by Vaibhav Tandon, Senior Economist, Northern Trust
Chief International Economist Vaibhav Tandon reviews the barriers protecting China's role in the global economy.
I’ve been wondering lately which economy, if any, can be the next China. As companies and countries look for alternative suppliers, who has the best chances of success?
Much of what made China a manufacturing powerhouse didn’t happen overnight; it took generations. Some view China’s manufacturing success as a simple product of its cheap and large labor pool. But low-cost labor is plentiful in many parts of the world ranging from Africa to South America. So why have these regions not become manufacturing hubs?
For years, China cultivated a thriving production ecosystem that included reliable infrastructure, efficient sourcing, and access to financing. China is also one of the few countries that is rich in key natural resources. These supports helped firms move up the value chain, from producing clothes and toys to cell phones and electric vehicles. China designed its production networks to make the most of its labor force.
But fueled by a rise in mistrust between Beijing and the West and disruptions from COVID-19, businesses are adopting a “China plus one” business model, which focuses on mitigating risks associated with over-reliance on a single nation.
Countries like India and Mexico are among the beneficiaries of this strategy, but not wholly because of economic considerations. Geopolitical and geographical proximity to the West have led firms to explore these destinations.
Yet these two nations are a long way from challenging China’s role as the workshop of the world. China accounts for about a third of global manufacturing output. None of the industrializing economies which are vying for Plus One status are even remotely close to matching that scale.
Mexico is benefitting from North American trade through the United States Mexico Canada Agreement but has a poor reach outside the continent. The quality of Mexican infrastructure diminishes importantly as you get further south of the border with the U.S.
India has a large labor pool and substantial intellectual capital. But those who track India’s economy from close quarters, which includes me, are well aware of the challenges businesses face. These range from a lack of world class infrastructure, to unskilled labor and burdensome regulations.
No single economy is likely to replace China. But I do see countries like India and Mexico replacing specific segments of supply chains for industries that are still heavily China-dependent. Alliances of nations could also form to create friend-shoring networks that could rival China.
While completely leaving China is not a solution, diversifying dependencies across regions or continents does make sense. In a rapidly changing geopolitical landscape, it is important to keep options open. As a former British prime minister once said: “There are no permanent enemies, and no permanent friends, only permanent interests.”
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