An Urban's Rural View

Controversy swirls around COVID-19 and China but on one point there's general agreement: America's experience with the coronavirus is likely to hasten its "decoupling" from China. At least some of the complicated supply chains that link American companies and Chinese manufacturers will be unwound.

It will happen fastest in the field of medical supplies.

Shortages of masks, swabs, ventilators and other necessities have taught the United States it cannot rely on deliveries from overseas that become uncertain in time of crisis. For these essential items it must have domestic suppliers.

In other industries, too, companies will be rethinking their sources of supply. China became the world's factory because it had the lowest cost of production but consulting firm A.T. Kearney expects companies to "spread their risks, as opposed to putting all their eggs in the lowest cost basket." (https://www.kearney.com/…)

The threat of future crises, A.T. Kearney argued, "will compel companies to restructure their global supply chains with an eye toward increased resilience, as well as lower risks and costs, as resilience is the key to operating profitably in the face of ongoing disruptions."

The big question about this decoupling process is, "How far?" How far along are we? How far are we likely to go? Will there be any appetite in China for what America's farmers and ranchers produce?

President Donald Trump has said, "We could cut off the whole relationship." (https://www.foxbusiness.com/…) Could it really go that far?

China has effectively been decoupling from the U.S. for years. That's what a lot of the intellectual-property theft has been about: import substitution. More than one American company has lost business to copycat Chinese competition. In agriculture, China has been diversifying its suppliers, intent on never being as reliant on America for products like soybeans as it once was.

Yet it's easy to overstate how far decoupling has already gone. A.T. Kearney observed a marked move last year to production in other low-cost countries, probably in response to increased U.S. tariffs on China. But a significant amount of this appeared to be trans-shipments -- Chinese-made goods being sent to the U.S. via Vietnam and Mexico to avoid the tariffs. (https://www.kearney.com/…)

MacroPolo, a think tank focused on China's economy, paints an even less-decoupled picture. It cites Apple, which has actually increased its reliance on China. In 2019, 47.9% of its suppliers were in China, up from 46% in 2017. As MacroPolo commented, "To borrow Robert Solow's famous quip: you can see supply chain decoupling 'everywhere except in the numbers.'"(https://macropolo.org/…)

The decoupling has been slow for good reasons. To set up their overseas supply chains, companies made costly capital investments. To tear them down and reestablish them elsewhere they will have to make further costly capital investments. Moreover, some of those American-owned Chinese factories, like Tesla's new auto plant, were built to serve the Chinese market. It wouldn't make sense to move them elsewhere.

But just because decoupling is slow doesn't mean it won't happen. China is no longer the lowest-cost country. Some labor-intensive manufacturing will move to Mexico, Southeast Asia and even Africa for purely economic reasons.

Government policy, including financial incentives, will lure semiconductor and other high-tech manufacturers to produce more in the U.S. Japan and South Korea are already subsidizing "reshoring" by their manufacturers. Don't be surprised if the U.S. follows suit. (https://www.wsj.com/…)

As this suggests, some of the decoupling won't involve ending production in China so much as making any new investments in the U.S. The speed with which these investments take place will depend at least in part on how successful the U.S. is in retraining its labor force.

Most of the new manufacturing in the U.S. will be heavily automated and the workers in these factories will need associate's degrees or better. "There is," A.T. Kearney said, "still a pronounced shortage of skilled manufacturing labor" in the U.S.

As for agriculture, there's reason to think that China will still import food and feed from the U.S. The question is how much. Even during the current Phase-One trade-deal period, when China is supposed to be ramping up its ag purchases from the U.S. big-time, a weakening Brazilian real and a large Brazilian harvest has led to record Chinese imports from Brazil. (https://www.ft.com/…)

By one estimate Chinese purchases from the U.S. are running at only 38% of the trade-deal pace, and former USDA chief economist Joe Glauber says there's "zero chance" China will hit the promised target. (https://www.bloomberg.com/…)

If, in the years ahead, U.S.-China relations continue to worsen and decoupling accelerates, what will happen to agriculture trade? It won't likely end altogether. The U.S. exported ag products to the Soviet Union during the Cold War. If the U.S. and China end up in a new Cold War, they might still trade when they find it advantageous.

But take China at its word. It's not going to rely heavily on the U.S. as a supplier. It's going to look for the best deal it can get, and if that's from Brazil or Argentina or Russia, the U.S. won't get the business. There will likely still be a Chinese market for American ag products, but whether in a decoupled world it ever reaches the peak levels of the recent past is very much in question.

Urban Lehner can be reached at urbanize@gmail.com

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