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China. China eyes greater influence on global trade, despite trade tensions and supply-chain restructuring

"Wondered what things from other countries China bans .. Prohibited and Restricted Imports"

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Amidst geopolitical strains with the US, the EIU forecasts the Chinese economy to grow at 4.9% in 2024. Most of this growth will come from domestic private consumption and a more positive trade outlook.1 A large number of China-based business executives (30%) believe export growth in 2024 will come predominantly from expanding operations in existing markets due to increased demand for goods. However, in the context of export growth, business executives are concerned about political instability and uncertainty around tariffs in their key markets, much more than their counterparts in the US and India. This comes as it is now five years since the US escalated trade tensions with China, a policy that has continued under the present US administration. Most China-based business executives (31%) cite the heightened geopolitical environment as their number one reason to be pessimistic about global trade over the next two years.

BAR CHART - Figure 1: Top reasons for pessimism in global trade (2023-25)
Respondents could select up to two

Heightened geopolitical uncertainty, (e.g. the war in Ukraine, tensions between the US and China)
Heightened inflation and interest rates
Economic downturn in key markets (i.e. the outcome of interest-rate hikes)
Rising governmental protectionism
The fragmentation of the world into trade blocs/regionalisation
The resurgence of the new covid-19 strains or future global pandemics
Global warming and extreme weather patterns causing supply-chain disruptions
Domestic opposition to trade/globalisation
Tight labour markets
An ineffective multilateral trading system (governed by the WTO)
De-dollarisation of trade (i.e. use of other currencies for bilateral trade transactions)
Outdated/ inadequate transport infrastructure
Cybersecurity breaches
None of the above
Other, please specify
Source: Economist Impact

China finds itself at the crossroads of global supply-chain restructuring

China finds itself at the centre of the push towards supply-chain restructuring, in light of the geopolitical shocks continually disrupting global trade. Some foreign-owned companies are pursuing a ‘China+1’ strategy by setting up an additional supply chain elsewhere to boost resilience and reduce dependency on a single country. South and South-East Asia in particular have benefited from this strategy so far. For example, Vietnam is increasingly attracting investments from the textile and technology sectors. Though companies are setting up manufacturing bases elsewhere, these are predominantly redundancy capabilities in case of potential disruptions. The sheer size of the manufacturing base and specialised labour in China enables the economy to remain a dominant player in these sectors.

The reconfiguration of global supply chains is prompting China to build new trade ties and consolidate existing relationships outside the US sphere of influence. In 2023, China-Russia bilateral trade reached an all-time high of US$240bn, a 26.3% year-on-year increase. China’s technology exports to Russia have skyrocketed since 2022, while Chinese buyers have offset Russia’s oil export slump due to Western sanctions.2 The two countries have grown closer from a political and economic perspective following Russia’s invasion of Ukraine in 2022.

Foreign-owned companies are not the only ones diversifying away from China. Some Chinese companies are investing overseas and establishing new manufacturing locations in countries with better market access through preferential trade arrangements than they would get from China. This is viewed, at least in part, as an attempt to circumvent some of the trade sanctions imposed by the US on China. For example, China’s Lingong Machinery, a construction equipment manufacturer, announced a US$5bn investment in Mexico, while Trina Solar, a Chinese solar panel manufacturer, also announced a US$1bn investment in the country.3 Additionally, Chinese textile and light manufacturing businesses are increasing their investment in Egypt to use the country’s favourable business environment and market access to Africa. At the end of 2023, Egypt’s Suez Canal Economic Zone received an investment of US$70m for a new dyeing, processing and textile manufacturing project from China-headquartered Hengsheng Dying Zhejiang Company.4 Chinese electric and home appliance companies such as Haier and Guangdong Vanward New Electric are also setting up production or expanding facilities in Egypt with goods destined for European markets.5 The nature of Chinese investment in Mexico and Egypt differs considerably from those in infrastructure or raw materials traditionally brokered by China around the world. In this case, Chinese capital is employed into services and manufacturing of goods.

