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The view of Chinese economists: global risks and Chinese opportunities in the process of value chain reshaping

The future value chain will be reshaped around the three major economies of China, the European Union and the United States, and will move further toward regionalization, independence and digitization. In the process of reshaping the global value chain, China plays an indispensable role, further leveraging its three main advantages: its leading position in the field of digital technology applications, its huge market size, and its extensive international presence. economic and trade cooperation in the market and enhance its competitiveness in the global value chain.

By Nicola e Gabriele Iuvinale

Since 2018, the global value chain has experienced three evolutions: First, with the rise of global trade protectionism, mutual trade sanctions between the world's major economies have led to the collapse of the vertical division of labor and collaboration model; second, repeated epidemics have led to the collapse of the value chain There have been global disruptions in production and supply links; third, the value chain has accelerated its recovery in the post-epidemic period, but continued potential geopolitical risks will still increase global supply costs as a whole. Overall, although global supply chain bottlenecks are being substantially repaired, global value chains will still be affected by the continuation of tariffs and non-tariff barriers, the spillover effects of a new round of potential trade conflicts between major countries, and the impact of geopolitical turmoil on supply. end impact.

We predict that the future value chain will be reshaped around the three core economies of China, the European Union, and the United States, and will further move towards regionalization, independence, and digitalization. In the process of coping with the reshaping of the global value chain, China is playing an indispensable role. It will further leverage its three major advantages: its leading position in the field of digital technology application, its huge market size, and its extensive international market economic and trade cooperation. Improve its competitiveness in the global value chain.

Triple risks facing the global value chain structure

Since 2018, the global value chain has continued to face three risks: First, trade protectionism and nationalism have driven up global trade costs (such as the Sino-US trade dispute); second, the global epidemic blockade has severely impacted the supply and demand in the global value chain. Relationships lead to the rearrangement of production relationships among manufacturers, suppliers, logistics providers, retailers and end consumers in the value chain. At the same time, the employment relationship between employees and employers within the organization has also been redefined; third, geopolitical conflicts have led to the reshaping of the global energy and manufacturing industries. On the one hand, energy exporting countries are trying to gain more pricing advantages in this round of geopolitical conflicts, thereby trying to change the past energy market supply pattern. On the other hand, energy-importing countries are forced to import high inflation while also accelerating their green energy transformation. To some extent, this transformation has enhanced the independence of energy importing countries in the value chain.

At the micro level, some manufacturing and retail industries have accumulated rich experience in effectively adjusting their inventories and costs to cope with more potential operational risks during the epidemic. Therefore, the resilience of enterprises in the value chain in the production and supply links has been strengthened. Based on a comprehensive measurement of global maritime transportation costs, European and American air freight cost indexes, and the PMI index of the top seven economies in the global value chain, the bottleneck pressure on the global supply chain will basically dissipate in early 2024. Although bottlenecks in the global supply chain are being substantially resolved, the global value chain still faces the direct impact of trade frictions (such as the Sino-US trade conflict), and the continuing impact of tariffs and non-tariff barriers during the epidemic (such as the mutual impact of global trade protectionism). Increased tariffs), as well as the spillover effects of geopolitics (such as geopolitical conflicts in the Middle East, conflicts between Russia and Ukraine, and the Red Sea shipping crisis), the rapid repair of global value chains is not smooth sailing.

More importantly, although globalization is disintegrating, the outlook for international trade and the economy is still full of uncertainty. The latest forecasts from the International Monetary Fund (IMF) show that global trade volume will grow by just 0.4% year-on-year in 2023, while it is expected to rebound to 3.3% and 3.6% in 2024 and 2025 respectively, which is still lower than the 4.9% historical average growth rate. This trend highlights the challenges and instability in the restructuring of global supply and value chains. The fragmentation and disruption of supply chains has become one of the major risks facing the global economy, and the fragility of supply chains has forced companies to reconsider and adjust their global supply chain strategies to increase their ability to withstand future shocks. For some companies that have already taken measures to prevent supply chain bottlenecks (such as bulk commodities and durable goods manufacturing), they may be forced to adjust their inventories again to prevent the accumulation of excess inventory in the future.

In the future, global value chains will become regionalized, and economics will be replaced by security.

In the future, global value chains will gradually move towards regionalization (North America, Europe, Asia), independence and digitization. The core within the major regions (US, EU, China) will prioritize the security and resilience of value chains. Currently, there are more and more signs reflecting the long-term and complex nature of global geopolitical turmoil in the post-epidemic period. Expectations of supply bottlenecks caused by geopolitical risks in global value chains have increased significantly. Therefore, how to maintain stable and continuous supply in a complex geopolitical situation will play a major advantage in long-term economic and trade competition.

