KEY POINTS

  • Experts say the pandemic likely will speed plans to move manufacturing out of China
  • The U.S. trade deficit with China fell to less than $16 billion in February, down from $43 billion in October 2018
  • A Pew survey indicated 66% of Americans have an unfavorable view of China

Amid the growing sentiment that China dragged its feet in alerting the world to the coronavirus pandemic, costing hundreds of thousands of lives and trillions of dollars, wrecking a global economy that had become dependent on Chinese factories for some of the most basic products, questions are now being raised about the reliability of supply chains and the wisdom of concentrating production of specific items in one source. 

Yet it remains unclear how countries will rethink their relationship with Beijing. What is certain is that the costs of doing business with China are much steeper than anticipated.

President Trump last week said he might take strong actions to punish China. The Trump administration has embraced the theory that the virus originated in a Chinese research lab despite U.S. intelligence agencies finding no such evidence. Nonetheless, Trump again is suggesting he would impose stiff tariffs.

As the outbreak worsened in Wuhan and lockdowns multiplied, global supply chains were disrupted. The scramble to obtain protective gear like masks and gowns for healthcare workers has yet to be resolved. The face mask shortage has been exacerbated by China's decision to change its customs policy to require retail packaging for every protective face mask leaving its factories, increasing both production and freight costs.

Mikkel Hippe Brun, co-founder and senior vice president at the B2B platform Tradeshift, said the pandemic has highlighted the vulnerability of the U.S. economy, characterizing American dependence on Chinese manufacturing and imports as “dangerous.”

“The lethal combination of single-source fragility and record-low trade activity suggest global supply chains will need to be rethought more broadly because any short-term decoupling between the two nations would prove impractical given China's dominance in several key areas of manufacturing where the U.S. is dependent,” Brun said. “What's needed is a rethinking of the value of consolidated centers of production, reduced inventory levels and manual supply chain management, and improved supply chain transparency.”

As the virus spread around the world, economies shut down as people were ordered to stay in their homes. Fears of a resurgence remain top of mind as cautious steps are taken to get back to business.

A recent Pew Research Center survey indicated 71% of Americans have no confidence Chinese President Xi Jinping will do the right thing regarding world affairs, while about 66% have an unfavorable view of the country and 62% see China as a major threat. Those feelings helped give rise to conspiracy theories about the true origins of the virus.

The outbreak has served as a wakeup call to both government officials and corporations that now is the time to think about repatriating certain manufacturing operations.

“U.S. businesses need to make serious changes,” said Phil Friedman, the president and CEO of global solutions provider CGS.

“Critical products need to be brought back to the U.S., but how? I’m a strong proponent of a market-based economy. Yet, one of the solutions to encourage manufacturing of strategic supplies in the U.S. may be a requirement, as part of the award of a major government contract, to require a commitment to manufacture some strategic supplies,” Friedman said.

The rethink began as Trump started his trade war with China, imposing tariffs that were designed to reduce the U.S. trade deficit. The Commerce Department reported earlier this month the U.S. trade deficit fell to its lowest level since September 2016. The February trade deficit with China fell to less than $16 billion, down from a high of more than $43 billion in October 2018. The March figure is expected to be even lower.

Supply chain expert Nick Vyas of the University of Southern California's Marshall Center for Global Supply Chain Management said he expects the COVID-19 pandemic to speed the “decoupling of China-centric global supply chain networks.”

“Some of the early evidence suggests that companies already began in this direction. The new supply chain post-COVID-19 will be driven by diversification, digitization and supply chain resiliency,” Vyas said.

Jerry McGinn, executive director of the Center for Government Contracting at George Mason University's School of Business, said he expects the pandemic to “accelerate trends in the U.S.-China relationship that were already existing prior to this crisis.”

“In the trade and business sphere, U.S. companies and the U.S. government have been increasingly looking at China in a different light over the past decade,” McGinn said. “For businesses, China is no longer the low-wage market it once was and aggressive state-led efforts to coerce or steal intellectual property from U.S. companies have made companies more wary of the Chinese market.”

But McGinn still expects the relationship to evolve rather than sever.

“The biggest areas where I believe that you will see the return of U.S. manufacturing will be in areas of strategic importance where we are currently in a dependent relationship with China. … This is not a 'Buy America' effort by any means, but a strategic get-out-of-China effort in manufacturing areas of national security importance,” he said.

Pittsburgh Attorney Dennis Unkovic said he expects the pandemic to spur more companies to realign their relationships with China, moving manufacturing operations to such countries as Malaysia, Vietnam, Philippines, Thailand and Indonesia, rather than back to the U.S., because of lower labor costs and increased flexibility. But Unkovic also expects pressure to be applied to U.S. companies to bring foreign manufacturing home.

“I believe Congress will eventually pass legislation to encourage reshoring of manufacturing in America,” he said.

Diplomat Kishore Mahbubani of the Yew School of Public Policy in Singapore said the coronavirus pandemic should have brought the U.S. and China closer to fight the scourge, but, instead, the situation has increased geopolitical competition. Mahbubani added that he doesn’t see the situation bringing an end to globalization.

Leo Friedman, founder and CEO of promotional products supplier iPromo, likened the U.S. relationship with China to a marriage that has its ups and downs.

“Both countries are dependent on each other and want -- no, need -- the other to be successful. We believe the relationship will continue to be strong through the pandemic because of our extreme reliance on China for medicine, raw materials, and crucial PPE supplies,” Friedman said in an email to International Business Times. “It may begin to cool off as more and more companies move their manufacturing elsewhere, including United States, but ultimately China will remain an economic and trading partner like no other nation in the world.”

How the U.S. and China have negotiated trade deals has been complex for several decades.

A New York Times article from April 1970 under the headline, "China Trade Welcomed Here" began this way: "China trade, a source of adventure and profit for earlier generations of American merchants, is again stirring interest among the nation's business leaders." 

The fate of U.S. relations with China isn't expected to clear up anytime soon, according to Kelly Ann Shaw, an international trade attorney at British-American law firm Hogan Lovells.

“The U.S.-China relationship has always been complicated, and COVID-19 has only added to the uncertainty,” said Shaw.