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How bad is China’s manufacturing exodus, and does India stand to gain from it?


China’s strict pandemic controls blocking production and logistics threaten to add impetus to the manufacturing exodus that has been picking up speed over the past decade, international trade experts said.


The Covid policy disruptions add to pressures from rising labor costs in China and worsening Sino-U.S. trade tensions. With low labor costs and surging domestic demand, Southeast Asia and India have become the most popular destinations.


In April, Apple Inc. said it started producing its iPhone 13 at an India factory of Taiwanese contract manufacturer Foxconn. Under Prime Minister Narendra Modi, India is pursuing a “Made in India” campaign, aiming to turn the country into a global manufacturing powerhouse by cutting red tape and attracting investment.


At the same time, China retains tremendous advantages as a manufacturing center built up over the past several decades, and its enormous and rapidly expanding domestic market provides a powerful incentive for investment in capacity of all kinds. Southeast Asian nations and even India still have enormous hurdles to overcome in competing with China, trade experts say.

So far most of the manufacturing leaving China has been in lower-end processes and hasn’t hurt China’s dominant position, many industry participants said. But the trend is forcing a transformation and upgrade of China’s manufacturing toward higher-value goods, creating risks and opportunities for domestic manufacturers, they said.


A Chinese trade official said the outflow of foreign trade orders is controllable, and its impact has been limited.


Manufacturing moving out of China is “in line with the law of economics,” Li Xingqian, director general of the Ministry of Commerce's Foreign Trade Department, said June 8 at a regular State Council briefing. China’s position in global industrial and supply chains is stable as China has a complete industrial system, with advantages in infrastructure, industrial capacity and professional talent, Li said. China’s business environment is continuously improving, and the attraction of the domestic market is still growing, he said.


Uncertain export outlook

China’s exports grew 16.9% in May from a year earlier, accelerating from April’s 3.9% increase and climbing well above an 8% gain projected by economists, customs data showed. China posted a trade surplus of $78.76 billion in May, up from a $51.12 billion surplus in April.


Exports rebounded as Covid-related bottlenecks on production and logistics eased, but the outlook remained uncertain as global consumer demand cools amid economic slowdowns and high inflation.


All manufacturing bases including China now face worries about weak demand in developed countries. Inflation in Europe and the U.S. are at the highest levels in 40 years, eroding consumers’ purchasing power and willingness to spend on nonessential goods.


Export orders for delivery in June and July, usually the peak season for booking goods for the back-to-school and holiday seasons, didn’t come in as expected, several people in the foreign trade industry said.


Weak demand in Europe and the U.S. was reflected in declining shipping prices, said Lin Jie, founder of Worldwide Logistics Group. Shipping costs from Shanghai to U.S. West Coast ports declined 5.1% and to the East Coast 4.6% in the week of June 17 compared with the same period last month, according to the Shanghai Shipping Exchange.


The drop in shipping rates means clients that placed orders earlier are paying higher transit costs. While this hasn’t let to widespread cancellations, it could affect subsequent orders if demand does not pick up by July, said Zhang Huafeng, Los Angles chief representative at Transfar Shipping Pte. Ltd.


It may take until the end of this year for American importers to work down inventories built up last year, said Wang Huanan, general manager of the Xiamen unit of Hailian (China) International Freight Ltd. Co. Only certain categories, such as auto parts, clothing and luggage, have relatively low inventories, Wang said.


Last week, U.S. President Joe Biden said that to help curb inflation he was considering lifting tariffs that his predecessor imposed on $350 billion a year of Chinese goods — including bicycles, baseball caps and sneakers — during a tit-for-tat trade war. But it’s not a simple decision, and advisers within the administration are divided on the matter.


Dropping the tariffs would boost China’s exports, but the key is implementation timing, Wang said. July is traditionally the busiest month for exporters as goods for year-end holidays need to be shipped by then, he said.


China still the world’s factory

Neither Southeast Asia nor India can replace China as the global manufacturing hub in the near future as they are mainly engaged in labor-intensive and low value-added manufacturing, several foreign trade participants told Caixin. They also face problems such as incomplete industrial chains and low labor efficiency to varying degrees, experts said.


To foreign companies, China is not only a manufacturing base but also a huge market, said He Xiaoqing, president of consulting firm Kearney Greater China. In 2020, global companies had $1.4 trillion of domestic sales, far more than their exports of $900 billion, showing the attractiveness of China’s local market, He said.


The share of finished products among China’s exports should slowly decline over time, said Gao Shiwang, director of the Industry Development Department at the China Chamber of Commerce for Import and Export Machinery and Electronic Products. Taking machinery and electronics as an example, higher-value-added integrated circuit exports increased 32% to $153.8 billion in 2021, surpassing those of cell phones, Gao said.


Vietnam especially has been one of the biggest beneficiaries of factories leaving China. The country offers manufacturers access to the 10-member Association of Southeast Asian Nations (ASEAN) free trade bloc and preferential trade pacts with countries throughout Asia and the EU as well as the U.S.


Read More at https://economictimes.indiatimes.com/prime/economy-and-policy/how-bad-is-chinas-manufacturing-exodus-and-does-india-stand-to-gain-from-it/primearticleshow/92684799.cms

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