Trade talks are stuck in a rut. This week’s conversations between trade envoys haven’t yielded a planned face-to-face meeting. U.S. restrictions on telecom gear maker Huawei Technologies remain a sticking point, and the threat of more tariffs still loom.
But in the interim, companies are reshuffling their supply chains, often making them more Asia-centric. Those shifts are unlikely to revert—even if a trade deal materializes.
Republican Senators introduced legislation on Thursday that would block Huawei Technologies from buying or selling U.S. patents. The restrictions placed on Huawei so far are a key issue in trade negotiations for China and could ripple through the technology supply chain. While President Donald Trump indicated some restrictions could be lifted—amid ongoing pressure from the industry—there is bipartisan support behind a tougher approach.
As for China, the growing view is it doesn’t pay for them to be overly eager. “China is going to play it cool and not actively pursue to get it done,” Keyu Jin, an associate professor of economics at the London School of Economics, said in an interview earlier this month, adding that she doesn’t think China will actively pursue reaching a deal. The wait-it-out-view is predicated on the idea that continued trade limbo—and certainly another round of tariffs—could slow the U.S. economy ahead of the 2020 election, which could create a better backdrop for a deal.
But companies aren’t waiting to see who blinks first. Trade patterns are already changing as companies accelerate the diversification of their supply chains, says Mikkel Brun, co-founder of Tradeshift, which manages electronic trading networks and helps facilitate $500 billion in trade globally. Among its clients, Brun says foreign suppliers to Chinese companies are losing out to domestic companies, especially in industries that are central to China’s long-term industrial policy, like renewable energy. That was a view echoed by BlackRock ’s Larry Fink in an interview on CNBC Friday, saying U.S. companies were diversifying their supply chains and pulling them out of China.
China is also pushing companies to relocate supply chains to China or neighboring countries, accelerating a trend toward more regional supply chains as firms have sought out cheaper labor costs elsewhere in places like Vietnam. “China had a major wake-up call with (semiconductor) chips,” Brun says, referring to the export restrictions on Huawei and those last year on ZTE that crippled the telecom gear maker until they were lifted and replaced with a fine.
“[Companies] are saying they have to prepare themselves for something even worse,” Brun says. “Reconfiguration doesn’t happen overnight, but the shock the Chinese and cross-border supply chains have experienced is permanent. Even if the situation normalizes, it will never return to what it was before.”
Vietnam is a beneficiary, as companies have been moving there to capitalize on lower wages for a couple of years, but it can only take so much capacity. Bangladesh and Thailand are also getting investment, and India could also get a boost, Brun says.
While a protracted trade-and-technology battle between the world’s two largest economies will crimp global economic growth, China is taking steps to soften the blow on its own economy, Brun says. That includes opening up parts of its economy—including financial services—and trying to create a technology and innovation hub to bolster its high-tech supply chain industry, Brun says. But Beijing is also aggressively trying to digitize small- and medium-size enterprises, with local governments often subsidizing companies’ transition to cloud-based solutions and allowing foreign companies like Tradeshift to get involved digitizing their supply chains.
All the data created by digitization, which is still in early stages, could in turn help the economy. For example, foreign banks, drawn to the opening of the financial services sector, could develop new ways to finance credit-starved small and medium enterprises while minimizing their risk. Banks can also use data to hold companies more accountable—for example, by correlating a factory’s energy consumption with satellite images of traffic around facilities to see if the numbers in their annual report are accurate, which can help them better assess the risk of borrowers.
“There is so much potential growth in China that could happen if capital was available,” Brun says. “That goes for any country, but with the generous access to data in China and the speed of innovation, we will see financial products we haven’t seen yet and it will make companies more competitive.”
By Reshma Kapadia