The old saying of “God made Heaven and the Earth and the rest are in made in China” does not seem to be holding anymore as China is facing fundamental problems in its economy.
These problems China is facing can be summarized as the “5Ds”.
1. Disease
Disease, known in the form of the Covid lockdowns, hit Chinese factories hard. Additionally, due to market share loss to other countries, some industries will never recover.
2. Demographic Change
Demographic change has hit China, too. China’s previous one-child policy had enormous effects on the population, where due to reduced births, the average age of a worker in China is now over 39 years old. Even though the government relaxed the one-child policy rules years ago, many young people are not planning to have bigger families due to inflation. So, these demographic issues are likely to continue.
3. Deflation
The next “D” is deflation. Although most of the world is experiencing problems with high inflation, China is experiencing the opposite situation due to insufficient aggregate demand.
4. Debt
Next, the debt situation is affecting China. In addition to local governments in China facing serious debt challenges, big developers such as Evergrande Group are also in serious trouble due to debt and falling prices.
5. Decoupling
The last “D” is the decoupling trend that recently started, where due to both national security reasons and diversification trends, many companies are now switching their sourcing out of China to nearby countries.
Let’s look at which countries are benefiting from this switch.
Mexico
This year, Mexico beat China as becoming the top trading partner of the U.S. China beat Canada back in 2014 to become the U.S.’s top trading partner, now it has switched to Mexico. Thanks to the renegotiated NAFTA agreement between the U.S., Mexico, and Canada in 2020 there are fewer barriers to trade compared to China. And, with the 5D’s that I briefly explained above, Mexico won big from the decline of trade with China. One key highlight is trade between Mexico and the U.S. is more balanced with imports and exports than between the U.S. and China where the U.S. imports far more than what it sends back to China. Also, the auto industry accounts for 25 percent of the economic activity between these two countries.
Vietnam
Due to its proximity to the U.S. compared to other Southeastern countries, low wage advantages, as well as not being affected by the tariffs imposed on China by the previous U.S. administration, Vietnam seems to be winning big from the decoupling between U.S. and China. It is also benefiting due to Vietnam exporting similar products to the U.S. as an alternative to China so it easily became the place to be since factories can easily be set up and workers trained when it comes to sending similar goods to the U.S. Back in 2019, Vietnam’s exports to the U.S. was around $500 billion, while that number is expected to be close to $700 billion this year, a staggering 30 percent increase in just four years’ time.
India
I wrote another article about India earlier this year and how it can benefit from China’s current situation. For the last 5 years or so, India benefited a lot from the decoupling trend between the U.S. and China, Where back in 2016 India was exporting around $46 billion to the U.S., that increased to $73 billion in 2021 – an impressive 63% increase in exports to the U.S. India also has a big advantage over China when it comes to population growth where 65% of India’s population is under 35 years old, while in China that number is over 39 years old.
There are other countries that are also benefiting from these trends such as Malaysia, Thailand, Korea, Taiwan and even Cambodia, and time will show if any of these will get into the list of the top five U.S. trading partners.
