The world is reducing its imports of finished goods from China, but still relies on components, raw materials, and machinery from China for manufacturing. This keeps China at the heart of the global supply chain, even as trade wars and international political events alter the direction of global trade.
In recent years, the term "decoupling," or economic separation between the United States and China, has been widely discussed. Many countries have attempted to reduce their dependence on Chinese manufacturing, shifting production bases to Vietnam, India, Mexico, and Southeast Asia. However, a deeper look at the structure of global trade reveals that China has not disappeared from the global supply chain. On the contrary, China is increasingly shifting its role from the "world's factory" to a "factory to the factories."
concept “Factory to the factories” This means that China is no longer solely focused on exporting finished goods, but has become an exporter of industrial components, machinery, raw materials, batteries, chips, memory, and technological components for other countries to assemble into final products and then export to global markets, especially the United States and Europe. This implies that even if a product isn't manufactured in China, it may contain a significant number of Chinese components.
Data from the McKinsey Global Institute clearly illustrates this shift. Last year, China's exports of consumer goods decreased by approximately 2%, while exports of intermediate goods increased by 9%. This reflects that China is moving towards an upstream position in global production, rather than just a downstream production base as in the past.
The trade war has shifted supply chains, but it hasn't abandoned China.
The trade war between the United States and China, particularly under Donald Trump's tariff policies, has significantly altered the structure of global trade. The value of trade between the US and China decreased by approximately 30% last year. The US has shifted its imports to India, Vietnam, Thailand, Malaysia, and Mexico, while many multinational corporations have moved their manufacturing bases out of China to reduce tariff and geopolitical risks.
However, relocating production bases does not mean that those companies stop using raw materials or components from China. On the contrary, many companies are employing a strategy called China+1, which means they continue to use China as a base for manufacturing parts, machinery, and raw materials, but move the final assembly process to other countries instead. This means that the global supply chain does not break away from China, but rather connects with China in a new way.
In this process, ASEAN has become a region playing a very important role. McKinsey states that ASEAN's exports have grown by approximately 14%, which is more than twice the rate of global trade growth, and the ASEAN-China and ASEAN-US trade routes have become two of the fastest-growing trade routes in the world. ASEAN has therefore become like an intermediary connecting the supply chains between these two superpowers.
What is happening, therefore, is not deglobalization or the end of globalization, but rather a geopolitical realignment of trade. Countries still trade with each other, but more with political allies and less with strategic competitors.
China recorded a trade surplus of $1.2 trillion, the highest in world history.
While the global supply chain structure is changing, China itself is facing domestic economic transformations. In recent years, the Chinese economy has experienced weak domestic consumption, a slowdown in the real estate sector, and declining private investment, forcing China to rely more on exports to maintain economic growth.
As a result, by 2568, China is projected to have a trade surplus of $1.2 trillion, the highest in world history. China's exports continue to grow, while imports increase only slightly, with annual import growth projected at only about 0.5%, significantly lower than export growth.
Several factors contribute to the high competitiveness of Chinese products, including deflation in China's manufacturing sector, leading to lower prices, and a weaker yuan, making export products cheaper.
Large-scale production capacity, government industrial policies, and a comprehensive supply chain structure result in many Chinese goods being significantly cheaper than those from other countries.
Cheap Chinese goods: A catalyst for global inflation or a threat to global industry?
Cheap Chinese goods have a dual impact on the global economy. On the one hand, Chinese goods help alleviate global inflationary pressures by lowering the costs of industrial goods, electrical appliances, batteries, electric vehicles, and solar panels. Many developing countries have access to cheaper technology and energy, accelerating their economic development.
For example, some countries are importing solar panels from China at significantly reduced prices, with data showing a nearly 60% drop in imported solar panels between 2567 and 2568. This allows many countries to expand solar power generation without requiring large government expenditures.
On the other hand, cheap Chinese goods are causing concern among industrialized and developing countries because they may make their domestic industries uncompetitive. The United States, Europe, and many other countries have therefore begun implementing tariffs and trade barriers, particularly on goods such as electric vehicles, batteries, solar cells, steel, and machinery.
Many economists warn that if China continues to rely too heavily on exports and maintains a large trade surplus, it could escalate global trade tensions and lead to a new trade war.
The problem with China's economic structure is overproduction and insufficient domestic consumption.
A major structural problem in the Chinese economy is excessive supply coupled with weak domestic demand. Domestic consumption accounts for only about 56% of GDP, which is low compared to developed countries, making the Chinese economy heavily reliant on investment and exports.
When China produces a large quantity of goods but its domestic consumption is insufficient, these goods are exported, resulting in a large trade surplus and a massive influx of Chinese products into the global market. This is one of the reasons why China has been able to continuously increase its share of the global manufacturing market.
However, some analysts warn that an economic model overly reliant on manufacturing and exports could create imbalances in the Chinese economy and create friction with trading partners in the long run.
The world hasn't abandoned globalization, but is entering a new form of globalization.
Looking at the bigger picture, it's clear the world isn't abandoning globalization entirely, but rather entering a new form where trade, investment, and supply chains are increasingly dictated by geopolitics. Countries remain economically interconnected, but these connections are being rearranged based on political, security, and long-term strategic alliances.
Foreign direct investment is also increasingly shifting along political alliances. For example, the United States invests in allies such as Japan, South Korea, and the Middle East, while China increases investment in Asia, Africa, and Latin America.
This trend reflects the fact that the world is being divided into multiple economic networks, but they remain interconnected, not completely isolated.
refer : chathamhouse.org, businesstimes.com.sg, fortune.com, economictimes.indiatimes.com
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