Extract from our "On the Prospective Manufacturing Divestment from China" research paper, published on the 15th March 2023. Register for a free trial* to access the full paper.
What are the implications of the world divesting from China’s manufacturing sector? We have a few guesses. Our thoughts can only be ‘guesses’ and not ‘market calls’ because of the confluence of uncertainties entailed.
- There will not likely be a wholesale de-globalisation – a significant reversal of the trend witnessed during 2001-2020: outsourcing from the US and Europe could slow but will not likely reverse, in our view.
- The bulk of the manufacturing capacity divested out of China in the coming years will likely stay in Asia, because of the strong and tightly-knit industrial ecosystem in Asia.
- While re-shoring will also no doubt take place, it will likely form a modest portion of the relocation of production in the world. Many more jobs will migrate from China to India or Vietnam than new jobs created back in the US or to Mexico. Re-shoring will likely be minimal in Europe, because its labour force and population in Western and Central Europe are already shrinking, and the latter is more expensive than many other EM Asian alternatives.
- If we are right that industrial divestment from China will be more modest than some predict, and much of the divestment will go to even cheaper jurisdictions in Asia, globalisation ought to continue to exert downward pressure on inflation.
The full report contains the following sections:
- Thought 1. A wholesale de-globalisation does not seem likely.
- Thought 2. Most of what leaves China will stay in Asia, we think.
- Thought 3. Re-shoring will likely be modest in size.
- Thought 4. Globalisation still disinflationary.
- China versus India.
- Bottom line
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