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“China Plus One”: Supply Chain Resilience Initiative and Beijing in Indo-Pacific

Jagannath P. Panda is Research Fellow at Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile.
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  • July 26, 2021

    Summary: The COVID-19 pandemic has brought to the fore drawbacks of over-reliance on a single source for manufacturing, launching a serious debate on the need to diversify away from China-centric supply chains. However, owing to a low possibility of complete decoupling from Beijing due to the country’s deep-seated economic integration with the global economy, the impetus has birthed strategies such as “China Plus One” that emphasise expanding and diversifying global supply chain networks with additional manufacturing sites outside China. This issue brief draws on such developments and proposes the emerging Supply Chain Resilience Initiative (SCRI) as a viable tool for implementing the “China Plus One” strategy. The brief argues that through meticulous implementation, the SCRI can play a significant role across various sectors to potentially enable partial decoupling from China. However, considering the structural limits of the initiative, the SCRI might need to be linked to economic initiatives by other like-minded nations to create a sense of collective economic security for the region.

    Introduction

    Supply chain management has been a subject of extensive study over the past decade, especially with the rise of China as a manufacturing powerhouse and the global supply chains becoming increasingly China-centric. This, coupled with China’s increasingly revisionist and authoritarian behaviour in the region, has highlighted the vulnerabilities resulting from dependence on a single source for manufacturing. COVID-19 has served as a reveille and showed that extensive dependency on China vis-à-vis supply chains is not limited to smaller nations but also major global powers such as the United States (US), India, Japan, Australia, South Korea, and others. This realisation has advanced an immediate focus on the idea of “China Plus One” in the global supply chain (GSC) network, especially as complete decoupling from China remains an unlikely scenario.1

    Simply put, the “China Plus One” strategy aims at expanding and diversifying the GSCs by developing additional manufacturing sites outside China.2 The past decade has witnessed deliberations and gradual implementation of this strategy by countries; however, the COVID-19 pandemic has prompted greater execution by nations, both individually and regionally via multilateral platforms. For instance, Japan is one of the first major economies that offered subsidies to its companies to move production out of China into neighbouring Southeast Asian states3 , amidst the pandemic.4 Similarly, the Supply Chain Resilience Initiative (SCRI)5 by the India–Japan–Australia trilateral, which seeks to de-risk supply chains and create a sustainable GSC network, has marked a shift in policy towards collective bids at implementing a “China Plus One” outlook.

    Supply chains are complex networks spanning across multiple countries and continents, effective management of which provides an immediate competitive advantage to the nations. Beijing has long utilised the benefits, being a manufacturing superpower. China’s sweeping hold over GSCs is quite evident; from products like high-end gadgets to modern hardware and clinical gear, Chinese suppliers are predominantly responsible for the world’s 1,000 largest corporations, which faced a supply cut-off during the pandemic.6 The pandemic acted as a particularly acute disrupting event, speeding up mitigating activities, including provider diversification and logistical expansion, and localisation and expanded utilisation of high-end innovation for improved predictions.7

    Yet, because of the intricacy of the interconnecting GSCs, quick and widespread localisation or regionalisation of supply chains is far-fetched. Simultaneously, while GSCs will undoubtedly undergo a change post-pandemic, a full decoupling from China remains “unrealistic”8 —as Beijing itself remarked post the establishment of the SCRI. As a result, diversification of existing networks and the creation of new and sustainable supply chains has instead emerged as a central focus amongst the Indo-Pacific states (particularly the US) and in Europe. Importantly, regardless of the level of diversification, the broader focus is to expand the GSC network to topographically proximate nations, especially to those in Southeast Asia. Here, the “China Plus One” strategy emerges as the guiding paradigm, with ventures like the SCRI providing immense scope for its practical implementation.

