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US-China Feud Is Accelerating The Biggest Shift In Trade Since The Cold War, Away From Globalisation

From an office in Tijuana, Mexico, Roberto Durazo has been capitalising on one of the biggest shifts in global trade since the end of the cold war.

His company, Ivemsa, has been helping dozens of companies move their factories out of China and other parts of Asia and into Mexico to make goods to be sold domestically and in the United States. Operating in what is known as the “shelter industry”, firms like Ivemsa help international companies operate in Mexico without having to maintain a legal entity.

“We have talked to many companies from Asia who are interested in Mexico as a platform to manufacture and send their products north to the US – that's really where the market is,” Durazo said.

“A lot of automakers are doing business here, for example Kia Motors from South Korea established a big facility in Mexico. And they moved at least 30 of their suppliers from Asia into Mexico. Their key suppliers followed them because if they don’t, they may lose the business.”

This example illustrates a wider movement that predates the trade war between China and the US, but one which experts now say is irreversible. After decades in which globalisation seemed to be an unstoppable force, the trade war is accelerating a complete transformation of global trade towards a more fragmented model, and Durazo is operating at ground zero.

The post-1990 trend towards globalisation was driven by the integration of cheap labour from emerging markets such as China, India and former Soviet Union bloc nations into the world economy. This benefit was eroded as these low-cost hubs developed and their factory workers demanded better compensation.

A McKinsey Global Institute study, released this year, found that “low skill labour is becoming less important as a factor of production. Contrary to popular perception, only about 18 per cent of global goods trade is now driven by labour-cost arbitrage”.

In the “first phase of globalisation, the age of mass manufacturing”, Seong said, companies could ship more bulk products from A to B, but customers now have more sophisticated demands for products such as clothing and electronics. The rise of highly customised products has meant that if manufacturers want to react quickly to changes in consumer demand, a shorter supply chain is imperative.

The political risks and financial costs of the trade war over the past year have only served to accentuate what some experts are calling a “balkanisation” or “deglobalisation” of supply chains, with companies seeking to produce closer to their consumer markets to avoid uncertainty in the changeable trading environment, as well as to mitigate the costs of tariffs.

“Companies globally have been looking at a trend of regionalism. So you're getting investments into Eastern Europe to supply the [European Union], and investments going into Mexico to be close to the US,” said John Evans, managing director of Tractus Asia, which also works with businesses relocating from China.

At the same time, locations that were previously hotbeds of low-cost manufacturing are becoming vibrant consumer markets. As millions join the ranks of the middle classes in China, India and Southeast Asia, many companies are choosing to have localised supply chains to service them.

In China, while manufacturers have been leaving in their droves, those who wish to continue to service the 1.4 billion consumer market are keeping their production close to home. This is evident when looking at the car market, where companies such as Changan Ford produce in huge numbers in China to satisfy domestic demand. However, these plants export very little to the US, for example.

“Automobiles that [were previously] exported to China are increasingly produced within the country in order to avoid the tariffs. The tariffs are making companies not import vehicles to the market, but produce domestically,” said Bill Russo, the founder of the Shanghai-based consultancy Automobility.

Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI), points to the decline in exports as a proportion of gross domestic product (GDP) in China and India, which are likely to provide the main engines of global growth in the coming decades, “partly because of the rise of the domestic consumer, as well as the growing importance of the non-manufacturing sector”.

“Indeed, exports’ share of GDP has dropped from over 37 per cent at the end of 2006 to under 20 per cent today in China, and from nearly 29 per cent seven years ago to about 20 per cent in India. These trends will not soon reverse course,” he said. Regional hubs will benefit from this, as is the case with Mexico and Vietnam, which are often described as the “winners” of the first year of the trade war.

Figures recently released by the US Census Bureau showed how much the Mexican manufacturing base is being swollen by the trade war. In May, the US trade deficit with Mexico was the highest monthly reading on record, at US$9.6 billion, with imports from its southern neighbour soaring to more than US$32 billion over the course of the month. Meanwhile, Vietnam’s reported GDP growth for the first half of the year was 6.8 per cent, driven largely by manufacturing exports.

However, the short-term case of Vietnam differs from its long-term trajectory. Much has been made of the migration of manufacturing out of China and into Vietnam, and since the start of this year its exports to the US have surged by almost 40 per cent. This shows that many companies are using Vietnam as a means of avoiding tariffs, but that is not a sustainable solution, given that Vietnam’s capacity to support manufacturing is already at a breaking point, with land and labour prices rising fast.

Instead, Vietnam and Indonesia are viewed as a logical long-term manufacturing base for firms servicing the Southeast Asian market, especially with US President Donald Trump hanging the threat of US tariffs over Vietnam.

Meanwhile, as technology continues to develop, deglobalisation will become more ingrained. With smart manufacturing and advanced robotics, it becomes less important to tap low cost labour in distant corners of the world.

“This trend is likely to continue, but the jobs may be far fewer in number, requiring much greater education and skill levels,” said Achuthan from the ECRI. This means that should Trump succeed in bringing manufacturing back to the country, the job creation prospects will be greatly diminished.

Other innovations will also further shorten and shrink the supply chain. Electric vehicles, for instance, require fewer components than their traditional counterparts, therefore condensing the supply chain. With the advent of 3D printing, factories could theoretically print what they need locally, thereby reducing the volume of trade and deepening the lines of balkanisation.

But for now, the restructuring is still a work in progress and companies like Ivemsa and Tractus Asia are benefiting.

Ivemsa’s Durazo, however, speaks like a man who has already glimpsed the future through the eyes of demanding customers.

“A few hours over the border is nothing compared to a few weeks from Asia,” he said. “But you can imagine that for the customers, there is always the next thing. If you do it in a few hours, then you just want it in a few minutes. You do it a few minutes, they want it in a few seconds. So that is what are we facing, right?”

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