As the conflict in Ukraine compounds the effects of supply chain and economic upheaval wrought by the Covid-19 pandemic, organisations are increasingly reviewing their networks to avoid future disruption. Amid heightened sensitivity towards risk, much attention has focused on China, where evolving relations with the US and others, as well as factors such as the country’s zero-Covid policy and tensions surrounding Taiwan, have helped fuel unease.
China’s zero-Covid policy has illustrated the impact that interruptions to Chinese industry can have on the global economy. China is the world’s biggest exporter of goods and services, and accounted for 30.5% of global manufacturing in 2021, according to the United Nations. By comparison, the US, the world’s second-largest manufacturer, accounts for a 16.8% share.
As 2023 approaches, and procurement teams evaluate the geopolitical landscape, Procurement Leaders looks at some of the main themes to monitor next year and beyond.
While many countries have relaxed Covid measures, largely on the back of successful vaccination programmes, China has retained a strict zero-Covid policy. The strategy, which allows for the shutdown and quarantine of large areas in response to an outbreak, has resulted in the abrupt closure of factories and offices, affecting production at facilities operated by firms such as Tesla and Foxconn. Lockdowns have also affected the movement of goods at China’s largest shipping terminals, restricting the flow of lorries and other transport necessary for their export.
Domestic frustration at the policy has bubbled over in recent weeks, triggering rare protests in cities across the country. Officials hurriedly announced an acceleration of the country’s vaccination efforts in the immediate wake of the protests and have since eased some restrictions. But China’s leadership has not yet offered an indication as to when it will end the policy. President Xi Jinping, who secured a third term at October’s Party Congress after scrapping the previous two-term limit, has championed the strategy, despite its economic impact.
According to the IMF’s Article IV mission to China conducted in November, economic growth is expected to slow to 3.2% in 2022 – its second lowest level since 1977 – before increasing to 4.4% in 2023 and 2024. This, however, is based on the assumption that the current zero-Covid strategy “will be gradually and safely lifted in the second half of 2023.”
It remains unclear how the policy will evolve but a smooth and rapid emergence appears increasingly tricky given the recent spike in cases and the potential healthcare connotations of a quick opening. Loosening the policy could help reinvigorate a stalling economy, but equally trigger a significant health emergency, itself a potential economic threat. The risk, for now, is that sporadic lockdowns will continue into the beginning of 2023 and, with them, further disruption to manufacturing and exports and a brake on China’s economic growth.
Foreign and trade relations
Following the economic reforms of 1978 – opening China’s economy to foreign investment – governments in many of the world’s largest economies assumed that with economic development would come greater liberalisation in areas such as market access, human rights and potentially even democracy.
Yet relations have deteriorated in recent years, with foreign policy clashes in areas such as the treatment of Uyghur people in the Xinjiang region, the political crackdown in Hong Kong, Beijing’s extensive territorial claims in the South China Sea and Western unease over China’s military and technological advances. Beijing’s stance on the Russian invasion of Ukraine also sits at odds with that of most in the West.
Concerns over China’s perceived evolution as a strategic and military threat are now increasingly helping shape policy, particularly in technology. Most recently, UK Prime Minister Rishi Sunak joined the growing line of western leaders adopting a more cautious approach – declaring the “Golden era” of UK-China relations to be over.
As a result, the term ‘decoupling’ is increasingly used to describe the economic and trade relationship between China and its major trading partners and rivals, particularly the US. And in areas that are deemed of strategic importance, incentives to bring supply chains closer to home are also being stepped up.
The US has passed the CHIPS and Science Act, aimed at making the country less reliant on imports of key technological items such as semiconductors, while the European Union has also aired plans for its own Chips act. Both Washington and Brussels are examining ways to reduce their reliance on rare earths that are critical for their economies and defence, and of which China is the world’s largest producer and refiner. China, meanwhile, is looking to deepen its own self-sufficiency in certain areas, as reflected in part by its ‘dual circulation policy’.
The risk entering 2023 is that ties between Beijing and other capitals continue to cool, resulting in greater economic and trade confrontation and, with it, further disruption.
The US Commerce Department’s decision to block the export of advanced semiconductors and the manufacturing technology to China – limiting its access to advanced US technology – marks a significant escalation beyond the trade measures unleashed by the Trump administration.
“This is a much more aggressive move in the sense it’s designed to choke China out of very specific areas – specifically those of hi-tech development – and it’s done that knowing that this is a key competitive problem for the US going forward,” says Eric Golson, associate professor of economics at the University of Surrey.
Amid these shifts in relationships, the risk is that commercial tools could be increasingly used as levers in any disputes, be it the result of policy change or defensive trade moves against countries or sectors. Policy could also result in multinational firms in some sectors needing to conform to one set of standards and processes for products manufactured in and/or sold to China, and another set for other countries. Organisations should brace themselves for future disruption, says Agatha Kratz, head of China corporate advisory at Rhodium Group: “Companies need to be aware that a lot is coming their way that is going to disrupt their operations directly or indirectly. They need to be prepared for that, need to have a plan on what they want to do, or have to do, choices they have to make if their industry is targeted,” she says.
For decades, Taiwan’s status has been a source of tension in relations between China and other nations, particularly the US. Episodes such as US arms sales to Taipei, democratic elections on Taiwan and foreign warships transiting the South China Sea will likely remain periodical flashpoints as they have done in the past. Yet conflict has, during much of the preceding period, been seen as an unlikely immediate outcome.
But a more sensitive geopolitical environment following the conflict in Europe – alongside cooling relations between China and the US and others – has amplified tensions. Following his consolidation of power, Xi Jinping’s oft-cited desire for reunification has also prompted some reassessment in the West of the potential for the use of military force in achieving those aims. China, for its part, remains wary of US potential involvement, not least after President Biden affirmed this year that the US would defend the island in the event of an invasion.
While Moscow’s decision to send troops into Ukraine resulted in a significant dent in supply channels, any conflict across the Taiwan Strait would undoubtedly have an even greater impact, not least given the involvement of the world’s second-largest economy and the planet’s leading manufacturer of semiconductors.
According to some reports, in the event of a conflict over Taiwan, a Chinese blockade could result in economic losses of $2.5tn per year.
As Russia’s invasion of Ukraine has also underscored, the cost of conflict in both economic and political terms is enormous, and potentially provides a persuasive deterrent. From a global supply chain perspective, it would be hugely disruptive, far beyond the upheaval wrought on value chains during the height of the pandemic.
And while conflict remains a risk – particularly where any of the key parties deviate from the current status quo surrounding Taiwan – economic and commercial leverage is currently more likely to be employed. That may fall far short of the economic and human catastrophe of conflict, it nonetheless does create potential risks for the supply chain, and one that firms with exposure to the region need to consider.
“People on company boards tend to look at Taiwan in black and white terms: there’s a war, there’s no war. But it needs to be thought of as a long escalation ladder with full conflict at one extreme. We are expecting a lot more steps to be taken but those don’t necessarily mean getting into conflict,” says Rhodium’s Kratz.
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