CHINA:  BRINGING SUPPLY CHAINS HOME  

"The proportion of foreign-made inputs in Chinese exports has been shrinking by an average of 1.6 percentage points a year over the past decade, and last year fell to 19.6%, from more than 40% in the mid-1990s, according to Chinese trade data."

Anjani Trivedi

October 18, 2016

If you have not seen it yet, you will want to read the front-page Wall Street Journal article by Anjani Trivedi, that was published earlier this week under the headline "China to World: We Don't Need Your Factories Anymore." Between eye-catching data - like the figures in today's featured quote - and a focus on a few individual companies, Ms. Trivedi lays out the elements of a phenomenon that will change the way the world talks about China and about trade.

A company that features prominently in her story is GMM Nonstick Coatings (GMM) which makes, well, nonstick coatings, for "cookie sheets, frying pans, and grills."  GMM's headquarters are in the United States, but it has significant operations in China.  It is those China operations that Ms. Trivedi focuses on, particularly the shift in who is supplying the raw materials GMM needs to make those coatings.  It used to be largely U.S. and European firms, but increasingly now GMM's suppliers are Chinese.  Sharing figures from Ravin Gandhi, a GMM co-founder, Ms. Trivedi explains that "More than 70 percent of GMM's 200 vendors are now based locally [in China], compared with 40% five years ago."

Just an anecdote?  Not really.  Ms. Trivedi makes a convincing case that this is an enormous phenomenon affecting global trade flows and national trade balances.  The U.S.  trade deficit with China has been exacerbated by cuts in China's demand for U.S. imports, with an analogous development across the globe.  "Exports to China," she writes, "which had risen nearly every year since 1990, fell 14% last year, the largest annual drop since the 1960s."

Three things came to mind as we read this story.

We were struck by how little attention it seems to have gotten - not just the story but the phenomenon.    We would have expected, for example, that those who have been expressing understandable concern over the lackluster growth in world trade might have paid more attention to it.  That was the first thing.

The second was the sure knowledge that it will complicate the American trade debate, which now relies heavily on pointing out the relatively high percentage of non-Chinese (including American) components there are in the things the U.S. buys from China.

Third was a reflection on the "invisible hand."  As Adam Smith used the phrase, it was a metaphor for the national benefit that is generated from the aggregate of individual, self-serving endeavors.  We have no doubt that there is an element of Mr. Smith's invisible hand in the developments Ms. Trivedi describes.  Chinese entrepreneurs are finding new market opportunities and taking advantage of them.  We suspect, however, that there are other invisible hands at work as well, invisible only because they are hidden away in the Forbidden City.

China to the World is a link to The Wall Street Journal story by Anjani Trivedi, which was the source for today's quote.

GMM takes you to the website of GMM Nonstick Coatings.