The Covid-19 pandemic, an opportunity to reduce the dependency towards „Made in China” brand

The Covid-19 pandemic, an opportunity to reduce the dependency towards „Made in China” brand

The trade deficit of the EU community bloc in relation to China reached 164 billion euros in 2019

The coronavirus pandemic exposed the entire world’s dependence on the imports made from China, but also how vulnerable we become when the international supply chains break and we face a disturbance of the „global balance and order” and the globalization trend. The question arises: should import traders keep contributing to the consolidation of the „made in China” brand?

The concerns about the world’s over-dependence on China have accumulated for years. The erosion of the domestic production in most of the developed countries, lower manufacturing costs in Asia, cheaper labor, easy international transportation, and many other factors have made out of the Chinese products the norm in almost every field of activity.

For example, the European Union is highly dependent on the imports from China, which delivered during last year a percentage of 19% of total imports from outside the EU. The trade deficit of the EU community bloc in relation to China reached 164 billion euros in 2019.

Romania as well has a significant degree of openness towards the Chinese state. Last year, our country has imported "Made in China" products worth almost 4.54 billion euros. The imports from China had a share of almost 5.3% of total imports, which in 2019 increased to 86.28 billion euros. This country is the largest partner outside the EU in terms of imported goods volume. Instead, Romania exported goods to China worth only 758 million euros, which represents only 1.1% of total exports, which last year summed up an amount of 69 billion euros.

As a result, Romania's trade deficit with China reached 3.78 billion euros, respectively 22% of the total trade deficit, of 17 billion euros, but also almost twice compared to the one recorded with Germany, the  country that has the largest share in goods exports and imports from Romania. China produces Romania's largest trade deficit among its trading partners. In second place is Hungary, from which we import of 6 billion euros, but export only of 3.3 billion euros. Poland produces us as well a trade deficit of 2.7 billion euros , from which we imported last year products worth 5.1 billion euros and to which we have exported only 2.4 billion euros.

The world was already "defensive" against China

In recent years, both the EU and the US have tried to reverse the openness to China trend, through more restrictive import policies, product charges, investment restrictions, but also by diversifying the supply sources or domestic production stimulation, together with a general skepticism about Beijing.

A number of defensive instruments, such as a European framework for examining direct investment from non-EU countries for security reasons, monitoring compliance with trade agreements or procurement reciprocity, are either in place or under development.

At the same time, a US-China trade war, which actually started in 2018, led to trade rates of tens of billions of dollars applied to the Chinese imports. Put in a difficult position, the traders adapted and paid additional commissions on products such as steel, aluminum, and solar panels.

A first agreement concluded in January 2020 reduced only a part of the tariffs applied by both sides. And the sanitary problem has recently led to a number of exceptions, such as protection materials or disinfectants.

But the pandemic has brought an apogee of the defensive trend towards China, in the context in which the world has discovered how dependent it is, in fact, on the supply brought from this country.

Trade tensions between the United States and China have restarted, with the latter one again being threatened with increasing trade rates.

The European Union has also changed its strategy, now aiming to structure the Sino-European relationship in a way that reduces the dependence on Chinese trade and investment.

Romania itself has become more reluctant towards China. For example, the current crisis was the perfect context for the Romanian state to give up on its Chinese partner, China General Nuclear Power Corporation (CGN), who was initially selected for the construction of the nuclear reactors 3 and 4 from Cernavoda.

Numerous Romanian companies have also relied on local production of masks and protective equipment, instead of importing products from China that have often proved to be dangerous.

Opportunity for the EU to reduce its dependence on China

At the same time, the pandemic has revealed what it means when imports from China are unavailable. China is currently at the heart of the global value chain for many goods.

The global pandemic traffic restrictions have blocked the global value chains, starting with China itself, the first country to impose the lockdown. This created the context for a real supply shock that affected many importers. In the first just two months, the Chinese restrictions reduced their exports to the EU by almost 30%, while imports from the EU decreased by almost 20%.

Therefore, the pandemic reopened the discussion on diversification, de-globalization, and brought an opportunity for the EU to reduce its dependence on China.

The European Commission is considering the "shortening" of the global supply chains. For example, Europe may look closer towards Central and Eastern Europe or Turkey, the Balkans, and Africa, but also towards emerging Asian countries such as India or Vietnam.

The European Union must, therefore, focus on the geographical proximity, on cultural and business familiarity and on its unique local market.

Would Romania become a player?

Taking all of these into consideration, the question arises: is the EU states tendency (and not only) to reduce dependence on China an opportunity for Romania as well?

Many investors are now reserved when it comes to the Chinese market, and Europeans will also be more careful about prices and the origin of goods. Therefore, Romania has a chance to become the necessary source of diversification.

Although Romania's economic growth has also been affected by the crisis, it has remained stronger so far than most of the other EU countries. In addition to this, the Romanian market has high development potential in production and export, due to the fact that there is a significant unused and cheap labor force (one million Romanians have returned to the country since the crisis and another 400,000 are unemployed).

It is really unlikely that Romania will have the capacity to use this period as a complete reset in order to produce the goods it needs, along with the EU and imports from China and thus to save budgets. But the time is right to start this trend as well.

How can import traders be of help

Import companies that rely only on China in their supply chain should ask some questions now and rethink their strategy in the event of other unforeseen situations that may arise in the future, such as a potential second wave of the pandemic. They must take into consideration that they have to maintain both the financial stability of their company and the trust of the customers who benefit from these imports.

Giving up the dependence on China could be achieved in two ways: by fully relocating the needed production capabilities to the local internal market and also by diversifying the suppliers' options. With fully local production and an advantageous exchange of the raw stock, materials or components between EU countries would provide many more opportunities, including for the import traders, who will no longer face global obstructions. Suppliers diversification seems almost impossible given that the Chinese state is the largest supplier for most of the sectors. It is obvious that a total breakup cannot take place. However, giving up China as the sole supplier and varying the supply sources is the necessary solution to adopt. For example, importers can refocus on Brazil, Mexico, India, Chile, or Colombia for electronics, plastics, or clothing. Central and Eastern Europe, Turkey, Georgia, and Armenia are also growing markets that will offer new opportunities in the future.

Importers must also find other solutions to reduce the impact of a new potential crisis on their own business. Importing companies should consider optimizing their costs, where possible.

A crisis of global proportions, such as a pandemic, comes implicitly with increased volatility. An obvious danger, which can be easily noticed, is the volatility of the foreign exchange market, which can sometimes cause losses, and in repeated situations or for large orders it can become a real danger to the business itself. In this regard, importing companies can make substantial savings through fintech and international exchange services. Advantageous exchange rates that manage to avoid the losses caused by unfavorable fluctuations, forward hedging operations and low fees on international payments are just some of the advantages that a fintech offers, and that can be of great help and benefit for any trading company.