Globalised Commerce might prove Resilient to the Pandemic

Companies might reshore some production of medical equipment for emergencies, but other international supply chains will be harder to break

By guest author Mike Bird from Wall Street Journal

Caption and graphic courtesy by Wall Street Journal

The first examples of coronavirus-induced supply-chain shifts are under way. This week, Japanese consumer-products manufacturer Iris Ohyama announced it would take government subsidies to expand the production of masks domestically, adding to its existing production in China, the first company to do so.

Bringing some manufacturing home for medical or security purposes might make sense. But those expecting large-scale deglobalization and the return of domestic production for many goods might be disappointed.

Amid the U.S.-China trade war, reshoring was already a major issue of discussion before the coronavirus arrived. In its annual assessment of the state of reshoring, consulting firm A.T. Kearney found that American imports of Asian-made goods as a percentage of domestic manufacturing output dropped in 2019, falling from a record high to the lowest level in five years.

But that decline was down to a sharp fall in Chinese imports. Imports from the rest of low-income Asia actually rose, and U.S. manufacturing output was roughly flat.

This is not exactly deglobalisation. Manufacturing shifting from one country to another as countries grow richer and pivot to higher-value manufacturing is not new. Just as China took a greater share of manufacturing once done in South Korea and Japan, Bangladesh and Vietnam are well placed to take a portion of manufacturing that, for now, is done in China.

It would be inefficient for wealthy countries to attempt to resume much low-value production currently done abroad. Even in high-value sectors, a lack of knowledge, experience and competitiveness in niche areas would prove difficult to surmount.

A test case came in July, when Japan restricted exports of smartphone screen components to South Korea. Despite Korea’s dominant position in electronics, these components are largely produced in Japan, and major manufacturers such as Samsung and LG were left hanging.

Korea managed to reduce its Japanese photoresist imports modestly, from 92% of the total in the first half of 2020 to 85% of in the second half, by massively expanding exports from the U.S., Belgium and Germany, along with considerable efforts to boost domestic production. Japan eventually loosened but didn’t completely remove the restrictions late last year.

It’s difficult to imagine how countries without similar expertise in the right industries would manage to reshore far more ambitious elements of the manufacturing process.

It is also often presumed that pulling down trade barriers is the main factor that allowed global value chains to grow in the first place. The truth might be the reverse: Anti-dumping measures and other trade restrictions might have been rolled back as a response to growing commercial globalization, with increasingly international firms no longer wanting protection, some economists have suggested.

Ideological commitment to globalization did not drive the growth of major value chains in the first place, and its decreased popularity is unlikely to unwind them even with the current pandemic. Without gargantuan subsidies or even more punitive trade restrictions, the seemingly fragile spider’s web of global commerce may remain surprisingly resilient.