Globalisation revised but not reversed by COVID
By Rajesh Kumar Singh and Philip Blenkinsop
CHICAGO / BRUSSELS (Reuters) - New York-based Delta Children, which makes cribs in China for retailers like Walmart, briefly investigated moving production to the US as supply bottlenecks due to the COVID-19 pandemic added to its high bill from the US Import duties.
Trade Secretary Wilbur Ross predicted in January that the pandemic would help accelerate this kind of shift in jobs to the United States, while some policymakers even spoke of a wider retreat from globalization than companies advocated dealing with disconnected supply chains withdrawn.
However, Delta CEO Joe Shamie finally ruled out the move due to higher labor costs and a lack of suppliers. The company continues to plan to diversify its supply chain - but by moving production to Southeast Asia.
"The Made in USA label works when the products are of equal quality and competitively priced, which is currently not the case," Shamie told Reuters.
"I would diversify and not leave China completely."
While global trade volumes have inevitably plummeted as the world slipped into recession and travel restrictions and social distancing constrained people's movement, the economic ties built by successive waves of globalization are proving to be more resilient than some thought.
The trade in goods is likely to decline by 9% this year, the World Trade Organization forecast on Tuesday less strongly than in April with a decline of 13-32%.
China's industrial sector is steadily recovering to pre-pandemic levels. Exports rose 9.5% yoy in August, the largest increase in 18 months. Optimism among German exporters reached a two-year high in September.
(Graphic: Rise of world trade over the decades - https://graphics.reuters.com/HEALTH-CORONAVIRUS/qzjvqnzogpx/chart.png)
From Washington to Wellington, politicians have preached self-sufficiency this year and urged companies to bring home the production of "essential" products in particular.
The pandemic has resulted in a record 235 export restrictions as countries hoard protective gear and medical supplies, according to monitoring service Global Trade Alert. The effects of trillions of dollars in subsidies are still unclear.
But despite the drumbeat of protectionist rhetoric, there have been far fewer new import tariffs than in the last two peak years, and Pascal Lamy, who headed the WTO from 2005 to 2013, believes the restructuring will be marginal.
"The reason there is more talking than walking is simple - it's expensive," said Lamy. "Globalization is efficient and painful. De-globalization is inefficient and painful."
The only high profile country issuing funds is Japan. 220 billion yen ($ 2.08 billion) is earmarked for companies rebuilding production. In a first round it paid 57.4 billion yen for 57 projects - less than 10 million US dollars per company.
"Senior policy makers have made a number of strong statements, but it has not yet reached a stage where there is a lot of money on the table for the repatriation of factories," said Simon Evenett, founder and professor of Global Trade Alert at the Swiss University St. Gallen.
Even before COVID, one of the main goals of US President Donald Trump's tariff war against Chinese imports from 2018 onwards was to repatriate production. Companies, on the other hand, were drawn in from China to reduce costs in Southeast Asia and followed a "China Plus One" strategy to increase the diversity of offerings.
"It remains to be seen whether (the pandemic) will lead to a much stronger containment of the US market," said Michael Froman, US trade representative in the Obama administration, in a webinar.
(Graphic: Export slows growth in the race for medical equipment - https://graphics.reuters.com/HEALTH-CORONAVIRUS/qzjpqnzgdvx/chart.png)
(Graphic: 2020 is expected to restrict fewer imports - https://graphics.reuters.com/HEALTH-CORONAVIRUS/ygdvzkljypw/chart.png)
McKinsey & Co advisors say supply chain issues have caught the attention of executives and boardrooms as COVID has caused the largest and broadest shock in the value chain, if only the most recent in a series of disruptions.
Instead of focusing solely on procurement costs, organizations are starting to consider stability and resilience.
"Supply chains are built to be just-in-time. Going forward, they could be built just in case," said Susan Lund, a McKinsey partner who leads research on globalization and trade.
McKinsey estimates that 15 to 25% of the world's goods trade could relocate over the next five years due to business arguments and non-economic factors such as regulation, compared to 8% in the past five years.
Patrick Van den Bossche, partner at consulting firm Kearney, which produces an annual re-shoring report, said it would be some time at best for the US to benefit from supply chain diversification caused by COVID-19 and the trade war.
"The big wave, if ever there is, will be at least five to ten years away as the basic infrastructure for a big wave to support it just doesn't exist," he said, adding that it involved sufficient skilled labor and suppliers.
Companies that have taken the plunge to relocate some manufacturing facilities to the US in the past decade include General Electric in Kentucky and Starbucks in Ohio, according to the US Reshoring Institute.
However, the WTO said Tuesday that the share of intermediates in trade remained stable at 52% in the first half of 2020, suggesting that there has been no major shift towards support this year. The US trade deficit in August also hit a 14-year high.
Last year, Mexico and the low-cost Asian countries were the main beneficiaries of China's declining share of imports into the United States. Despite the pandemic, Vietnam's total exports rose 4.2% in the first nine months of 2020, with the US and China being the two most important markets.
According to Lamy, dealing with COVID-19 and preparing for a future pandemic will inevitably lead to a greater focus on consumer protection and more insistence on prevention, safety, more controls and a different risk assessment.
"Upward reassessment of risk will redistribute that multi-localization. It won't be de-globalization, it will be a different version of globalization. It's a new agreement," he said.
($ 1 = 105,6100 yen)
(Reporting by Philip Blenkinsop in Brussels, Rajesh Kumar Singh in Chicago, Khanh Vu in Hanoi, Daniel Leussink in Tokyo, Cynthia Kim, Hyungjoo Jin in Seoul; editing by Kirsten Donovan)
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