Trade protectionism and the scramble for precious mineral and energy commodities make ‘de-risking’ from China more difficult

China is likely to continue introducing trade protectionism measures on some exported goods on the grounds of national security in 2024, as it seeks to continue ringfencing its high-tech manufacturing in light of its growing rivalry with the US. In October 2023, China announced export controls on graphite (a key component in batteries), fuel cells and nuclear reactors.6 China dominates global graphite production, despite having only 22% of global reserves. In 2021, the US imported 100% of its graphite and relied on China for at least 30% of its graphite imports.7 This follows a move by China in early 2023 introducing export bans on other materials critical for solar power technologies.8 Consequently, businesses looking to divest from China, particularly in sectors that rely on critical minerals during their manufacturing process, will have to consider risks to the procurement of critical inputs outside of China.

China’s expanding influence in critical materials and green infrastructure makes it harder for businesses to de-risk from China. This can be seen in electric vehicles, a sector the country is already dominant in. For example, as part of its Belt and Road Initiative, Chinese investment is entering new markets in Africa and Central Asia to pursue mining interests tied to the procurement of critical minerals. These are necessary for high-tech green technology production, like batteries, electric cars and solar panels, as well as energy procurement. For instance, a key infrastructure-for-minerals trade deal between China and the Democratic Republic of the Congo, mooted in mid-2023, is expected to move ahead this year.9 Meanwhile in Central Asia, the Chinese government has unveiled a new plan to invest US$3.8bn of financing and grants into development projects while accelerating the building of a natural gas pipeline into China.10

China’s sheer size and influence on global supply chains and global trade will inevitably be at the forefront of business executives' minds in 2024. The ongoing US-China trade tensions, and the formation of new geopolitical alignments, will also shape how foreign businesses assess their risks in China and how Chinese businesses invest overseas. China’s dominance in emerging sectors such as green technologies will pressure Western competitors, while expanding Chinese soft power in the developing world, particularly in the provision of critical raw materials, will keep China dominant. While friendshoring is on the rise, the bulk of the global manufacturing base will be difficult to move overseas in the short term.

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1[https://viewpoint.eiu.com/analysis/geography/XO/CN/reports/one-click-report]

https://www.trade.gov/country-commercial-guides/china-prohibited-and-restricted-imports

**

United States

Geopolitical unrest hangs over US supply chains

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The North American region was projected to register the strongest export growth of any region in 2023, at 3.6%.1 This was below the export growth levels of the previous two years, however, and is projected to decline to 2.7% in 2024. Conversely, trade volume of imports are estimated to have fallen by 1.2% in 2023—down from 6% growth in 2022—before recovering to 2.2% in 2024.2

More broadly, the Economist Intelligence Unit expects US real GDP growth to slow to less than 1.5% in 2024, reflecting the impacts of rising interest rates and still-high inflation on consumption.3

Trade tensions with China continue to impact US trade and supply chains, while November’s presidential election looms large on the horizon. The outlook is further clouded by unrest in the Middle East, with supply chains affected by disruption to shipping traffic in the Red Sea area.4 Yet, the US Congressional Budget Office expects the US trade deficit to narrow from 3.4% of GDP in mid-2023 to 3.1% in mid-2024, with the deficit then remaining stable as stronger domestic demand offsets export growth.5

The US-China trade war remains disruptive for businesses and the global economy

Global trade continues to be shaped by tensions between the US and China. The trade war between the two countries has affected an estimated US$450bn in annual trade since it began in 2018-19.6 Trade barriers imposed in this trade war, such as the Section 301 tariffs7 imposed on China by President Trump in 2018, are still in operation. Additionally, the Biden administration barred US exports of advanced semiconductors to China and is reportedly considering new tariffs on electric vehicles and certain minerals imported from China.8

Our survey of business executives shows that the issue is affecting businesses globally. US-China tensions contribute to the heightened geopolitical uncertainty, cited by 22.9% of respondents as a chief source of pessimism regarding the global trade outlook. Around one-in-six respondents in the US and China also see rising protectionism as a cause of pessimism regarding the future of global trade over the next two years.

