This significantly slows global growth. Many western companies rely on parts made in China for the products they assemble elsewhere. Stop the flow of coins from China and you stop the flow of goods from the rest of the world. Experts are already predicting that the global economy will not grow at all in the first quarter of this year, the result of the first slowdown since the financial crisis of the past decade.
Companies must ask themselves if China is particularly threatened by these mysterious epidemics. The SARS virus exploded outside of China in 2003, causing thousands of infections with a 10% death rate, according to the National Institutes of Health. It was another version of a coronavirus, according to laboratory tests. China was not the center of world manufacturing at the time, so its epidemic has caused less disruption than today. But no other world power has seen two mysterious fast-spreading viruses appear during this period. Is it worth the risk of this happening again?
Political risk from the United States is another risk factor that companies must now weigh. Federal prosecutors ducked a charge Thursday against Chinese telecommunications giant Huawei, alleging that the firm is engaging in racketeering and conspiracy to steal trade secrets. The United States and other companies have long accused Chinese companies, under the benevolent gaze of the Communist government, of stealing their technology. If Huawei’s complaint is just the tip of the iceberg, it means the U.S. will have to start turning to its own justice system to punish suspected criminals. This in turn will cause any Western company that contracts with Chinese companies on charges or suspected of having doubts about their relationship. Safer, perhaps, to find a business in a country that is less likely to fall into the crosshairs with the United States government.
Finally, the pressure of climate change will soon affect trade relations with China. China is the world's largest emitter of greenhouse gases and its emissions are increasing faster than the United States and Europe can decrease theirs. But western developed countries are to blame for much of this increase, as they are the engines of investment in Chinese factories, which then export goods to the West. This gives climate change activists a powerful lever to use if they decide to seriously reduce their emissions: tariffs.
The most serious plans on climate change already recognize this. They are not called tariffs per se; advocates label "border tax adjustments". But these are tariffs, and they would increase the price of goods imported from countries with high greenhouse gas emissions. This will devastate a country like China, whose industrial boom is powered by coal-fired electricity. Indeed, China continues to build hundreds of coal-fired power plants despite global pressure to reduce emissions. This will have to stop if we have a chance to beat climate change, but it does mean that factories in China will see their energy costs rise dramatically.
Combined, these factors will make returns to manufacturing increasingly profitable in the developed world or in countries within the sphere of influence of these countries. The United States and Canada, for example, do not run the risk of closing factories due to pandemics and are increasingly relying on clean fuels for their energy. Neighboring Mexico can offer cheaper labor, and Mexico's economic dependence on these two giants means that it is more sensitive to the pressures of climate change. European companies benefit from the same incentives and also have the low cost countries of Eastern Europe to invest.
None of this will happen overnight, but any rational enterprise must see the writing on the wall. A slow but steady disengagement from China will cost money in the short term but will likely pay off in the long term.