Disruptions to Chinese production resulting from the coronavirus pandemic have led some economies and companies to rethink the extent of their trade linkages with mainland China.

But reducing trade reliance on mainland China will not be easy. Although supply chains were already shifting in Asia before the pandemic and trade tensions with the US had escalated, mainland China remains highly integrated into global production chains for many key products.

The more complex supply chains are, the longer they will take to move. Mainland China is not only the world’s top goods exporter and second largest importer; as the largest economy on a purchasing power parity basis, it is also a large market in its own right.

Mainland China’s prominence as a trader of goods has risen since it joined the World Trade Organization in 2001. Its share of global imports has jumped from 4 per cent to 11 per cent today, while its export share has increased from 4 per cent to 13 per cent.

The US is mainland China’s largest export destination, but mainland China is also the top source of foreign goods for more than 60 economies. Mainland China is also the largest export destination for 37 economies, with South Korea supplying 10 per cent of its imports, ahead of Japan and Taiwan.

Mainland China is the world’s leading exporter of phones, computers, office equipment, TVs and lighting. But it is also the top importer of many items, including electronic integrated circuits, crude oil, and iron ore. It is a major purchaser of soybeans from Brazil, Argentina, the US and Canada and has quickly become the world’s third-largest importer of natural gas, mainly from Australia.

As the producer of 79 per cent of the world’s lithium hydroxide, global battery makers rely on mainland China, which itself dominates global exports of lithium-ion batteries, selling nearly three-times as much as its nearest rival, Korea.

Mainland China is also a large producer of rare earths used by foreign electronics companies. And it is the world’s fourth-largest vehicle and parts exporter, selling mainly to the US, while developing countries rely on mainland China for pharmaceuticals.

Meanwhile over 900,000 Chinese students are enrolled abroad, mainly in the US but also in Australia and the UK. More than 60 per cent of Korea’s foreign students are Chinese. And mainland China is an important source of global tourists, especially to Hong Kong and ASEAN nations.

Mainland China is an important destination for foreign direct investment and invests abroad, mainly in other Asian economies and the US, and through its Belt and Road Initiative. Foreign-invested enterprises in mainland China are prominent exporters and importers.

Adopting a ‘mainland China plus one’ supplier strategy could help businesses diversify import markets and build resilience to future trade shocks, but it may require significant investment, in alternative markets or even domestically. Firms shifting supply chains may also face increased competition from other foreign companies looking at the same alternative markets.

Making the most of comprehensive trade deals, such as the recently ratified EU-Vietnam trade agreement, could help businesses gain a competitive advantage when engaging with new markets.

First published 16 June 2020.

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