In addition, the US’s crackdown on China has extended from trade to science and technology. The US Department of Commerce is adding more Chinese companies to its Entity List, restricting them from access to US technology.
On August 6, the Trump administration issued an executive order that would ban TikTok, a short video app owned by ByteDance, from operating in the US unless the Chinese technology company sold it within 45 days. Another executive order he signed on the same day said it would ban transactions on WeChat within the US, a messaging app and payments app owned by Chinese tech company Tencent.
The decoupling has spilled over to soft technology. The UK, France and Japan also have, one after another, either excluded or sidelined Chinese tech giant Huawei from their 5G telecommunication networks. China faces the risk of being excluded from the global technology industrial chain.
Meanwhile, the US is encouraging American firms to move out of China. White House economic adviser Larry Kudlow called for American companies to pull out of China in April and suggested the US pay all the moving costs for plants, equipment, intellectual property, structures and renovations. It is not just talk. The US has already offered loans as incentives to attract companies back.
In July, Japan unveiled a list of 57 companies that will move their manufacturing bases back to Japan, among which most are engaged in protective materials, medicine and medical equipment.
Despite China’s advantages, the risk of the removal of supply chains should not be underestimated. Proper policies are needed to cope with this.
In the short term, China should enhance the countercyclical macro-adjustment of its economy, expand demand and stimulate domestic market vitality. At a time of weak demand and insufficient orders, stronger macroeconomic policies are needed to counter the impact from the pandemic and expand demand for companies, particularly small- and medium-sized enterprises, and help them restore production and operations.
China could consider targeted supportive policies for manufacturing industries that suffer sizeable gaps in external demand, such as textiles and apparel, electronic information, electronic machinery and other sectors to sustain the enterprises and maintain employment. The country could adopt tax reductions or exemptions, fiscal subsidies and other support measures to assist export-oriented companies in exploiting the domestic market, while encouraging domestic e-commerce platforms to sell quality exports in the domestic market.
In the long run, China should further deepen reform and opening-up and speed up the process of digitalization across industries. In a step to cope with the shift of supply chains outside of China, it should move to hasten talks on the trilateral free trade agreement with Japan and South Korea and make good use of the Belt and Road Initiative. Meanwhile, China needs to keep optimizing its business environment, enhance the protection of intellectual property (with substantive punitive measures on habitual and willful infringements), increase its appeal to foreign investors and encourage cooperation between transnational enterprises, to gather broader support in countering anti-globalization.
China also needs to speed up the removal of restrictions on market access for foreign and private enterprises to allow more room for social investment and unleash the vitality of private investment. Last but not least, it needs to support the acceleration of its industrial transformation and upgrading, particularly toward digitalization and the remolding of industries with smart technologies, to achieve the goal of reducing costs and promoting efficiency. These will all boost China’s global competitiveness and position in the supply chain.