Why China is Still the World’s Factory, only Upgraded

Sources from the overseas media, despite rising costs, a US trade war and the Covid-19 outbreak, China’s resilient supply chain has prevailed and enabled its economy to move up the value chain.

China remains an export powerhouse reshaping the landscape of global trade. China has retained many critical supply chains locally, making it necessary for others to cooperate with it.  

The meteoric rise of the Chinese economy over the past 40 years would not have been possible without the stellar success of its export-driven growth model. While the economy has rebalanced away from export expansion in recent years, there is no let-up on its trade competitiveness. 

The country’s position as the “world’s factory” has strengthened despite a structural increase in production costs, and recent events such as the US-China trade war and the Covid-19 pandemic, both of which could have undermined its position in the global supply chain. 

Successive US tariff increases on Chinese products had the anticipated effect. US-bound exports from China fell by 17 per cent from 2017 to end-2019, resulting in a sharp drop in China’s market share in the world’s largest consumer market. 

But on the global stage, China’s market share grew by around 0.5 per cent, more than twice that of the next biggest riser, Vietnam, which saw growth of some 0.2 per cent over the same period, according to Unctad data. 

China’s exports to the US has fallen but globally, its market share has increased. This happened for two reasons. First, by shifting their focus from the United States, Chinese exporters were able to explore new markets in the Asean region and countries along the Belt and Road Initiative. 

Second, export diversion helped. By selling inputs to third countries for assembly before the final products were shipped to the US, China was able to circumvent some trade levies, while still retaining value in the final products sold. 

A once-in-a-generation public health crisis triggered by Covid-19 soon erupted. This, combined with Beijing’s  severe response to the coronavirus, almost paralysed the economy. 

With production grinding to a halt and exports collapsing, many thought the pandemic could trigger a mass exodus of supply chains out of China, which would spell the end of the country’s reign over global trade. However, what transpired thereafter came as a surprise. 

The effective defence against the trade war and Covid-19 reflects the resilience of China’s supply-chain ecosystem. This resilience, as our research suggests, is no longer built on cost competitiveness as China’s economy matures, and the demographic cycle turns. Instead, it is a result of an accelerated upgrading of China’s domestic production system, which enables its economy to move up the value chain.

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