Washington, DC, May 18, 2021 --  

China and the West are drifting apart after three decades of integration. A peaceful transition is critical for all.

When Chinese electronics giant Huawei surpassed Apple to become the world's second largest smartphone manufacturer in 2019, its victory lap was short lived. in May of that year, the United States added the company to an export blacklist ultimately blocking Huawei from critical microchip technology and Google's Android operating system.¹ In the past year, phone shipments by Huawei have collapsed in international markets and declined to just a 16 percent share within China itself².

What was once seen as a tool of the Trump trade war on China has been maintained as U.S. policy four months into the Biden administration. Now, as the world's economic engine begins to emerge from a year of pandemic-era retrenchment, it has become clear that the three decades of increasing global integration with China has come to an end.

The emerging shift of manufacturing away from China is in part a natural economic phenomenon. The low wages that once made it profitable to put new assembly lines in China, are largely gone. New low-wage manufacturing has been sent to other South and Southeast Asian countries for years. China's continued manufacturing largesse derives from momentum, huge capacity and deep supply chains. These supply chains will ensure that even today, a recovering world economy has no choice to get much of its supplies from China's export-oriented manufacturers.

But the dynamics have changed. In a post-Trump era, it has become clear that China's autocratic Xi Jinping is now the primary driver of the global pull-back from China. Between bullying Taiwan, ending democracy in Hong Kong, fortifying the South China Sea and severely repressing China's Uighur minority, he has caused Westerners to think twice about working with China. Outrage over the Chinese Communist Party's treatment of its Uighur minority is the cause of the most recent flashpoint. Xi's confinement of Uighurs in concentration camps in China's western Xinjiang province has been called genocide by the British government.³ Western fashion retailers H&M and Nike publicly announced they will not use cotton grown in the region. This caused a backlash within China, as state-run media pushed a boycott of these Western brands.⁴.

Such a dust-up is minor on a global scale, but it is indicative of broader changing attitudes. Amongst American startups, seeking a Chinese manufacturing partner was once considered cool -- an indication that the startup company was poised to hit the big time. Today, this arrangement taken only out of necessity -- it isn't anything you want to brag about.

The shift away from China is a big change, but it is to some extent just a return to the norm. The decade after the financial crisis saw a trend of Chinese outsourcing so frantic that it became overreach. The pullback from integration will inevitably mean a partial return to national economies rather than global ones. Huawei will try to make a go of it within China with its domestic HarmonyOS (called HongmengOS in China) and locally sourced chips. Brands like Nike and H&M may have to say goodbye to the Chinese market, at least for awhile. And while the world can certainly live with this kind of national fragmentation, let us not forget that it typically leads to bad things for consumers.

Argentines living under import substitution policies in the middle of the last century had to buy expensive copies of Ameriucan appliances made by the Siam Di Tella factory in Buenos Aires. Soviet citizens of the same era were even worse off -- they had to wait for years to purchase refrigerators far inferior based on Soviet designs. Today's Chinese consumers already use domestic knockoffs of Google services (with heavy dose of Communist Party surveillance), and if Huawei has its way, Chinese citizens will be relegated to a new era of crappy domestic apps built for its HarmonyOS. But it is China, not other countries, that will suffer these kinds of effects.

What will change for citizens Western countries? Not much. China's industrial output is huge, but generally consists of industrial commodities that can be had elsewhere, or manufactured goods made under contract from foreign designs and as domestic variants of foreign designs.

The one thing that China has that other countries can't match is volume. China accounts for 28 percent of global manufacturing output by value⁴, but this understates the situation because so much of what China exports is made up of bulky low-value components and commodity products. All the other countries in the world combined cannot make the volume of stuff that China can, and nobody has the warehouses and supply chains primed with all those things needed to deliver tomorrow. If China were to completely shut off access to those supply chains -- as in a military conflict or a total blockade -- citizens of Western countries will certainly suffer. Yet if war ever comes, consumer products will be the least of our problems.

Related Web Columns:

The Rise of the Silicon Curtain, June 4, 2019

Notes:

1. 9To5Google, Trump Administration Puts Huawei on Export Blacklist, Can’t Import US Hardware Without Government Approval, May 16, 2019

2. Global Times, Huawei HarmonyOS Phones are Coming, Challenges Remain as Devices Market Share Keeps Declining, May 5, 2021

3. BBC News, Nike, H&M Face China Fury Over Xinjiang Cotton 'Concerns', March 25, 2021

4. The Guardian, UK MPs Declare China is Committing Genocide Against Uyghurs in Xinjiang, April 22, 2021

5. World Economic Forum, These Are the Top 10 Manufacturing Countries in the World, February 25, 2020