BAR CHART - Figure 1: Reasons for pessimism in global trade (2023-25)
Respondents could select up to two options

Heightened inflation and interest rates
Cybersecurity breaches
Economic downturn in key markets
Heightened geopolitical uncertainty
Global warming and extreme weather patterns causing supply-chain disruptions
Rising governmental protectionism
Domestic opposition to trade/globalisation
Tight labour markets
The resurgence of the new covid-19 strains or future global pandemics
Outdated/ inadequate transport infrastructure
An ineffective multilateral trading system (governed by the WTO)
The fragmentation of the world into trade blocs/regionalisation
De-dollarisation of trade (i.e. use of other currencies for bilateral trade transactions)
None of the above
Other, please specify

US-China decoupling is driving increased trade disruption as companies separate supply chains to circumvent restrictions.9 Almost 36% of US respondents are creating parallel supply chains or dual sourcing to service different markets in response to geopolitical disruptions. While these strategies can increase supply-chain resilience, they require significant upfront investment and add to pressure on inventory management and supplier due diligence.10

Globally, ‘friendshoring’—switching to suppliers in countries that are politically aligned or where a preferential trading arrangement exists—is the supply-chain strategy most commonly implemented in response to geopolitical events (36.1%). Like other such strategies, however, friendshoring comes at a cost to US businesses and the country’s economy.11

The global economy could be hit hard by tech decoupling

Once a key driver of globalisation, technology has become a major source of trade friction, with the US and China increasing restrictions and reducing collaboration as the former seeks to prevent Chinese AI businesses from gaining access to US technology assets, evidenced by their export controls on semiconductors.12,13

Through our own quantitative modelling using the Global Trade Analysis Project (GTAP) platform, we found that eliminating high-tech trade between the US-led Western bloc and China-led Eastern bloc would result in a global output decrease of 0.9%. GDP in China and the US would decrease by 1.9% and 0.9%, respectively. The remaining Eastern bloc would suffer a 0.7% GDP decline, and the remaining Western bloc would see GDP fall by 0.8%, illustrating the effect of trade disputes on the global economy, and on the technology sector in particular.14 This reinforces the need for US businesses with supply chains across multiple geographies to enhance supply-chain resilience, such as establishing dual supply chains to mitigate risks from certain markets.

The 2024 US election will shape the direction of trade

The extent of future trade barriers between the US and China will be dictated, in part, by the outcome of the US election in November 2024. Should former President Donald Trump take office for a second time, it is likely that he would intensify the trade war he began during his first tenure.15

That would include higher tariffs, targeted at China,16 with Mr Trump on record as saying he would “enact aggressive new restrictions on Chinese ownership” across a range of assets in the US, among other measures.17

The tariffs imposed on Chinese imports by the Trump administration have been left in place under President Biden, reflecting concerns about being framed as ‘soft’ on China. There have been efforts in recent months to restore diplomatic relations with China and explore potential cooperation opportunities.18 Yet the Trump tariffs remain in place, and President Biden is under pressure to maintain an assertive stance on China as the election approaches.

[Insert: It's unfortunately not good that necessary political consideration, such as
perceived 'going soft on China' in the US can affect the world economy so much.]

It is clear from our survey, however, that higher tariffs and rising protectionism are high on the list of concerns for business. They have already taken action, such as diversifying supply chains to mitigate the effects of increased protectionism. The prospect of having to take further action will occupy minds as the election approaches. However, hardline rhetoric from both candidates while campaigning is likely to be watered down once in office. This was the case with the Trump-era tariffs on Chinese goods, as the list of products the tariffs would apply to was significantly watered down. Yet, whoever wins, it seems likely that the current protectionism is here to stay, and it could extend further into industries including renewables and electric vehicles.

https://impact.economist.com/projects/trade-in-transition/country-united-states