    This issue brief explores the “China Plus One” strategy in the context of the SCRI. It argues that the SCRI is an ideal framework to further a “China Plus One” thinking, however, its execution will require a concerted effort by all founding members, as well as by their like-minded partners in the region. The brief explains how the SCRI can be envisioned as a challenge to Beijing’s growing economic and political influence—such as under its Belt and Road Initiative (BRI). However, for the SCRI to evolve and emerge along such lines, the India–Japan–Australia trilateral must accord it due focus in their national security perspectives. They must envisage it under a long-term vision, including outreach to key partners and its amalgamation with various national and regional ventures. Only then can the SCRI successfully overcome its limitations and act as an effective conduit for the “China Plus One” strategy and achieve its larger goal of economic security.

    Diversification, China and SCRI

    The “China Plus One” strategy has been explored by many companies over the past few years. The vulnerabilities due to increased dependence on a single manufacturing source, growing US–China competition, and rising costs in China have driven firms in this direction. One of the earliest examples of such a shift is the SARS epidemic of 2002 which adversely affected China’s business operations with countries like Japan even as medical assistance from Tokyo to Beijing marked a prominent “expression of China-Japan friendship”.9 Today, the “China Plus One” strategy is being adopted by not only Japanese multinationals but the wider global community. In essence, the pandemic has not been a cause but a catalyst forcing states to realise that China-centric value chains are no longer economically or strategically viable; more importantly, as the pandemic proved, such over-dependence was an outright national security issue—making risk diversification a priority concern.10

    Such a narrative equating supply chain diversification with national security has been accentuated by China’s “wolf warrior” diplomacy, which saw Beijing employing economic retaliation to perceived slights. For example, China banned imports from countries (a prominent example being Australia) that questioned its role in the pandemic outbreak. Such coercive strategy marked a shift from Beijing’s previous tactics of promoting trade and investments as an incentive, with the aim of converting its economic power into political influence.11 This strategy was most poignantly reflected in President Xi Jinping’s flagship BRI. Being a large-scale infrastructure building venture with an extremely vast geographic footprint, the BRI holds several implications for supply chains. Due to its expansive nature, even though the BRI is not overtly or entirely (or limited only being just) a supply chain initiative, its mechanisms and functioning enable China to integrate itself further with the GSCs, advance its trade and industry, and utilise the BRI as leverage to dominate the global economy.

    These developments have given rise to several initiatives aimed at diversifying supply chains to ensure more sustainable and resilient GSCs. The SCRI is one such critical venture that seeks partial decoupling from China in selected sectors for better risk management, security and exploration of new market bases, therein attracting countries and companies not willing to completely decouple from China.12 This makes it a viable fit for the “China Plus One” strategy, which, too, does not seek complete decoupling from China.

    Structural Tenets of SCRI

    Despite its merits and significant goals, the SCRI faces considerable structural limitations as a nascent framework. Most prominently, the founders (India, Japan and Australia) are ambiguous about how to shape the initiative: expand the initiative, which could risk losing its focus amid great power rivalry, or keep it limited to only its founding members, which might lead the SCRI to be viewed as far-fetched or overly ambitious.13 The scope of SCRI has been discussed in the Quadrilateral framework (involving the US, Japan, India and Australia) but without much serious thought. The inclusion of the US is definitely in the reckoning. The Joseph Biden administration has shown willingness to be a potential participating member of the SCRI, and prepare to handle disruptions caused by supply chain discontinuities.14

    Furthermore, the initiative could act on its potential outlook of “expansion…based on consensus”15 and work with like-minded countries, such as the US, and some member states of Association of Southeast Asian Nations (ASEAN). It could also consider full or partial participation of key economies and economic blocs—including the United Kingdom (UK), Canada, ASEAN and the European Union (EU)—to ensure that a diverse, expansive, inclusive and resilient supply chain network is created, in its true sense.16 It could further utilise the momentum already built through the abstract framework of “Quad Plus”, which incorporated New Zealand, South Korea, Israel, Brazil and Vietnam in its discussions. In the same tune, the SCRI can find synergy with the “Blue Dot Network” (BDN)17 —a public–private initiative led by Australia, Japan and the US to offer sustainable and certified quality infrastructure development projects in the Indo-Pacific—to advance its own outreach in the region.

