The Tide Has Already Begun to Turn on China’s Miracle

February 18, 2022

On December 11, 2001, China officially became the 143rd member of the World Trade Organization (WTO), after 15 years of trade reform and negotiations. What has transpired over the past 20 years has been nothing short of miraculous.  

In 1986, China’s gross domestic product (GDP) was $300bn — roughly 7% of the size of the US economy and smaller than both Italy and Canada. Fast forward to 2021: China’s GDP is 60 times larger at nearly $18tn, and second in size only to the US. 

While internal Chinese spending has increased, foreign direct investment (FDI) has been a large part of that success story. Since 2003, there have been nearly 20,000 FDI announcements equating to $1.5tn worth of investment, and nearly five million jobs. North American investment contributed roughly 25% of those numbers. In 2018 alone, two American companies, ExxonMobil and Tesla, announced projects worth an estimated $22bn in investment and 9000 new jobs.   

But announced projects into China from North America peaked in 2008, and have steadily declined since as US and Canadian companies looked elsewhere to invest in new operations. Perhaps some of this decrease was bound to happen — with such rapid investment occurring in the decade immediately after China’s entry into the WTO, many companies that were going to establish a new presence in China had done so. Other factors, such as higher cost of labor in China, increased tariffs on Chinese goods, higher energy costs with less reliability, and higher shipping costs also contributed to China’s slowing investment climate.  

Location decision drivers are as varied as the projects announced, but ultimately, companies are looking for locations that optimize three factors: low cost, high quality, and low risk. 

For labor-intensive projects, rising wages in China have led US companies to find lower labor cost locations, such as Vietnam. For energy-intensive projects, cheap shale gas has reduced energy costs in the US, making domestic projects more cost-competitive. These differences, coupled with the risk posed by chronic electricity interruptions in China, have driven more companies to build energy-intensive operations in the US instead of China. Additionally, almost all China-based manufacturing operations that serve North American markets have learned first-hand the risks of hyperextended, global supply chains in the face of system-wide interruptions like COVID-19.  

Recently, China’s increasingly restrictive and authoritarian policies and human rights abuses have caused North American investors to rethink their investment strategies as shareholders and customers focus on the conditions under which products are manufactured. All these factors have contributed to either a ‘China +1’ strategy — staying in China but setting up capacity overseas to circumvent risks — a relocation of certain processes to closer, friendlier shores, or in some cases, a combination of both. 

It won’t happen all at once, as companies that have invested in bricks, mortar, and expertise in China will be reticent to abandon their assets. But the tide has already begun to turn on new investments. China’s share of FDI announced investments has fallen from 12% of capital expenditure and 14% of jobs in 2010 to a mere 5% and 8% respectively in 2021. How low will it go? Only time, and Xi Jinping’s ability to convince corporations that China is a secure and profitable location to invest, will tell. 

Written by Didi Caldwell and originally published in the February/March edition of fDi Intelligence magazine. 

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