Economic Development

The impact of China’s reopening on global supply chains

January 23, 2023


The impact of China’s reopening on global supply chains

January 23, 2023

Oliver Sawbridge

Manager, Policy and Insights

Oliver Sawbridge is a policy and insights manager at Economist Impact in its new globalisation practice, and is particularly responsible for research and analysis on international trade. As the global economy is being transformed by multiple forces including geopolitics, technological progress and climate change, the new globalisation practice works with clients to navigate these structural shifts.

His insights provide context and meaning in an accessible way. They are informed by numerous years of policy experience, most recently at the Department for International Trade, where he delivered aspects of Britain’s free-trade agreement programme. Before this he was a policy and legislative researcher at the House of Commons.

Mr Sawbridge holds a master’s degree in international relations from the University of Auckland. His areas of expertise include geopolitics, trade and supply chains.

China’s economy is likely to rebound now the zero-covid policy has been abolished. The rebound will solidify in the second half of 2023, as the first six months of the year will be marred by a wave of Covid infections, exacerbated by a lack of medical readiness. The combination of a weak recovery in China and slowdowns in the world's two other biggest economies, the European Union (EU) and United States of America (US), will significantly impair global trade growth in early 2023.

China remains the dominant manufacturing hub globally in 2023 and has been for the past ten years. So, any reshaping of supply chains due to their reversal of the zero-covid policy will not happen overnight due to the complexity that has been built up over the last decade, with China at the epicentre. However, due to the amount of uncertainty and volatility in recent years, global supply chains are being reconfigured as evidenced in a 2023 Economist Impact trade and supply chains report, which surveyed 3,000 business executives globally. The relinquishing of China’s zero-covid policy, combined with their other protectionist trade policies, will only accelerate such trends.

Yet, supply-chain reconfiguration depends on the market you are servicing. Many companies still see China as an attractive export destination due to the size of the market. But for companies sourcing from China to service other markets, such as the EU, supply-chain strategies will require a different approach. This will lead to two global supply-chain strategies: China-centric and “Anywhere but China”. If the latter, we are unlikely to see a tsunami of businesses leaving China. Instead, it will be a steady trickle in the next decade due to the time needed to find and certify alternative supply chains.

A risk associated with the China-centric strategy is that companies will remain in the country for too long, attracted by their vast market. With China being both the best customer and the biggest threat, there are consequences attached to this. The first is that they may face government discrimination towards foreign companies, such as through forced technology transfers. The second is that companies focused on the Chinese market could miss out on opportunities in other regions, including Africa and South America.

With either approach, businesses have realised since covid-19 that building non-economic factors, such as resilience and security, into supply chains is essential because of the uncertainty and volatility of recent years. A central strategy was a shift away from the ultra-lean “just-in-time” supply chains to those of “just-in-case” where higher inventories are maintained. These changes are likely to remain, particularly to weather the temporary disruptions following China’s departure from the zero-covid policy. This is particularly true for critical inputs (i.e. semiconductors).

Whilst there has been a shift towards nearshoring and reshoring, diversification remains the favoured supply-chain strategy for businesses across the world. This will remain as businesses look elsewhere because of the disruption in China. The above Economist Impact report highlights that over 47% of businesses are diversifying their supply chains to hedge against risks and uncertainty. But, a rise in state  protectionism—particularly the hawkishness of the Chinese state—has caused a raft of industrial policies aimed at onshoring industries deemed strategically-important to be rolled out in the US, EU and Japan. Therefore, reshoring of production will become increasingly popular as a supply-chain strategy. The same report cites that 23% of companies are reshoring, primarily to take advantage of government financial incentives. A further 17% are reshoring to align with local content government requirements. Both of these figures suggest government intervention will increasingly dictate how businesses operate their supply chains. As China emerges from the zero-covid policy and looks to retain their position as the world top manufacturing hub, the Chinese government will likely offer various incentives to remain the centre of supply chains, such as tax breaks and the adoption of international agreements.

This is all subject to there being no major additional geopolitical shocks in 2023, which is not guaranteed. The tension between China and Taiwan is not easing and relations between China and the West could deteriorate more, leading to a further decoupling of their economies. Climate change poses another risk to global supply chains; the record-breaking drought in 2022 pushed China to the brink of a water catastrophe. Failure to pay attention to these risks will see the world sleepwalking into 2023. Businesses that are paying attention are also turning towards friendshoring. This is yet another supply-chain strategy that is likely to proliferate to hedge against future geopolitical instability. Vietnam as the “China+1” destination will mean that investors can still keep costs low due to access to affordable labour and stability afforded through a wide network of preferential trade agreements.

With the impending disruptions because of the reversal of the zero-covid policy, businesses should produce supply-chain risk mitigation strategies up until mid-2023 at a minimum.


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