    SCRI versus BRI: Supply Chain Competition

    Although the BRI is overtly conceived as an initiative that provides financial aid for infrastructure projects to states along its land-based corridors and maritime passages, ultimately creating a massive economic network with Beijing, it implicitly reconfigures supply chains to strengthen China’s global dominance. In other words, it seeks to forge a vast global supply chain network with China as its nucleus. In this context, the SCRI comes as a significant concern to Beijing. In fact, the SCRI, which has been initiated by three Indo-Pacific democracies, has the capability to provide the region much greater inclusion, flexibility and transparency, devoid of the scepticism and allegations of debt-trap diplomacy vis-à-vis the BRI.18

    The SCRI could also be instrumental in building green and sustainable supply chains.  Several Southeast Asian countries have criticised the BRI as an environmental disaster, considering its massive carbon footprint. Though Beijing has expressed its strong commitments to “greening” BRI, most associated energy investments and contracts have been in fossil fuels.19 In this context, the SCRI could emerge as a more attractive competitor by developing post-pandemic mechanisms that prioritise ecological sustainability and draw on policies of countries like South Korea and its “Green New Deal”20 to foster and promote sustainable supply chains.

    Another significant area where the SCRI could play an instrumental role is in the field of technology. China’s rapid technological advances are enabling it to play a leading role in contemporary geopolitics. In fact, technology has been a crucial part of its 14th Five-Year Plan (2021–25), which witnessed an investment commitment of $1.4 trillion over the next five years in 5G, smart cities and other technological infrastructure.21 However, several countries, particularly India, Japan, Australia, and most prominently the US, have raised concerns about the possibility of Beijing deploying or exploiting technology to gain strategic leverages.22

    The SCRI members have already left Chinese telecommunication companies such as Huawei and ZTE out of their respective 5G trials over security fears,23 and are moving towards building more resilient supply chains focusing on information technology. The SCRI has already discussed the bolstering of resilient supply chains with policy measures including the support for “enhanced utilization of digital technology”.24 The SCRI could be expanded to include more like-minded countries, and also regional and global initiatives, to build on the momentum of exploring a common approach on 5G technology and their respective national technological plans. Groupings like the Quad have already discussed expanding strategic cooperation on similar issues,25 while the UK has proposed the prospect of creating a 5G club of democracies, including the original G7 countries – UK, US, Italy, Germany, France, Japan and Canada, with a possible expansion to include Australia, South Korea and India.26 In essence, the SCRI’s goals and potentials, if realised constructively, could limit the political and strategic clout of China. However, such developments are bound to witness firm reactions from China.

    Quantifying Chinese Response

    As expected, China’s response to the SCRI has been harsh, despite the initiative completely avoiding any reference to China and focusing more on risk diversification imperatives. Beijing termed the initiative as “artificial” and “unfavourable” to the global economy, with the Chinese foreign ministry spokesperson describing the move as “unrealistic”.27 The “China Plus One” strategy has already strengthened Beijing’s belief that decoupling from China is a move pushed by the US in a bid to reduce China’s power, even though no concrete indications attest to this. Such assertions have been reiterated in academic and strategic circles in China, particularly through articles published in state-run media outlets such as Global Times and China Daily. One such article published in Global Times argued that technology companies were reeling under growing pressure from the US government in an effort to “weaken” China’s dominant status in GSCs, particularly as Beijing recovers from the economic fallout of the COVID-19 pandemic.28