Specifically, the United States has linked the issue of "supply chain resilience" to national security. Both Democrats and Republicans have unanimous support for fiscal measures to strengthen the resilience and security of U.S. supply chains. This cross-party consensus highlights the important position of supply chain security in the U.S. national strategy, and also indicates that the United States will adopt more proactive policies and measures in the future to deal with the risks and challenges that the supply chain may face.

Similarly, China is building a new national economic and trade security system to ensure the country's new dual-circulation development pattern. Specifically, under the guidance of the dual-cycle development strategy, China will establish a more independent, sustainable and secure value chain system. This strategy not only reflects the high priority it attaches to national security, but also reflects China's efforts to maintain the stability of the domestic market and foreign economy by enhancing the security and independence of the supply chain.

At the same time, Europe is also actively responding to the challenges of supply chain security and resilience, especially in the context of the ongoing conflict between Russia and Ukraine. Eurozone countries, especially Germany and France, are accelerating the transformation of energy independence and are committed to building a new industrial chain security strategy. This transformation is not only related to the diversification and security of energy supply, but also involves the stability and security of the entire industrial chain from raw material supply to production and manufacturing. Through these measures, Europe is expected to reduce its dependence on a single energy supplier and enhance its competitiveness and autonomy in the global economy.

Facing the reshaping of global value chains, China is demonstrating three advantages

As the global value chain moves further toward regionalization, independence, and digitalization around the three core economies of China, the European Union, and the United States, China is playing an indispensable role in the process of reshaping the global value chain. This is not only reflected in technological innovation and industrial transformation and upgrading, but also covers the further deepening of global trade and regional economic cooperation.

First, technological innovation and digital transformation provide China with significant first-mover advantages in the global value chain.

As the regionalization, independence, and digitalization of global value chains accelerate, China's advanced layout in these fields demonstrates its competitiveness. In particular, digital transformation occupies a key position in the reconstruction of global value chains. The Chinese government and enterprises have strengthened the construction of digital infrastructure and vigorously promoted 5G technology and big data applications, which not only promoted the rapid development of the domestic digital economy, but also provided Chinese solutions for digitalization in the global value chain. According to data from the China Academy of Information and Communications Technology, China's digital economy will reach 50.2 trillion yuan in 2022, a nominal growth of 10.3% year-on-year, ranking second in the world in total, and accounting for 41.5% of GDP. This wave of digitalization, especially its application in the industrial Internet, smart manufacturing and other fields, has not only optimized China's industrial structure, but also enhanced its core competitiveness in the global value chain.

Secondly, market potential and domestic demand expansion have gradually formed China’s scale advantage.

Against the background of increasing global economic uncertainty, China's huge market potential and the continued expansion of the domestic consumer market have made the resilience and potential of the Chinese consumer market widely recognized by the international community. In 2023, China's GDP will grow by 5.2%, ranking among the best among the world's major economies. Its contribution to world economic growth is expected to exceed 30%, making it the largest engine of world economic growth. The dual-circulation development strategy promoted by the Chinese government, with internal circulation as the main body and internal and external circulation reinforcing each other, will further unleash the potential of domestic demand and provide a strong impetus for the sustained and healthy development of the Chinese economy.

Finally, in the context of reshaping the value chain and moving towards regionalization, China is demonstrating its strategic advantages.

By actively promoting the "Belt and Road" initiative, China has strengthened infrastructure construction and economic cooperation with co-building countries, which not only enhances China's position in the regional value chain, but also opens up new growth points for Chinese companies to expand overseas. Taking advantage of the "Belt and Road" initiative, we can not only give full play to the advantages of China's large enterprises, but also make full use of the auxiliary role of small and medium-sized enterprises in the value chain system, forming a value chain system with key leading enterprises as the value chain center and small and medium-sized enterprises cooperating. This will further enhance the connections and interactions between domestic and foreign supply chains, industrial chains, and innovation chains. Take the renewable energy cooperation in the China-Pakistan Economic Corridor as an example. This cooperation not only builds an integrated upstream and downstream industrial chain in the energy field, but also provides a more stable and sustainable resource guarantee for the regional value chain.

(Autors: Cheng Shi is the chief economist of ICBC International, and Zhang Hongxu is the senior economist of ICBC International)

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