Is the West Slipping Away From China?

Is the West Slipping Away From China?
An empty road is seen in Shanghai Central Business District (CBD) during a lockdown amid the COVID-19 pandemic in Shanghai, China, on April 16, 2022. (Aly Song/Reuters)
Milton Ezrati

As the old saying has it, “nothing lasts forever.” This truth is beginning to dawn in China. Rising costs, abusive policies, and, more recently, COVID-19 and war sanctions have prompted Japan and the West to rethink China’s exposure. Money is flowing elsewhere. Beijing would have to change much to bring back the former flood of money and interest.

All the commentary from both American and European sources speaks to an anti-Chinese leaning. In the United States, Congress seems set to pass legislation that would limit investing in China and especially sourcing there. This legislation is probably behind the curve. Long before, businesses almost universally expressed concerns about future relationships in the Middle Kingdom.

Joerg Wuttke, president of the EU Chamber of Commerce in China, sums up the general attitude of both American and European business when he says, “China is losing credibility as a best-source location.”

All have made clear that former supply chain arrangements must change. Few are ready yet to pull operations out of China. Still, just about everyone seems willing to shift new investment elsewhere, either to other emerging economies in Asia or to bring it home.

The most powerful proximate causes of this new approach are the lockdowns and quarantines that grow out of Beijing’s “zero-COVID” policies. Beijing’s rigid insistence has made both production in China difficult and expensive, especially shipping, either within the country or for export.

A recent survey conducted by Wuttke’s group indicates that some 60 percent of Western interests in China expect a revenue decline this year. About half complain that Beijing’s policies have severely interrupted shipments of either critical inputs or finished products. Some 77 percent of these businesses have concluded that Beijing’s behavior on COVID alone has made China either slightly or significantly less attractive as an investment destination.

One might think that the war in Ukraine would benefit China by making places like Eastern Europe comparatively less attractive. Some 39 percent of the businesses surveyed agreed that the war and sanctions made China slightly or significantly more attractive as an investment destination. But some 32 percent say just the opposite, noting political uncertainties. On balance, then, it looks as though the war is neither a help nor a hindrance for China, at least in this regard.

Nor are headline issues all that lie behind the decision to turn away from China. On top of these more fundamental considerations is Beijing’s less than an honest approach to patents and copyrights. Foreign business in China, wherever it is headquartered, has long complained about Beijing’s insistence that foreign firms doing business there have a Chinese partner with whom they must share technologies and trade secrets. These foreign interests have also complained of outright theft by Chinese agents. Most have looked to their governments for remedies. These governments have failed them.

Hope on this front rose in January 2020 when Beijing signed the “phase one” trade agreement with the Trump White House. In that document, Beijing promised to streamline procedures for foreign firms to file complaints against patents and other such abuses. But it has since become clear that Beijing had no intention of living up to that commitment. Indeed, a Chinese court has recently determined that Chinese firms cannot be sued on such matters.

U.S. President Donald Trump and Chinese Vice Premier Liu He hold up signed agreements of phase 1 of a trade deal between the United States and China, in the East Room at the White House in Washington on Jan. 15, 2020. (Mark Wilson/Getty Images)
U.S. President Donald Trump and Chinese Vice Premier Liu He hold up signed agreements of phase 1 of a trade deal between the United States and China, in the East Room at the White House in Washington on Jan. 15, 2020. (Mark Wilson/Getty Images)

Beijing has acted abusively in other ways as well. Most recently, it has threatened to refuse contracted shipments of rare earth elements to the United States and others over relatively minor diplomatic matters. It did the same with Japan some years ago. In the past, Beijing also has abruptly altered trade policies, sometimes in response to only transitory problems.

Such arbitrary moves have inflicted considerable harm on trading partners. Beijing, for example, slapped huge tariffs on Australian trade simply because Canberra asked questions about the origin of COVID. Often the imposition of such punitive policies passes quickly but not always. However, even when the pain is short-lived, it dissuades others from continuing relationships with China.

At the most fundamental level are wages and costs. One of the great attractions for foreign investing in China has been access to a disciplined and inexpensive workforce. In recent years, however, that picture has begun to change. Chinese wages are outpacing those in most of the rest of the world. Between 2011 and 2021, for example, Chinese wages on average rose about 10.5 percent a year, more than double the rates of wage gains in the United States and Europe and faster than most other Asian countries.

To be sure, Western and Japanese labor costs still exceed China’s, but the gap is no longer as vast as it once was, and it is closing rapidly. Relative to other Asian economies, China has already lost much of its low-cost appeal. Vietnam has long since lured away from China much of the manufacture of inexpensive shoes and clothing for export to Europe and America. COVID has slowed wage growth in China, but that will not last, and, in the meantime, the lockdowns have increased shipping costs.

This combination of influences may not yet have reached a point where Western and Japanese business severs existing Chinese arrangements. But as the survey respondents have made clear, these realities have prompted foreign business to shift its new investment efforts elsewhere to less expensive and less troublesome venues. It might seem from this description that China will stabilize its position, something that might give comfort to the country’s leadership in Beijing. Such a conclusion, however, would mistake the nature of business.

The focus of any business follows the new investment. Even if there is no pullout from China, the trends described here will tend to reduce that economy’s footprint in global trade and business.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, a New York-based communications firm. Before joining Vested, he served as chief market strategist and economist for Lord, Abbett & Co. He also writes frequently for City Journal and blogs regularly for Forbes. His latest book is "Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live."
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