The beneficiaries of globalisation are right to be worried

The dispute between China and the US is likely to continue for many years as their clash of ideologies changes global trading patterns and supply chains.

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  1. Garry White

A senior American politician publicly derided one of the most important British companies on a scale we have not seen since attacks on BP following its oil spill in 2010. Secretary of State Mike Pompeo accused HSBC of “kowtowing” to political forces in Beijing over its support for China’s proposed security law in Hong Kong.

These comments are not only of concern for the management of HSBC and rivals such as Standard Chartered. The decoupling of the American economy from China is now a central US foreign policy goal – and there will be significant changes in global trading patterns as a result. Even though company managers are currently distracted by the Herculean task of steering their businesses through the Covid-19 pandemic, this too needs addressing with some urgency.

The face-off between ideological extremists in Beijing, who have been spurred on after authoritarian Xi Jinping secured the presidency indefinitely, and Washington’s China hawks is not a temporary phenomenon. The aggressive stance against China will continue even if Joe Biden manages to win the Oval Office in November, as the Democrats also dislike technology theft and they have an even-larger axe to grind over human rights abuses against China’s repressed Uighur Muslim population.

Jobs a significant issue

Before his election, Donald’s Trump vowed to the American people that he would stop US businesses “outsourcing jobs” to places such as China and India. He proudly claimed he would be known as “the greatest jobs-producing president in history”. Although much was said about ‘America first’ in the first part of his presidency there was not a major adjustment in global supply chains. His Phase One trade deal with China, signed in January amid much fanfare, was limited and tame – even regarded as a joke by some. But the spread of Covid-19 has been a gift to US hawks that want to ensure the US remains the global hegemon.

At the start of the pandemic, a shortage of ventilators and other medical equipment resulted in a media storm across America, with the punditry inflamed that America could not look after itself in a time of crisis. Border closures and restriction on movement that were required to halt the spread of Covid-19 achieved what Donald Trump failed to do – it started to break up supply chains. Even Trump’s rivals have conceded that the US is too dependent on China

China manufactures about 50pc more medical equipment and drugs than the US – and the health crisis meant these essential products were being used to help its own citizens at the same time social distancing measures closed factories, thus limiting new supply. The fact that America was reliant on a rival foreign power for its medical supplies during a serious health emergency did more to galvanise support for the ‘America first’ trade policy than any Trump rally could. It wasn’t just partisan Trump-supporting news outlets questioning outsourcing to China – it caused outrage across the media spectrum and galvanised support for the stance.

This means it’s more important than ever that businesses properly understand their supply chains, which may have become so long and complex that few people in the company really understand them completely. The outsourcing process was meant to increase efficiency and productivity thus saving costs, especially in staffing. But the process that was supposed to save a company costs has proved very expensive indeed over the last few months. Changes are inevitable as the economic argument against outsourcing mount.

It’s not just the way goods are manufactured and traded that will be upended because of rivalry between Beijing and Washington. Events happening in Westminster also highlight just how far down the road to a significant East-West split we have travelled.

Technological supremacy

American hawks are making it very clear that the US government is deeply perturbed that components from Chinese telecom supplier Huawei may be used in Britain’s 5G network. They claim that this will provide Beijing with a gateway to spy on western allies, comprising security and even threatening the western alliance itself. Huawei’s management argue that attempts to stop western countries using Huawei equipment are really part of a plan for the US to maintain its global technological leadership because its equipment is superior. The argument comes full circle as China’s detractors argue that its technological advances are all based on theft of US intellectual property.

This means that the so-called ‘Splinternet’ – an increasingly fragmented worldwide web with competing China-centric and Western systems – is starting to appear. Advances in technology means it is now cheaper and less labour-intensive to censor local internet content, and authoritarian states are using the software with glee. It’s also part of concerns about national ‘data sovereignty.’

Cyber-balkanisation is likely to reduce the addressable market of global business and limit their penetration into new markets. The original vision of an internet that had free and open access to information flowing unrestricted between individuals, nations, and organisations will never be achieved. If companies still want to compete in regions where internet freedom is being curtailed, they need new data strategies to ensure they are not trounced by local rivals with access to data that they are denied. In the future, the internet will exist in silos and businesses need to prepare.

This new era of deglobalisation prompted by a fight for ideological dominance implies a rise in costs for businesses as complex supply chains are analysed and adjusted. It also means they may lose some market access, accelerating deglobalisation further. Yet again, Covid-19 appears to have accelerated a trend that was already in place.

A version of this article appeared in the Daily Telegraph

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