G2 Trade Changed by COVID-19... US and China Deepen 'In-House Production' of Intermediate and Finished Goods

[Asia Economy Reporter Kim Hyewon] A survey has revealed that after the COVID-19 pandemic, the self-production systems of the United States and China, the so-called major two countries (G2), have intensified. This indicates a clear trend toward regionalization of the global value chain (GVC).

On the 14th, the Federation of Korean Industries (FKI) analyzed the trade status of intermediate goods (parts and materials) based on trade statistics systems and found that from January to July this year, China's imports of parts and materials decreased by 36.8% compared to the same period last year. Compared to the 4.1% decline in China's total trade volume during the same period, the drop is significant. The proportion of parts and materials in China's total imports fell sharply from 41.6% to 27.5%, a decrease of 14.1 percentage points.

Traditionally, China played the role of importing overseas parts and materials in the GVC, processing and assembling them, and exporting finished products. However, due to difficulties in importing overseas parts and materials caused by COVID-19 and trade regulations, China appears to have maintained its production function by increasing the proportion of domestically sourced parts and materials.

The FKI noted that Chinese companies such as Huawei and SMIC, which are struggling under strong U.S. regulations, plan to establish their own semiconductor production plants within China. Therefore, if trade disputes with the U.S. continue, this trend is expected to strengthen further.

On the other hand, in the U.S., the proportion of parts and materials in total imports increased by 3.9 percentage points from 28.2% to 32.1% in the January to September period compared to the previous year. This is interpreted as a relative strengthening of the U.S.'s finished product self-production function, which traditionally played a consumption role in the GVC, due to the expansion of reshoring. In fact, the U.S. manufacturing Purchasing Managers' Index (PMI), which reflects manufacturing business conditions, recorded 59.3 in October, the highest in over two years since November 2018. It has remained above 50 for six consecutive months since June, reflecting an expansion of manufacturing functions within the U.S.

The share of Mexico, which has significant trade in parts and materials, decreased by 2.8 percentage points from 19.6% to 16.8% in the January to September period compared to the previous year. This is believed to be due to production disruptions caused by the suspension of operations at parts factories concentrated in Mexico, such as those in the automotive and home appliance industries, due to COVID-19.

Compared to China and the U.S., Korea and Japan have shown only minimal movements in GVC restructuring due to COVID-19. Korea's exports of intermediate goods from January to October amounted to $293.6 billion, down 8.4%, and imports were $192.3 billion, down 7.7%. There were almost no changes in the major partner countries or the share of intermediate goods trade. The proportion of intermediate goods in total trade was similar at 60.6% last year and 60.9% this year. The FKI pointed out that Korea's high dependence on China in the GVC and the lack of active reshoring like in the U.S. make it difficult to restructure the GVC in the short term.

Japan also saw a decrease in the overall volume of parts and materials trade due to the global economic downturn caused by COVID-19, but the proportions did not change significantly compared to last year. Japan's exports of parts and materials fell by 10% and imports decreased by 13.1% in the January to September period.

Yoo Hwan-ik, head of corporate policy at the FKI, said, "Through this analysis, we confirmed the GVC localization trends centered on the G2 countries after COVID-19: China expanding self-sourcing of parts and materials, and the U.S. expanding finished product production. Korea, with intermediate goods accounting for about 60% of total trade and a high concentration of certain countries in its supply chain, needs to expand its self-sourcing capabilities for parts and materials (intermediate goods) to mitigate future risks," he emphasized.

This content was produced with the assistance of AI translation services.