Finance

China set to dominate global supply chains as RCEP trade deal is signed

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Workers are seen at a production line manufacturing solar photovoltaic components at a factory in Huzhou, Zhejiang province, China February 12, 2019.

Lin Yunlong | Zhejiang Daily | Reuters

BEIJING — China is set to remain a key player in global supply chains, thanks to a combination of factors ranging from the coronavirus pandemic to new trade agreements.

China and 14 other countries signed the Regional Comprehensive Economic Partnership (RCEP) this month, forming the largest trade pact in the world.

Analysts predict the deal will increase the market size of Asia-Pacific, creating more opportunities for companies to produce and sell within the region.

In particular, the agreement pushes back against a protectionist trend that set up barriers against trade using measures such as tariffs, according to Michael Hirson, practice head for China and Northeast Asia, at consultancy Eurasia Group.

When implemented, RCEP would remove potential restrictions on sourcing products from China by putting the country in the same category as other members of the trade agreement. Such streamlining “helps anchor China in regional supply chains, serving as a potential counterweight to disruptions from trade tensions and the pandemic,” Hirson said in a note over the weekend.

More significantly, RCEP may help accelerate negotiations on other trade deals — such as the China-Japan-South Korea free trade agreement and a China-European Union bilateral investment treaty, Morgan Stanley’s chief China economist Robin Xing and his team said in a Nov. 18 note.

“These, if signed, would mark another move for China to mitigate risks from slowbalization, and sustain its advantages in global supply chains,” the authors wrote, referring to a term for a slowdown in the integration of different economies.

Coronavirus hits supply chains

China has been a global manufacturing hub for decades, with exports driving the bulk of its economic growth. However, rising costs of human labor and trade tensions have prompted some companies to move their factories away from China to other countries.

For its part, the Chinese government would like to shift the economy to relying more on domestic consumption for growth.

Then, the spread of Covid-19 this year in a global pandemic hit international travel and trade flows as authorities restricted business activity in an attempt to control the virus. Companies were forced to evaluate how well prepared they were for maintaining production.

The coronavirus has shown companies that if their supply chain is too long, they may run into some problems, Zhu Caihua, deputy director at the Ministry of Commerce’s Institute of Foreign Trade Research, said in an interview earlier this month.

I believe this crisis will significantly accelerate the integration and the penetration of AI into this supply chain.

Min Wanli

CEO of North Summit Capital

In particular, the pandemic has accelerated businesses’ adoption of digital tools to increase manufacturing efficiency, a trend which might not have happened as quickly without market pressure, Zhu said.

Such incorporation of technology with supply chains, or so-called digitalization, ties in with Beijing’s aim for higher quality development, as laid out in the 14th Five-Year Plan that kicks off in 2021 and in China’s goals for the year 2035.

Zhu expects that rather than considering the lowest-cost option for labor-intensive manufacturing, companies will turn more to capital-intensive production. This trend, she said, will help China increase its competitive edge in high tech.

Tech for factories

China as an end market

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