    Similarly, an opinion piece in China Daily described the “China Plus One” strategy as “good” in theory but denied any merit to its possible implementation, owing to the advantages of “basing supply chains in China” and other “Plus Ones”, such as Japan, South Korea, and even India, being unattractive due to high costs and poor infrastructure.29 These demonstrate an acknowledging yet dismissive perception regarding the “China Plus One” strategy. Reflecting this view, another opinion piece in Global Times negated the possibilities of Vietnam becoming the next “world’s factory” in the backdrop of an intensifying US–China trade war. In particular, it emphasised low competitiveness and comprehensiveness in Vietnam’s industrial base, the poor foundation of suppliers, and even infrastructure when compared to China, rendering a “China Plus One” strategy as “impossible”.30 A Global Times piece earlier this year dismissed any possibilities of India evolving as a leading manufacturing hub due to “backward industrial foundation and over-protectionism”. It even argued (and accused) that the Narendra Modi administration has been trying to “replace China’s role in the global manufacturing sector with various reforms and efforts to create favourable conditions to make it easier for foreign investors to set up factories in India”.31

    The Chinese Communist Party (CCP) has long focused on policies aimed at sustaining China’s leading position in GSCs, coupled with reducing dependence on “unfriendly countries”.32 Now, with states actively looking to balance China’s leading position (and therefore its growing political influence), President Xi Jinping faces a pressing need to address the policy disturbances resulting from a decade-long economic slowdown, and further amplified by the US–China trade war and the COVID-19 pandemic.33 Xi’s implementation of a “dual circulation” strategy34 —which focuses on domestic demands in light of an uncooperative external environment—is catered to meeting this very challenge. Through this strategy, Xi aims to reduce China’s overseas economic dependency by turning into a domestic market-oriented and self-sufficient economy.

    This outlook is a cause of concern for  the US, as well as the SCRI states of India, Japan and Australia, especially as they have been attempting to build their own advantages as  COVID-19 induced breakdown of GSCs, raising calls for economic decoupling from China. However, should China’s strategy of “dual-circulation” be implemented, such decoupling will no longer be on Washington’s terms, failing the US-led aim of moving states away from China and “China Plus One” as a geo-economic power tool.35 Importantly, China will attract more international investment via “dual circulation” by increasing domestic consumption and focusing on rebuilding its BRI.

    “China Plus One” and Indo-Pacific

    Despite challenges, consensus on the need to diversify from China has emerged strongly amongst powers like India, Japan, Australia, the US, the UK and some EU states. However, the degree of diversification varies. For instance, for the EU and the US, the top 10 goods by volume imported from China are similar. In the case of the US, trade redirection because of the additional tariffs Washington has imposed on Chinese items is critical in deciding the diversion of trade.36 Moreover, US companies were already diversifying in the wake of the US–China trade war, as firms reduced purchases from China and started buying more from the rest of the world, notably India, Taiwan, Malaysia, South Korea and Vietnam, where a production footprint already existed.37

    In contrast, the degree of diversification in the EU is substantially less. China’s fast resumption of manufacturing activities made it fit for providing industrial items and retail merchandise to Europe before the continent could look elsewhere. Still, there are indications of diversification in products like glassware, ceramic-ware, footwear and clothing. For glass and ceramic products, there is an increment in supply from India and the European nations.38 Many footwear and clothing companies have also moved assembling exercises outside China to Southeast and South Asia. Be that as it may, many are still reliant upon the Chinese stockpile of crude materials.39 Meanwhile, with the UK, France and Germany moving their strategic compass towards the Indo-Pacific and taking cognisance of the ill-effects of China’s economic dominance in Eurasia, the “China Plus One” outlook has immense potential to boom in Europe.

    Simultaneously, Japanese companies have, over the past decade, been gradually moving away from China and looking at Vietnam, India, Bangladesh and Thailand, among others, as prospective venues with low labour and foreign exchange costs; overall, Japan’s production in the ASEAN region has reached over US$ 139 billion in the past 10 years.40 Japan’s push to actively promote and support the SCRI aids its own national strategy to move out of China’s manufacturing grasp. Japan’s long-held tradition of “seikei bunri” (separate politics and economics) has spearheaded its balancing of economic and political ties with China. However, amidst China’s assertive actions in the East China Sea and growing synergy amongst Quad states, Tokyo’s national security calculus has become more critical of its economic partnership with China. Meanwhile, for Australia, economic ties with China, its largest import and export trade partner, have been at an “all-time low”.41 A push in Australia to buy homegrown and indigenous products is trending. With its manufacturing sector being a potential source of growth post–COVID-19, Australian supply chains and production are steadily moving out of China.42

