Pandemic, political risks mean companies should disengage with China
Global companies have flocked to invest in China for decades, lured by the promise of cheap, skilled labour and a stable, if tyrannical, government. Recent economic shocks show it's time for them to rethink that cosy arrangement.
This is an economic as well as a humanitarian crisis. Tens of thousands of factories lie idle and won't reopen for months. Others operate at reduced capacity as workers don't show up out of fear they will contract the virus, while goods from the plants that are open are stalled at border checks to ensure the virus doesn't spread.
This is dramatically slowing global growth. Many Western companies depend on Chinese-made parts for the goods they assemble elsewhere. Stop the flow of parts from China, and you stop the flow of goods from the rest of the world. Experts are already projecting the global economy will not grow at all in the first quarter of this year as a result, the first downturn since the global financial crisis.
Companies have to wonder whether China is peculiarly at risk for these mysterious epidemics. The SARS virus exploded out of China in 2003, causing thousands of infections with a 10 per cent mortality rate, according to the US National Institutes of Health. This was another version of a coronavirus, according to lab tests. China was not the centre of global manufacturing then, so its outbreak caused less disruption than is now the case. But no other global power has had two mysterious, rapidly spreading viruses arise in this time period. Is it worth the risk that it could happen again?
Political pressure from the United States is another risk factor that companies now must weigh. Federal prosecutors unsealed an indictment last Thursday against the Chinese telecommunications giant Huawei, alleging the firm engages in racketeering and conspiracy to steal industrial secrets. The US and other countries have long charged that Chinese firms, under the benign gaze of the Communist government, steal their technology.
If the Huawei complaint is just the tip of the iceberg, it means the US will have to start turning to its own court system to punish alleged miscreants. That in turn will cause any Western business that contracts with Chinese firms under indictment or suspicion to have second thoughts about their relationship. Safer, perhaps, to find company in a country that has less of a risk falling into US government's crosshairs.
The US and Canada don't run the risk of plants shutting down because of pandemics and increasingly rely on clean fuels for their energy.
Finally, climate change pressure will soon have to hit business dealings with China. China is the world's largest emitter of greenhouse gases, and its emissions are increasing faster than the US and Europe can decrease theirs. But Western developed nations are to blame for much of this increase, as they are the driving forces behind investment in Chinese factories that then export goods back to the West. That gives climate change activists a powerful lever to use if they decide to get serious about reducing emissions: tariffs.
Most serious climate change plans already recognise this. They aren't called tariffs per se; advocates label them as "border tax adjustments". But they are tariffs, and they would increase the price of goods imported from countries with heavy greenhouse gas emissions.
That will devastate a country such as China, whose industrial rise is fuelled by coal-powered electricity. Indeed, China still is building hundreds of coal-fuelled plants despite global pressure to reduce emissions. That will have to stop if we have any chance of beating climate change, but that means plants in China will see their energy costs rise dramatically.
Combined, these factors will increasingly make it cost-effective to bring manufacturing back to the developed world or countries in those nations' sphere of influence. The US and Canada, for example, don't run the risk of plants shutting down because of pandemics and increasingly rely on clean fuels for their energy.
Nearby Mexico can offer cheaper labour, and Mexico's economic dependence on those two giants means it is more amenable to climate-change-induced pressure. European firms have the same incentives and have the low-cost countries of eastern Europe to invest in, too.
None of this will happen overnight, but any rational company has to see the writing on the wall. Slow but steady disengagement with China will cost money in the short term but will likely pay off big in the long term.