(Bloomberg Opinion) -- U.S. Commerce Secretary Wilbur Ross had a spectacularly insensitive reaction to China’s coronavirus epidemic during a recent interview:
I think it will help to accelerate the return of jobs to North America. Some to U.S. Probably some to Mexico as well…the fact is, it does give businesses yet another thing to consider when they go through their review of their supply chain.
This is a heartless thing to say at a time when thousands of Chinese people have been infected, and millions more are huddling indoors as disease spreads. But it’s also probably wrong on the merits. Coronavirus is unlikely to be a boon for U.S. employment.
It is true that the epidemic may cause multinational companies to rethink their reliance on China. The country is so huge that despite the need to diversify, companies can’t help but turn to it as a source for components and manufactured goods. The U.S., Japan and South Korea are especially dependent on China in this regard:
Diseases, although they can jump from country to country, tend to stay within a nation's borders because the government can close the borders to limit the spread. This highlights the risk of concentrating supply chains in one nation. Of course, that’s dangerous for other reasons, as the trade war and Chinese government policies designed to help domestic champions against foreign rivals have recently made clear. But the knowledge that China can still be an incubator for fast-spreading epidemics will probably heighten the sense of risk. That won’t be enough to get multinationals to abandon China, especially given the lure of its huge domestic market. But it could accelerate the trend of diversification to other locations.
But these alternatives are unlikely to be in the U.S. Now that U.S. companies have built up the management and technical infrastructure to manage global supply chains, there are plenty of other low-cost countries available. And China’s spectacular success at providing jobs and rising living standards for its people by attracting multinational investment has inspired a number of other countries to try to be the next China.
Two such countries are Vietnam and Bangladesh. Both have stable governments and low labor costs and are natural alternatives for labor-intensive manufacturing of items such as toys, clothing, furniture, electronics-assembly work and so on. Bangladesh, for example, is a star in the apparel industry:
Meanwhile, the U.S. trade deficit with Vietnam, which had been growing for years, jumped in 2019:
The coronavirus outbreak may accelerate this shift and pull countries such as Indonesia, Ethiopia and the Philippines closer to global supply chains. Each country has a limited ability to absorb production from China because of institutional bottlenecks and a smaller population. But together they offer a modest amount of diversification for multinationals. A wholesale exit of global companies out of China would be a different story, but this is vanishingly unlikely.
Meanwhile, some production may return to the U.S. from China. But this is likely to be capital-intensive stuff -- heavy industry and complex manufacturing. Those are things best done by machine tools and robots instead of by human hands. High U.S. wages mean that a wave of reshoring from China will do little to counteract the trend toward automation in manufacturing, meaning that any gain in U.S. jobs will be minuscule.
And those are just the effects from trade diversion. Although much ink is spilled over the zero-sum competition for multinational companies’ investment dollars, the truth is that the amount of economic activity in the world isn’t fixed. Coronavirus is likely to lower China's growth, meaning less demand for U.S.-made products. The disruption of supply chains will also lead to higher prices and possibly even shortages, hurting the U.S. economy. The impact of slower Chinese growth on jobs is likely to outweigh any benefit from reshoring.
So Ross’s comments aren’t just callous; they reflect a flawed understanding of the global economy. The Trump administration’s conception of international trade as a zero-sum game between nations tells only a small part of the story. The reality is that when one country suffers, especially one as big and important as China, most others tend to suffer as well.