    Concurrently, for India, there exists an immense opportunity to emerge as a winner in the “China Plus One” diversification trend. Though not as much as Southeast Asia, India has already witnessed modest benefits from the trade diversification in machinery and consumer goods (such as toys and furniture) amid the US–China trade war.43 Indian government has initiated a wide range of projects across various sectors to support manufacturing in the country, with “Make in India”, “Digital India” and “Aatmanirbhar Bharat” (self-reliant India) leading the way. Still, competition from Southeast Asian states like Vietnam and India’s rather low ease-of-doing-business rankings are challenges New Delhi must surf through first. In addition, India’s somewhat inward-focused financial policies do not serve well in gaining an edge over its competitors. India’s average import duties have also significantly increased over the last few years.44 Furthermore, India’s absence from the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) could be an unmistakable drawback, in the long term.

    Moreover, the India–China “developmental partnership” has taken major hits post the Galwan crisis. Amidst such an outlook—accompanied by the banning of Chinese applications, curbing Chinese investments in public procurement contracts, and restricting Huawei and ZTE’s access in 5G trials—the call to move production away from China has emerged as a central factor in Indian economic and business circles. In fact, several public campaigns have called on consumers to boycott items produced in China.

    With China’s weakening global position, India is set to accelerate its own strategies to attract foreign investments, expand economic growth, and pose a challenge to China in sectors like telecom and technology, auto, cellular, tech, pharmaceutical ingredients and textiles. Initiatives such as the SCRI can provide India with an additional crucial avenue to further bolster its ties with like-minded strategic partners, which can help realise its regional/global economic goals and enhance its position in the region.

    Summing Up

    As a stand-alone venture, the SCRI cannot succeed fully, and neither can “China Plus One”, for both require a collective economic security outlook. For the SCRI to actualise, it is imperative that the initiative is coupled with national and regional ventures. A primary or immediate focus here must be to consider the full or partial inclusion of key economies and economic blocs such as the ASEAN, if not others.45 At the same time, the SCRI needs to formulate a clear vision and direction for the long-term; officially theorising the “China Plus One” strategy within such a vision could strengthen its aims and objectives.

    Furthermore, the SCRI states must coordinate their strategies with key regional and global partners, such as the US, EU, ASEAN, UK, Canada and South Korea, and reorient their strategies and tactics vis-à-vis the "China Plus One" approach. As Beijing's response suggests, it is aware of the potential ramifications that SCRI could have in light of the collective economic might of its founders. Under such conditions, the SCRI (and potential partners in the future) must press down upon available opportunities and advantages to balance, if not limit, China's still growing role in the global economy.

    The "China Plus One" strategy finds in SCRI a democratic, rules-based and transparent partner, led by three of the most important Indo-Pacific powers. Through Japan's Expanded Partnership for Quality Infrastructure (EPQI); India's Sagarmala (to enhance the logistics sector), Bharatmala (for roads and highways), and the Indo-Pacific Oceans Initiative (IPOI) for maritime security and stability; the US' BDN and Free and Open Indo-Pacific (FOIP) strategy; and Australia's Pacific Step-up to provide support to Pacific-island countries, the SCRI members could mark synergy between a "China Plus One" implementation regionally as well as multilaterally. EU's "Asia connectivity" strategy and the Master Plan on ASEAN Connectivity (MPAC) 2025 could be potential areas for collaboration.

    The ultimate goal for all actors involved will remain the reorientation of GSCs away from China. The India–Japan–Australia trilateral must focus their extensive resources on SCRI's outreach and incorporation of and support from other like-minded states, setting an example of collective economic security outlooks.

    Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.

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