The scale of the shock
To understand the magnitude of the supply shock in China and its global propagation, the Lloyds Banking Group Centre for Business Prosperity (LBGCBP) at Aston University has mapped China’s global trading networks using official Chinese data. In 2019, the US had the highest trade dependence on China, followed by seven European countries and Japan. By 2020, European countries had moved even further up the rankings. As the pandemic continues, the worst affected Chinese exports include capital goods such as nuclear reactors, intermediate goods like iron, and labour intensive final goods such as furniture. The most disrupted Chinese imports include intermediate goods such as organic chemicals, a likely result of factory closures in China, and capital goods like electrical machinery. Hardest hit were precious stones and metals, highlighting the emergence of a sophisticated middle-class of Chinese shoppers and how COVID-19 has reduced their demand for luxury goods. Interestingly, Chinese imports of meat and mineral fuels increased sharply in 2020. The first can be explained by China’s weakened domestic supply of food during lockdown. The second highlights China’s growing demand for crude oil. Four product categories have been particularly hard hit as both imports and exports: nuclear reactors, electrical machinery and equipment, plastics, and organic chemicals. These categories include some commonly used intermediate goods (those that are used for producing other goods). Under normal circumstances, such goods would be traded back and forth between China and other countries as part of the heavily interconnected global production system. This significant drop in their international trade highlights the devastating effect of COVID-19 on GVCs.An uncertain future
But an unprecedented, synchronised and likely deep fall in demand is now developing. And China was again among the first to feel its impact. Chinese workers returned to work in April but many no longer had jobs. Widespread cancellations of international orders and delayed payments have led to liquidity problems and mass closures of businesses reliant on global demand.Read more: How to boost UK productivity after coronavirus
Investment also tumbled. During February and March 2020, official Chinese statistics report 24.4% fewer new foreign trade enterprises established in China compared to the same period last year. Meanwhile, 12,000 existing foreign trade enterprises closed down. Agriculture, logistics and those producing raw materials, textiles and clothing have been hardest hit. But, on a more positive note, there has been a surge in demand for medical supplies. Many are now highlighting the dangers of relying on global value chains – and in particular, those linked to China – leading to talk of “de-globalisation”. The European Commission president, Ursula von der Leyden, for example, has called for the “shortening” of global supply chains because the EU is too dependent on a few foreign suppliers. Similarly, the French president, Emmanuel Macron, has argued for a strengthening of French and European “economic sovereignty” by investing at home in the high tech and medical sectors. So is this the end of globalisation? No. But a reconfiguration of GVCs is inevitable.
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