Is Trump able to subdue China?

Is Trump able to subdue China?
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Global companies are leaving China: according to Gartner Inc., a third of them have already moved production and supply chains from China or plan to do so in the next two to three years, the rest of the industries within five years. Over this five-year period, American and European companies will spend about a trillion dollars to withdraw production operations from China, Bank of America estimates.

The process has been going on for several years amid trade wars, and the pandemic has added fuel to the fire. The Bank's research showed that about 80% of companies from global sectors faced supply chain disruption during the border closure period, as a result, 75% of them decided to expand their plans to return production to their home countries.

A survey conducted at the beginning of the year, before the pandemic, indicated that there was a real and structural trend moving from globalization to localization. Six months later, amid the rampant COVID-19, the presence of tectonic shifts became apparent, according to the Bank of America review.

The pandemic is a significant, but far from the main reason for the flight of global companies from China. First of all, it is connected with the actions of the United States, which sees China as its clear competitor. The Chinese are taking an increasingly confident position in global finance and politics, and they have a fairly strong army. Obviously, the United States is not satisfied with this situation, and is trying to move China from the pedestal of the world leader and restore the former balance of power.

In many ways, such US policy is determined by President Donald Trump. On the eve of the presidential election, the incumbent owner of the White House is increasing pressure on China. Recently, Trump said that the States will provide tax breaks to companies that return production from China to the United States and, on the contrary, will impose additional fees on those who do not.

A while ago, the US Department of Commerce tightened restrictions for the Chinese telecommunications company Huawei Technologies Co., effectively depriving it of access to all equipment using American technologies.

If Trump wins the election, the process of withdrawing production from China will continue. If the Democratic candidate Joe Biden wins, it is quite possible that things will turn in the opposite direction.

It was under the Democrats that a global deal was made with China, when production was introduced in China, and thus multinational corporations reduced costs, some analysts say. After all, China has become a World Factory for a reason: the Chinese have a huge capacious market, cheap labor, and very flexible legislation aimed at companies that export. All these factors have not gone away.

According to the experts’ assessment, it is unprofitable for global companies to return production to the United States: salaries are many times higher there. In Europe, labor legislation is very difficult, and trade unions are very strong: the costs of companies that transfer production are significantly increasing. And even if we take into account that wages in China have grown significantly in recent years, there are still many countries where labor is quite cheap. Many businesses that leave China place their production not in the US or the EU, but in other Asian countries - India, Indonesia, Vietnam. American companies are moving to Mexico, which was a surprise for the Trump himself.

Can any of these new industrial locations repeat the so-called Chinese miracle? India is very close to trying to move China off the podium. It has all the factors that make it possible to succeed: huge population, cheap labor, workers who speak English. However, this may cause strong opposition from China, and relations between the countries are already quite tense.

Looking at the experience of China, probably everyone would like to repeat this path. However, not everyone will succeed.

Test of strength

If the process of withdrawing global production from China continues, it will mean a sharp loss of export revenues, further devaluation of the yuan in an attempt to return these revenues, and social unrest. But the global economy will also have a hard time.

This will also mean turmoil for the world markets, including in the financial market. China will sharply reduce purchases of US Treasury bonds (it has already reduced them), and may begin to discount them. This is not a submissive country that will calmly accept the latest trends. They have ways to hit back.

The disruption of supply chains and logistics will have a negative impact on the global economy as a whole. But for China, most likely, this will not be a catastrophic situation. The famous tactic of the Chinese - to take other people's technologies and develop their projects based on them - has borne fruit. China has its own global corporations and brands that successfully compete with world leaders. So even if Western companies leave China, China will still remain a fairly strong, industrially developed country.

The global economy will be redistributed in some way, but China will still maintain its position. And, most likely, sooner or later it may catch up and overtake the United States.

However, experts do not believe in the complete withdrawal of world corporations from China: some of the companies will still remain there. Politicians do not believe in the end of globalization. Trade wars and COVID-19 can slow down this “train”, but it is already impossible to stop it. Moreover, services and industries such as tourism and international passenger transport have been severely affected by the border closures, but global trade has not stopped: container ships from China have both traveled and will continue to travel to the United States.

Yes, there were production idle runs, but only for a short time, and much has already been restored.

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