Supply Chains Shutdown?

The latest reports out of South Korea about the spread of COVID-19 points to ominous signs for Asia's supply chains and global production.

Is COVID-19 succeeding in decoupling the world economy from China where Trump failed? This is the question that the The Financial Times Editorial Board grapples with in their most recent opinion piece The virus crisis and the decoupling of global trade:

"Where politicians failed to decouple the Middle Kingdom from the west, mother nature is succeeding. The introduction of tariffs by US president Donald Trump attempted to renationalise supply chains and encourage businesses to bring jobs and factories back to the west. Apart from a few companies moving to other Asian economies, such as Vietnam and Thailand, to avoid the duties, trading patterns have remained largely in place, although US-China volumes declined slightly." FT

South Korea, Taiwan and Hong Kong remain among the top economies linked to mainland China through trade channels. The unprecedented closure of economic activity and production shut down across most of China will leave its mark on multinational companies. There is no question about it. If the tariff wars and rising wages were raising uncomfortable questions for board rooms of MNCs, now the lack of products, something companies have not experienced with China, is sure to increase the discussions.

But there are no short term fixes here. As the FT article notes and as we've experienced over the past 3 years living through the US-China trade tensions and trade wars, very few companies are able to completely re haul their supply chain outside of China. For one, no single country or grouping of countries - Sorry, ASEAN and AEC cannot replace China - cannot replace the scale, expertise, and logistical capabilities that China posses. But that doesn't mean change will not come.

MNCs who sell into the mainland market will be loath to cut manufacturing in China for fear of being black marked by the government of by Chinese consumers. Also more practically, if your strategy is to produce and sell in China, COVID 19 changes nothing in the medium to long term.

There are other issues like rising wages and declining population to worry, but production shut down is not one. They may use this as an opportunity to move down the supply chain and outsource some production though.

The MNCs that only use China as an assembly location though, COVID 19 does raise important questions that leaders, boards and shareholders will need to grapple. This episode has also brought into the open many topics about China that tend to get swept under the carpet. No easy fixes, at least in the short term.

So De-coupling. We hear this every decade or so. Back in 2007, Asia was said to have decoupled from the West and America. Here's a reuters article - Emerging market "decoupling" theory may be premature

"The notion that the U.S. is no longer the driver of world economic growth is in vogue on Wall Street, yet the idea that Europe and Asia have “decoupled” from the American economic engine may be more an investor hope than a sound investment theory." Reuters, 2007

Clearly, the world today in 2020 is not what it was before 2016. We are in a different paradigm. While goods trade is 'under attack' from nativist ideologues to natural disasters to epidemics, services trade is on the rise. There will be profound changes and this is just the beginning, but global trade will continue, but in a more bifurcated manner, more regional in nature, but it will still be cross border activity. The final chapter of globalization and coupling or decoupling has not yet been written.

#trade #supplychains #geopolitics #multinationals #politicalrisk #disruptions #Asia