience of Southeast Asian countries, step up tax and fee reduction, guide and support the orderly transfer of industries with taxation tools, strengthen inter-provincial coordination, and reduce horizontal tax competition. (2) In this process, it is necessary to improve the incentive and restraint mechanism of the governments in the central and western regions, improve the level of marketization and government efficiency, and strengthen the relationship between government and enterprises. (3) In terms of market entities, efforts are needed to promote the development of domestic small and medium-sized enterprises, so as to help them gradually shake off the OEM status of serving foreign investment, and achieve the triple goals of stabilizing employment, increasing profits and cultivating brands. (4) The border provinces in the central and western regions are encouraged to carry out labor cooperation with Vietnam and Myanmar who boast low labor costs and rich young labor resources. Medium and low-end labor-intensive industries can be deployed in border provinces such as Guangxi and Yunnan where an integrated model featuring the combination of Chinese industrial chain and Vietnamese labor force can be implemented for trial. These provinces can attract young Vietnamese labor force to study and work in China by providing language training and degree courses, a move that can not only alleviate the shortage of young labor force in China, but also keep the supply chain within Chinese borders.
In terms of regional restructuring of the supply chain, the disruption to automobile supply chains in Europe under the blow of the pandemic has seriously impacted East Asian countries, from which we can draw some lessons: supply chain cooperation with East Asian countries can start with the automobile industry as it is highly integrated and is a typical representative of globalized production. Affected by the pandemic, the production of the European auto industry was suspended from March to April 2020. On the one hand, China's auto parts suffered from the disrupted supply of imported intermediate products; on the other hand, it reduced Europe’s demand for imported auto parts from Japan and South Korea. In this context, Japan and South Korea's supply can meet China's import demand. Especially from the perspective of secondary and tertiary suppliers, the automobile supply chains in Japan and South Korea can match well with that of China.
The automobile industry is the perfect choice for East Asian countries to carry out supply chain cooperation. Especially under the background of new technology and new energy revolution, the automobile industry is now closely linked with artificial intelligence and green energy. East Asian countries such as China, Japan and South Korea have distinctive advantages in the emerging automobile industry. Moreover, China is relatively advanced in the fields of artificial intelligence and unmanned driving with a complete industrial supporting network and a huge domestic market. China is expected to become a hub for cooperation on the automotive supply chain in East Asia. However, we must also see that economic integration in East Asia has been largely constrained by political relations within the region, and supply chain cooperation also faces certain challenges in this regard.
This article is the Introduction to the book Global Supply Chain Restructuring: China’s Choice, based on the outcome of the research project “Global supply chain restructuring and China’s coping strategy” sponsored by Pu Shan Foundation, an affiliate of CF40. It is translated by CF40 and has not been reviewed by the author.
