This is a heartless thing to say at a time when thousands of Chinese people have been infected and millions more are huddling indoors as the disease spreads. But it’s also probably wrong on the merits. The coronavirus is unlikely to be a boon for US employment.
It’s true the epidemic may cause multinational companies to rethink their reliance on China. The country is so huge that despite the need to diversify, companies can’t help but turn to it as a source for components and manufactured goods.
Diseases, although they can jump from country to country, tend to stay within a nation’s borders because the government can close borders to limit the spread. This highlights the risk of concentrating supply chains in one nation. While that won’t be enough to get multinationals to abandon China, it could accelerate the trend of diversification to other locations.
These alternatives are unlikely to be in the United States, though. Now that US companies have built up the management and technical infrastructure to manage global supply chains, there are plenty of other low-cost countries available. And China’s spectacular success at providing jobs and rising living standards for its people by attracting multinational investment has inspired a number of other countries to try to be the next China.
Two such countries are Vietnam and Bangladesh. Both have stable governments and low labour costs and are natural alternatives for labour-intensive manufacturing of items such as toys, clothing, furniture, electronics-assembly work and so on. Bangladesh, for example, is a star in the apparel industry. Mean-while, the US trade deficit with Vietnam, which had been growing for years, jumped in 2019.
The Covid-19 outbreak may accelerate this shift and pull countries such as Ethiopia, Indonesia and the Philippines closer to global supply chains. Each country has a limited ability to absorb production from China because of institutional bottlenecks and a smaller population. But together they offer a modest amount of diversification for multinationals. A wholesale exit of global companies out of China would be a different story, but this is unlikely.
Meanwhile, some production may return to the United States from China. But this is likely to be capital-intensive stuff – heavy industry and complex manufacturing. Those are things best done by machine tools and robots instead of by human hands. High US wages mean that a wave of reshoring from China will do little to counteract the trend toward automation in manufacturing, meaning that any gain in US jobs will be minuscule.
And those are just the effects from trade diversion. Although much ink is spilled over the zero-sum competition for multinational companies’ investment dollars, the truth is that the amount of economic activity in the world isn’t fixed. The outbreak is likely to lower China’s growth, meaning less demand for US-made products. The disruption of supply chains will also lead to higher prices and possibly even shortages, hurting the American economy. The impact of slower Chinese growth on jobs is likely to outweigh any benefit from reshoring.
So Ross’s comments aren’t just callous; they reflect a flawed understanding of the global economy. President Donald Trump’s administration’s conception of international trade as a zero-sum game between nations tells only a small part of the story. The reality is that when one country suffers, especially one as big and important as China, most others tend to suffer as well. – Bloomberg
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