De virus, Decoupling, De-globalization, Downsizing, and FDI in China

Dr. Jean-Marc F. Blanchard's picture

China’s coronavirus epidemic has had profound economic effects including dramatically reducing travel within and outside China, severely suppressing business activity in the education, entertainment, food & beverage, and leisure and recreation industries, among others, and disrupting or freezing manufacturing and the delivery of production inputs and end goods. It is making foreign multinational corporations (MNCs) and governments consider anew diversifying their markets, production chains, and suppliers away from China. Yes, they should have been meaningfully contemplating this previously given the political and economic risks posed by Washington’s trade war against China, the efforts of many in the United States (US) to decouple the US and China, and anti-globalization movements in the US, European Union and elsewhere. Yes, countering rising costs, accessing new markets, and tapping overseas talent—reasons many MNCs went to or expanded in China in the past—also already should have prompted MNC executives to consider seriously diversification. Two reasons supporting their inertia to date are well known. One is that China has very attractive characteristics including, inter alia, huge markets, rising incomes, very good infrastructure, significant engineering and scientific talent, myriad industrial agglomerations, broad and deep supply chains, and many cost advantages. A second is that the alternatives (e.g., India, Thailand, and Vietnam) have many shortcomings. Complacency, however, will not suffice given the limited benefits of excessive concentration, the growing risks flowing from it, and the increasing attractiveness of other locales. China’s current epidemic will end one day and China will remain an attractive place for foreign direct investment (FDI). It is not clear, however, that it should be the place for all FDI or FDI along the entire chain. MNC leaders need to break out of their lethargy and think strategically about the value of diversification as a means to bolster risk management and bargaining power.