News analysis

Looming exit of US, Japan manufacturers adds to Chinese woes

BEIJING • When China and the United States were embroiled in a trade and tech war last year, US President Donald Trump tweeted: "We don't need China and, frankly, would be far better off without them."

But many Chinese shrugged off what they saw as mere rhetoric, convinced the two economies were too intertwined - thanks to globalisation - to be decoupled.

In January, US Secretary of Commerce Wilbur Ross could not hide his schadenfreude when China was grappling with the outbreak of the coronavirus pandemic. "I think it will help to accelerate the return of jobs to North America," he told Fox Business News.

Chinese Foreign Ministry spokesman Hua Chunying called Mr Ross' remarks "unkind", in a diplomatic slap on the wrist.

As the number of coronavirus infections and deaths dwindled in China but skyrocketed in the US, President Trump ordered American companies this month to "start looking for an alternative to China, including bringing your companies home and making your products in the US".

This time, the message is unmistakable: The US is determined to decouple the world's two biggest economies.

"China's growing economic and military power had already provoked a bi-partisan determination in the US to decouple China from US-sourced high technology and intellectual property and try to force allies to follow suit," Dr Robin Niblett, director of Chatham House, wrote in Foreign Policy.

To China's dismay, Japan then entered the fray. Prime Minister Shinzo Abe has earmarked about 240 billion yen (S$3.2 billion) to support domestic companies in decoupling their supply chains from China, especially those in high value-added manufacturing. But Japanese carmakers targeting the Chinese market are likely to stay.

The move comes amid warmer bilateral relations. Chinese President Xi Jinping was initially scheduled to make a state visit to Japan this month, but this is unlikely to happen any time soon.

China is now bracing itself for an exodus of American and Japanese manufacturers in what it sees as a US-led coordinated attempt to cripple its economy.

A headline in the English-language Global Times called the plan a "big mistake".

"If the US and Japan move their companies out of China, they will potentially lose the China market," Mr Liu Zhiqin, a senior fellow with the Chongyang Institute for Financial Studies at Renmin University, wrote in the tabloid, an offshoot of the Chinese Communist Party's mouthpiece, the People's Daily.

"The companies will almost certainly be surpassed by competitors from other countries during the relocation, and there will be no way back for them."

52 MILLION JOBS AT RISK

The pandemic will threaten the employment of 52 million workers in China if the outbreak goes on until September, the Asian Development Bank warned.

If US and Japanese manufacturers quit China, millions more could be out of a job, adding to the woes of the stability-obsessed Chinese Communist Party.

Growing the domestic economy - or buoying it, in this case - and reining in joblessness and inflation have been China's watchwords to prevent a repeat of the 1989 Tiananmen pro-democracy protests, which were crushed by the military.

China and the US have been mired in an escalating war of words over the Covid-19 pandemic, plunging bilateral relations to their lowest ebb since normalisation in 1979.

The US has accused China of under-reporting figures and silencing whistle-blowers, while China argues that the US had ample time to prepare, but bungled its handling of the pandemic. Beijing insists the coronavirus may not necessarily have originated in China.

Washington has a long list of grievances, including America's bulging trade deficit with China, restricted access to the Chinese market with its high tariffs and import quotas, currency manipulation, forced technology transfers, intellectual property theft, industrial subsidies and alleged cyber attacks.

DECOUPLING DIFFICULT

But decoupling is no easy task.

"Bringing manufacturing back to the US is easier said than done," Dr Willy C. Shih, a Harvard professor of management practice in business administration, wrote in the Harvard Business Review.

"The issue is complex and defies easy solutions," Dr Shih wrote. "The pandemic and trade wars together highlight the brittleness of our global supply chains."

According to a survey jointly conducted by the American chambers of commerce in Beijing and Shanghai, most US firms in China with global annual revenue of more than US$500 million (S$710 million) have no plans to relocate elsewhere, but worries are growing over decoupling.

"Our survey results show that companies are considering adjustments to their business strategy, but there is no mass exodus as a result of Covid-19," Mr Ker Gibbs, president of the American Chamber of Commerce in Shanghai, said.

President Trump has singled out General Motors (GM) for its presence in China - employing 58,000 workers - questioning whether the US carmaker should move its operations back home. But a GM China executive, requesting anonymity, told The Straits Times: "Our factories will stay in China. We make cars only for sale in China."

GM is the second-biggest foreign carmaker in China. Its sales last year fell 15 per cent from a year earlier to 3.09 million vehicles, including the Buick, Chevrolet and Cadillac brands. About 3.65 million vehicles were delivered in 2018.

In the face of shrinking sales, French carmaker Renault has said it would divest its 50 per cent stake in its joint venture in China. But to Beijing's relief, most European firms have no plans to follow suit, at least for now.

Mr Jorg Wuttke, chief representative of German chemical giant BASF in China, told Caixin magazine that European manufacturers would find it difficult to move their operations out of China despite the disruptions caused by the pandemic.

It is early days yet to predict whether the pandemic would spell the end of globalisation.

Mr Wei Jianguo, a retired Chinese vice-minister of commerce, was cautiously optimistic that China's 400 million-strong middle class meant it would still be able to continue to attract foreign investment if and when US and Japanese manufacturers pull out.

"The huge Chinese market is China's trump card to attract foreign investment," Mr Wei, vice-president of the China Centre for International Economic Exchanges, a government-backed think-tank, told The Straits Times. "China will build a better business environment... and build open, stable and safe industrial and supply chains."

Rhetoric or not, President Trump will try his best to make life difficult for China as he seeks to deflect blame for his fumbling of the management of the virus outbreak, because his top priority is to get re-elected in November.

A version of this article appeared in the print edition of The Straits Times on April 27, 2020, with the headline 'Looming exit of US, Japan manufacturers adds to Chinese woes'. Print Edition | Subscribe