Trade tensions and COVID-19 have prompted changes in manufacturing locations and sourcing patterns. But these changes have consolidated mainland China’s role as the dominant component supplier to manufacturers elsewhere.

On average, 12 per cent of manufacturing output in other major economies comes from mainland China – almost double the share from the US and four-times the inputs from Germany or Japan.

Mainland China’s increasing importance in intermediate-goods manufacturing mirrors Japan’s decline. But although imports from mainland China comprise just 9 per cent of Japan’s factory output, that is more than twice the amount from any other economy.

Other Asian economies are much more dependent on imports from mainland China. They constitute more than 20 per cent of manufacturing output in Korea, Malaysia and Thailand, and 45 per cent in Vietnam.

Although the latest OECD figures are for 2015, comparison with other years shows the underlying trajectory of supply chains: which economies are becoming more important suppliers and which are becoming more reliant on foreign inputs.

The proportion of Vietnam’s components bought from mainland China increased by 21 percentage points over the six years to 2015, for instance. There were also significant increases in Malaysia, Thailand, Korea, Taiwan, the Philippines, Indonesia, India, and Australia.

Asian inputs have grown in importance for manufacturing globally, led by Vietnam. But of 27 major economies, only mainland China’s manufacturing output reduced its reliance on imported Asian components. Against the trend, mainland China has become more self-sufficient.

Asia increasingly trades with itself. Excluding Japan, the reliance on inputs from outside the region has dropped from nearly 24 per cent in the mid-1990s to below 14 per cent today.

And while more than a third of exports from Germany, Britain and France comprised foreign inputs last year, just 13 per cent of mainland China’s exports were components from abroad. Mainland China is now only barely more reliant on imports for its export manufacturing than the US.

In fact, the import dependence of most economies’ exports has fallen in recent years, suggesting that global supply chains were already shortening before the pandemic.

In 2012, the US was the dominant supplier of components to global supply chains, ahead of mainland China. By last year the positions reversed.

Mainland China supplies more inputs than the US in most economies’ exports apart from Taiwan and Australia. Reliance on mainland China is especially high in Singapore, Korea, Britain, Vietnam, Thailand and Malaysia.

However, US tariffs on Chinese exports may actually have raised other economies’ input dependence on mainland China as they supply the US instead. And while both the US and mainland China raised the share of their local components in exports, the reliance on mainland China inputs in US exports has continued to climb while the share of US inputs in shipments from mainland China has fallen.

Globally, mainland China has greatly increased its export market share since 2017 despite tariffs. A big increase in market share elsewhere – directly or by selling inputs for exports ultimately bound for the US – has more than compensated for its loss in America.

First published 22 July 2020.

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