US protectionism disrupting global supply chains

From the 1990s to 2008, global industrial supply chains experienced a golden era.

However, due to the United States' adherence to the mindset of national competition and zero-sum game thinking, it has introduced various restrictive measures in recent years, leading to disruptions in the operation of those chains. Under such circumstances, rebuilding political trust and abandoning trade protectionism are necessary to ensure the long-term stability and growth of supply chains.

Markets have enjoyed rapid development from the vitality of global supply chains.

After China's reform and opening-up in 1978, the nation quickly integrated into global supply chains through processing trade, which refers to the activity of importing all, or part of, the required raw and auxiliary materials, and reexporting related finished products after processing or assembly by companies within China.

In the 1990s, with the dissolution of the Soviet Union and the end of the Cold War, Central and Eastern European countries also began to participate in global supply chains. The period from this time until the 2008 global financial crisis was the golden era for the development of such chains.

This was due to three main factors. First, developing countries supplied a large amount of labor. Second, multinational corporations from developed economies allocated resources globally. Third, technological advancements reduced trade and transportation costs.

Fundamentally, political divisions between countries were dissolved and political barriers were removed, paving the way for the market to play a decisive role in supply chains. As a result, low-cost labor in developing economies was combined with the abundant capital of developed economies to produce goods that could easily cross borders multiple times. From a business perspective, this allowed multinational companies to allocate resources globally based on economic costs.

Government restrictions thus inevitably hinder the development of global supply chains.

The division of labor in supply chains has two distinct characteristics. First, from the perspective of production, countries are keen to find the optimal combination of factors, resulting in the lowest production costs. This requires the free flow of these factors. Second, from the perspective of trade, different stages of production are placed in countries with the lowest costs, requiring the free flow of goods. This means that governments must reduce restrictions on the free flow of factors and goods. To achieve this, countries must build mutual trust, eliminating uncertainties that hinder businesses from participating in global industrial supply chain divisions. At the same time, countries need to establish international trade and investment rules that promote the liberalization and facilitation of trade through multilateral, regional and bilateral channels.

The logic of US participation in global supply chains has shifted from market competition to national competition.

The development of supply chains follows the logic of market competition. The essence of this is that companies allocate resources based on economic benefits and participate in market competition. All countries benefit by participating in supply chains and improving their overall welfare. However, the US feels that China has gained more benefits from global supply chains in recent years. Furthermore, rather than focusing on overall welfare improvement and benefiting the majority of its businesses and consumers, the US has become more concerned with the welfare loss of certain domestic groups. Even if it harms its own interests, the US pursues greater damage to China's interests. This has led to US suppression of China in supply chains.

US intervention in supply chains has brought numerous adverse consequences.

The US' adoption of national competition logic means that it inevitably interferes with the operation of global supply chains. The US has used various policy tools to interfere in recent years, such as discriminatory subsidies, export controls, unilateral tariff hikes and the creation of exclusive industrial supply chain alliances.

Discriminatory subsidies refer to financial support provided by a government to its own industries or companies in a way that gives them an unfair advantage over foreign competitors, giving the recipients a competitive advantage, either in the domestic market or in international trade.

Discriminatory subsidies affect the efficient allocation of global resources by multinational corporations. Export controls restrict the free flow of goods, leading to disruptions in industrial supply chains. Unilateral tariff hikes not only harm other countries' economic interests, but also raise end-consumer prices and production costs for downstream manufacturers in the US. The creation of exclusive supply chain alliances directly violates the principle of market cooperation, artificially splitting the supply chains into US and non-US systems.

Removing restrictions is key to returning global industrial supply chains to prosperity. The history and theory of global industrial supply chain operations demonstrate that enabling the market to play a decisive role in the allocation of global resources is essential for fostering the ongoing development of supply chains worldwide. This demands efforts from two aspects — rebuilding political trust and abandoning trade protectionism.

First, certain countries must waive the mindset of national competition and rebuild political trust. They should focus on improving their own welfare rather than adhering to a zero-sum game mentality. All countries should strengthen dialogue and cooperation, resolve differences through communication, and create a positive political environment for businesses to participate in global industrial supply chains.

Second, it is critical for countries to uphold the authority of the multilateral trading system and abandon unilateral protectionism. The rules of the World Trade Organization are the institutional guarantee for the smooth operation of global industrial supply chains, and all countries should adhere to them.

On this basis, all involved parties should further promote trade liberalization, providing institutional and regulatory support for the free flow of goods and services.

The writer is a senior fellow and deputy director of the department of international trade, institute of world economics and politics, the Chinese Academy of Social Sciences.

The views do not necessarily reflect those of China Daily.