Yuji Miura, a senior researcher at the well-known Japan Research Institute, has recently noticed a phenomenon where "the global market may be divided into 'China' and 'non-China'. This is a striking statement as it would be expected that the global trade can be isolated and divided into different sections in the era of globalization.

In the context of U.S.-China trade war, the concept of industrial transfer has begun to change. In the past, the supply chain transfer was dominated by horizontal integrations to gain competitive advantages. However, studies have shown that the global supply chain is favoring vertical integrations due to the increasing trend of trade protectionism. Take the U.S.-China trade war as an example. In the past year, the United States has imposed high tariffs ranging from 10% to 25% on Chinese exports. This has greatly affected companies that consider the United States as an export market, which is the industrial transfer's biggest intention. To better gain an intuition on this scenario, let's consider the supply chain of mobile phones. An iPhone is primarily designed upstream by mobile phone and semiconductor companies in the Silicon Valley such as Apple and Qualcomm. Then, other important mobile phone components like microSD cards and mobile processors are produced in countries like Taiwan, Japan and Korea. All these components and designs will be sent to mainland China for manufacturing, and the final product is shipped back to the United States for sale. Hence, China is the last player in the chain of production, and the United States plays the role of an export market.

It is without a doubt that the global supply chain is greatly affected by the China-U.S. trade war. The Japan Research Institute has conducted a study to investigate the total value of countries and regions included in China's exports to the United States. The result of this study has shown that, as of 2015, South Korea, United States, Taiwan and Japan have reached a value of about JPY 1 trillion each. This shows that China's assembly of electronic products has utilized a huge number of overseas components. As a result, several enterprises have developed strategies to reduce their dependence on China due to the economic pain that stagnates product circulation in China. According to recent data, 50 companies worldwide have publicly indicated or discussed the need to move their product manufacturing due to the U.S.-China conflict. Although many of the situations are still under active discussions, most companies are expected to retain China's production base and transfer U.S. operations targeted by tariffs overseas. Data has also shown that investment in China's neighbouring countries like India and Vietnam is growing by 10% - 30%.

On the other hand, China still has great potential as a consumer market. According to the United Nations Statistics Division, China's total consumption accounts for 26.35% of the global market, second only to the United States. Therefore, the supply chain brought by the Chinese market is undoubtedly important. The supply chain subsystems play an important role in the context of U.S.-China conflict. Although certain companies such as chip manufacturing leader TSMC can maintain relations with both China and the U.S., many other companies are forced to pick a side. Reuters previously reported that Tokyo Electronics, the world's third largest semiconductor manufacturing equipment supplier, will not sell their products to Chinese companies blacklisted by the US government. The executives of Tokyo Electronics have stated that they may be in deep trouble if they utilize the U.S. export ban to expand their businesses with China. In other words, manufacturers in Japan, South Korea and Taiwan who are competing with US companies will face challenges in selecting the country to side with. Terry Gou, the founder of Foxconn, has moreover said that the United States will establish barriers to technology equipment and components so that China will have to readjust their product manufacturing strategies. There will eventually be a need to re-establish the supply chain in different regions, and this supply chain will be divided according to the U.S. and China markets.


How should China overcome the division of supply chain? The researchers at Anbound has presented three suggestions. Firstly, the framework of foreign investments should be improved to attract foreign investors into businesses, productions and sales in China. Aside from tax reduction and subsidies, China must create opportunities for foreign investors to create business environment. However, if the local finances are not up to standard, such methods of attracting foreign investments will only increase the pressures on local finances. Hence, Anbound emphasizes the importance of transparent and predictable policies that reduce the complexity of applications and assessments, increases the communication with foreign corporations and focus on the cultivation of consumer markets. In the midst of U.S.-China trade war, there are still many companies chose to stay in Mainland China for production in order to target China's consumer market. Hong Kong's South China Morning Post and Taiwan's Business Weekly have reported that some electronics and textile manufacturers in Taiwan did not leave mainland China in the midst of a global economic turmoil. Instead, they have chosen to maintain the current structure of supply chain and target the Chinese market. Therefore, the consumer market has a great impact on the future of global supply chain. Finally, throughout an industry life cycle, some enterprises will eventually need to move out of China. The government needs to monitor and guide the movement of Chinese enterprises and capital instead of restricting them. To maintain China's supply chain, her market potential must be fully utilized.

Final analysis conclusion:

Due to the U.S. sanctions in the midst of U.S.-China trade conflicts, the global supply chain looks to be divided into "China" and "non-China". To overcome this situation, China must reform the business environment and cultivate the domestic market to attract foreign investments. At the same time, the government shall guide enterprises and capitals that are moving out of China.