Supply-chain decoupling from China gets sharper teeth

The European Union has proposed a ban on goods that are the product of forced labor, a proposal that is seen by some as aimed at China (Photo: Reuters)
The European Union has proposed a ban on goods that are the product of forced labor, a proposal that is seen by some as aimed at China (Photo: Reuters)


Breaking of links with China to start gaining steam as governments act to secure supply chains

Covid-19, Russia’s invasion of Ukraine, and rising geopolitical risks in Asia have thrown a wrench into global supply chains. That has reinvigorated the push to put key supply links back onshore—particularly those currently located in manufacturing juggernaut China.

A full “decoupling," meaning the breaking of economic links with China, remains unlikely, but supply chains would become less integrated than in the past. That would have significant consequences for both businesses and consumers—and probably for long-run inflation expectations as well.

Two proposed laws in Europe are the latest case in point. The European Union proposed a ban on products made using forced labor last Wednesday. It doesn’t name China but alleged forced labor in the country’s Xinjiang region is clearly a main target. A few United Nations reports have added impetus in recent weeks. A U.N. expert published a report saying it is “reasonable to conclude" that forced labor has taken place in Xinjiang. And the U.N. human-rights agency said China has committed crimes against Uyghurs and other Muslim minorities. China denies such claims.

The proposed law looks less harsh than its U.S. equivalent. The U.S. legislation puts the onus on importers to prove that products from Xinjiang aren’t made with forced labor—an incredibly high bar. The EU proposal doesn’t. Products would only be blocked at the conclusion of an investigation. That, however, could change as the proposal needs approval from the Council of the European Union and the European Parliament.

It could be years before the proposal becomes law—but it will nonetheless add pressure for companies to reassess supply chains now, especially since the U.S. law is already in effect. Such rearrangements could be challenging in some cases: For example in the solar supply chain, which is dominated by China. Xinjiang is a major producer of polysilicon, a crucial precursor of solar cells, due to the region’s abundant and cheap coal, solar and wind power.

According to Morgan Stanley, Europe is China’s single largest market for solar exports. Chinese solar module shipments to Europe rose 137% in the first half this year, according to the bank.

Another proposal from Europe tries to directly address such dominance, which also extends to the processing of lithium and other minerals critical for green energy applications. If passed, the law would attempt to speed up domestic production, processing and recycling of such raw materials. The way Europe sleepwalked into an energy crisis due to overreliance on Russia for oil and gas has doubtless helped focus minds.

“Lithium and rare earths will soon be more important than oil and gas," said European Commission President Ursula von der Leyen last week. China processes almost 90% of rare earths and 60% of lithium, according to Ms. von der Leyen.

All of this follows similar moves in the U.S. The healthcare, climate and tax law passed in August provides incentives for domestic manufacturing of clean-energy products such as batteries and solar panels. Washington is also implementing policies to encourage the onshoring of semiconductors and biotechnology.

Such onshoring will take years and a full-scale relocation of manufacturing jobs back to the West is unrealistic. Friendlier or closer countries such as Vietnam and Mexico will probably be big beneficiaries—particularly those that already have free-trade agreements with the U.S. or the EU.

But the rapid globalization of the past few decades seems likely to take a pause. Businesses, consumers and governments will gain a measure of reliability and peace of mind—but they should be prepared to pay up too.

Catch all the Elections News, Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.


Switch to the Mint app for fast and personalized news - Get App