China: A U.S. Supply Chain Salvo

Published on April 16, 2020

For some weeks now, Beijing has lashed out at any reference by senior officials in Washington to the COVID-19 pandemic as a “Wuhan,” or “China” virus.

Since then, President Donald Trump has, if anything, doubled down on the public pressure on Beijing – first, through criticism of China’s lack of transparency as the virus first broke, and second, in directly challenging Beijing’s influence over the purportedly apolitical World Health Organization.

** But what is really rattling State Council sources in Beijing is the long-term implication of an almost casual suggestion, made last week by National Economic Council Director Larry Kudlow, that the U.S. tax code could be restructured to reward companies that bring production “back” to America’s shores.

** To be precise, in an interview with FOX News on April 9, Kudlow said, “I would say, 100 percent immediate expensing across the board for plant, equipment, intellectual property, structures, renovations… In other words, if we had 100 percent immediate expensing, we would literally – literally pay the moving costs of American companies from China back to the U.S.”

** While it is still anyone’s guess if, or when, such a massive overhaul to the U.S. tax code might come to pass, its mere mention has been enough to elicit a strong reaction from senior sources in Beijing. That includes a high-level official who defiantly vows, “China will not be thrown into recession by decoupling from the U.S., nor will its industrial chain be disrupted by the departure of U.S. companies.”

**  The source goes on to stress the size of China’s expanding middle class (“400 million out of a 1.4 billion population”), education level (“200 million with bachelor’s degrees or higher”), technological prowess (“1,000 more international patent applications filed in 2019 than the U.S.”), and development potential (“central and western regions that still need 500 trillion yuan in infrastructure investment”).

** But the real point is not that, but the enormous degree to which the leadership in Beijing is in fact alarmed, and bracing, for a fundamental challenge to its economy.

** “There is no doubt,” says one senior level official, “that the Covid-19 pandemic will reshape the global industrial chain. In the face of major adjustments in the global industrial chain, we will unswervingly base ourselves on the domestic market. Based on the domestic industrial chain, we will rebuild the global industrial chain led by countries along the Belt and Road.”

** Along those lines, Premier Li Keqiang, in a virtual summit call on Tuesday with leaders from ASEAN countries, Japan, and South Korea, stressed the importance of deepening a regionally focused supply chain (centered, naturally, on China), noted that ASEAN in the last quarter had surpassed the EU as China’s largest trading partner bloc, and pushed for the ratification of the Regional Comprehensive Economic Partnership (RCEP) by the end of 2020.

** The push to bring supply chains “back home” from China is not limited to the U.S. and includes some of the participants on that very call. Most notably, on April 7 Japan’s Prime Minster Shinzo Abe earmarked 240 billion yen in an emergency supplementary FY 2020 budget explicitly towards the relocation of manufacturers back to Japan, or to locations in Southeast Asia — as an alternative to China.

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