Will Coronavirus Result in Economic Distancing of China?

With drugs for the treatment of coronavirus currently still at the trial stage, social distancing appears to be the only effective remedy for the prevention and cure of COVID-19. But the specter of economic distancing also looms large over China, which is in the eye of the storm due to being the reported origin of the coronavirus endemic.

Calls to Penalize China

US President Donald Trump has called for penalizing China and threatened to impose tariffs, while Japan and South Korea have shown eagerness to replace manufacturing bases from China. Furthermore, India, Vietnam, and other nations are working overtime to lure away companies based in China. The stage seems to be set for the economic distancing of China.

Trump’s repeated criticism of China for its handling of the COVID-19 outbreak is likely to strain global trade ties with various Chinese companies. In the meantime, countries are exploring possibilities to move out of China to diversify supply chains. Japan has earmarked $2.2 billion to help shift factories from China, and Korean companies, like Hyundai Steel and steel major POSCO, are in talks with the Indian government to shift to India. Also, European Union members have planned to cut dependence on Chinese suppliers.

The US Strategy to Economically Replace China

US Secretary of State Michael Pompeo stated last month that the US is working with India, Japan, South Korea, Australia, New Zealand, and Vietnam to “restructure supply chains to prevent disruption from corona like situation ever happening again.” According to Reuters, the Trump Administration is “turbocharging” an initiative to remove global supply chains from China, with one official saying it is favoring an “Economic Prosperity Network” of trusted partners instead. Kearney, the renowned consulting firm, in its seventh annual Reshoring Index released in early April, said that companies “will be compelled to rethinking their sourcing strategies, (and) their entire supply chains.”

India and Vietnam to Replace China in Post COVID-19 Era

According to researchers, the US will primarily look to Vietnam and India to replace China in the global supply chain network. The US has high hopes that India and Vietnam can quickly ramp up to equate Chinese manufacturing capacity. An official said India is in talks with US-based Abbott Laboratories and Medtronic Plc for relocating their units to India. As Abbott and Medtronic are already present in India, it is easier for them to move their supply chains from China to India.

The Indian government has approached more than 1,000 companies in the US in April and offered incentives to manufacturers seeking to move out of China. India is prioritizing food processing units, medical equipment suppliers, textiles, leather, and auto part makers.

Officials have told companies that overall costs are still higher than China, but India is more economical in terms of securing land and affordable skilled labor as compared to the US or Japan. India’s trade ministry has sought feedback from US companies for necessary changes in the country’s labor and tax laws to make it more investor-friendly. The Indian states of Madhya Pradesh and Uttar Pradesh have relaxed their labor laws to lure away companies based in China. The Indian government is also reviewing e-commerce companies’ requests to postpone the proposed tax on digital transactions introduced in this year’s budget.

The Indian Government is Ready For New Opportunities

Dr. Ajay Sahai, director-general and chief executive officer of the Federation of Indian Exports Organization, said, “During the US-China trade war, India missed the opportunity, but this time government is prepared. China is also losing manufacturing competitiveness due to the soaring manufacturing cost on account of environmental norms. USA’s China-specific traffics will be followed by many countries, like Australia, and the European Union. India is a bigger market than Vietnam or Cambodia, so it would be an ideal destination for investors looking to move operations out of China”.

It is worth mentioning that India has identified a total area of 461,589 hectares (nearly double the size of Luxembourg) across the country, providing ample space for businesses moving out of China. Interacting with local media, Mukesh Aghi, president of the US-India Strategic and Partnership Forum said that “US capital is looking for geographies outside, and we can see India responding.”

Amid the corona furor, UK parliamentarians opposed a Chinese government-owned investment firm’s attempt to install four directors in a British smartphone chips manufacturing company. The surreptitious be-wary-of-China campaign launched in the European, Asian, and the United States indicates that China’s days as the go-to manufacturing hub for the Western world are over.