Asia Minute: China Maintains Key Role in Global Supply Chain

Aug 26, 2019

President Trump helped send stock markets sharply lower on Friday when he called on U.S. companies to consider alternatives to doing business in China. But unwinding the regional supply chain is not a simple matter.

U.S. trade with China goes far beyond relatively inexpensive consumer items.

The business with what economists call intermediate goods is critical.

For example, computer chips designed in the United States and manufactured in Taiwan could go into a computer assembled in China, making use of other components made in South Korea and Japan. 

That kind of complex supply chain underlines the corporate relationships that make up the bulk of a lot of commerce across the Pacific, and they are complicated and time consuming to unwind.

25 years ago, China was known as a base for cheap labor. But over time, the Beijing government established local content rules — giving tax breaks to companies that produced components in China as well.

One result: for many companies, several parts of the supply chain wound up going through the country.

Many U.S. companies have already stepped up their search for alternative production sites. A survey this spring by the consultants Bain and Company of 200 high-level executives at U.S. multinationals found 60% were ready to modify their supply chains.

A year earlier, half of them were still waiting to see how the trade situation developed.

Even so, multinational companies still move relatively slowly when it comes to shifting international investment — especially when those decisions involve more than simply the politics of trade.