Focus topics

The supply chain is becoming more Chinese

Dr. Wan-Hsin Liu, Kiel Institute for the World Economy

The COVID-19 pandemic has exposed how vulnerable global supply chains can be. The global supply chain disruptions caused by the pandemic have prompted policymakers around the world to urgently clarify how reliant their country is on imported goods and foreign suppliers. Some have already called for companies to reshore business activities back home to reduce the country’s (over-)dependence on foreign (rival) countries. 

China also takes the (potential) threat to its economic self-sufficiency seriously. This is not only because China itself is directly suffering from the supply chain disruptions caused by the pandemic. As the world factory of almost all globally traded goods or/and their components, China is naturally interested in serving overseas markets without major obstacles. Since many firms in China still rely strongly on imported high-tech equipment and intermediates for their own production, China is also interested in ensuring a well-functioning supply of key components from overseas.

The indirect (potential) threat of the pandemic to the Chinese economy is relevant here as well. On the one hand, many, particularly Western, economies are strengthening their own industrial capabilities and capacities to ensure their technological sovereignty and economic self-sufficiency. This can further fuel the already existing economic and political tensions between China and Western economies such as the European Union (EU) and the United States (US) and further aggravate the difficulties Chinese firms face in sourcing key components from abroad. On the other hand, multinational enterprises (MNEs) affected by supply chain disruptions may relocate their business operations out of China. Since MNEs in China have been a key provider of financial resources, advanced knowledge, technologies and jobs, MNEs’ such relocation decisions could harm the Chinese economy.

The overall goal is to increase domestic demand

These direct and indirect threats have alerted China to the increasing global competition for (financial) resources, for talents, for technology and for market as well as to the further increasing economic and political uncertainties Chinese companies are facing. Thus, in its recent 14th Five-Year Plan (2021-2025) for development, China emphasizes the critical importance to, firstly, promote its technological innovation capacity to ensure its self-reliance in science and technology and, secondly, promote its domestic economic circulation (as a core element of China’s dual circulation development strategy) to ensure economic self-sufficiency.  

China plans to significantly increase its overall expenditures on research and development and to strengthen (Chinese) companies’ role in innovation. Both the transformation and the commercialization of new research results and technologies shall be scaled up. Technologically leading foreign companies and global talents shall be attracted to help close China’s gap to the technological frontier in critical technological fields. 

China plans to explicitly strengthen its domestic economic circulation, i.e., boosting domestic demand and supply as well as ensuring demand, supply and upstream and downstream production stages along the supply chains to be coordinated more efficiently. China’s own industrial base shall be further strengthened and modernized. Its market size advantage shall be used to attract global resources for production and research. At the same time, the increased domestic supply of innovative and high-quality products shall help strengthen China’s role as a leading manufacturing and trading power.  

In short, China goes for more domestic innovation, domestic production and domestic demand and it will be even more “selective” in promoting international trade and investments than in the past to help achieve its development goals. Chinese policies derived from the 14th Five-Year Plan are thus expected to strongly influence how future global supply chains will be reshaped. For example, MNEs with investments in or exports to China that may be considered by the Chinese government to hamper the Chinese firms’ development will face more difficulties in doing business as usual in China. And support for Chinese direct investments abroad can be geared to help enhance China’s own technological capability, thus helping upgrade Chinese firms’ position in the global supply chains in the long term. 

China’s Five-Year Plan and its policies will therefore pose challenges not only for MNEs doing business in/with China but also for their suppliers and customers. This will further reinforce the need felt by policymakers from Western countries to in turn foster economic self-sufficiency and technological sovereignty of their own economies through decoupling. 

At a time of considerable tension in the economic and political relations between China and Western countries, as well as increasing geopolitical conflicts and uncertainties, deglobalizing policy initiatives by China, the EU and the US may further weaken mutual trust, reduce willingness to cooperate, and ultimately lead to costly economic decoupling and less efficient re-nationalization of global supply chains. 

To be sure, economic and political relations between China and the EU/US are complicated and there are economic and political conflicts of various kinds. Decoupling from each other is certainly not the best way to deal with these conflicts, however. Instead, to reap the (potential) benefits of globalization for global prosperity and sustainability, open bilateral and multilateral dialogues and cooperation are essential.  

And for such dialogues, it is key not only to understand the interests of one’s own country, but also to learn more about the views of the other side. This is what the Global China Conversation # 5 “Reshaping Global Industrial Chains: Options for China” aims to contribute to.  

Wan-Hsin LIU is a Senior Researcher in the Research Centers “International Trade and Investment” and “Innovation and International Competition” at the Kiel Institute for the World Economy. She is also Coordinator at the Kiel Centre for Globalization. 

This contribution is prepared in the context of the event series “Global China Conversations” of the Kiel Institute for the World Economy (IfW). On Thursday, Qiyuan Xu, Deputy Director at the Institute for World Economics and Politics of the Chinese Academy of Social Sciences (CASS-IWEP), and Rolf J. Langhammer, Former Vice-President at the Kiel Institute for the World Economy, will discuss the topic: “Reshaping Global Industrial Chains: Options for China”. China.Table is media partner of this event series. 


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