Impact of Trade Restrictions and COVID-19 on IT Industry Location PDF

Part 3 Changing industrial locaƟon Extended reading Textbook p. 80...

Part 3 Changing industrial locaƟon Extended reading Textbook p. 80 Impact of trade restrictions and the COVID‐19 pandemic on the location of the IT industry Credit: D-Keine/iStock.com Over the past few decades, many multinational IT firms from the MDCs have located their production operations in the lower-cost countries. China has been a popular destination for the IT industry. However, due to rising production costs in China, its comparative advantage is slowly losing to other lower-cost countries such as Vietnam, Cambodia and India. Some US multinational IT firms have been moving part of their production operations from China to these countries. This trend may become more evident due to US trade restrictions on China in recent years. In addition, the disruption of the global supply chain due to the COVID-19 pandemic has motivated many US IT firms to reshore part of their operations from other countries. The reshoring has adversely affected the globalisation trend. Some economists even predict that this will lead to ‘deglobalisation’. Apart from reshoring, some MDCs are actively attracting foreign IT firms to set up factories in their countries to produce key IT components. This is intended to secure their supply of IT components in case of disruptions in international trade. Figure 1 Impact of two major incidents on the recent global location trends of the IT industry supply chain 供應鏈 deglobalisaƟon 逆全球化 Senior Secondary Exploring Geography Third Edition (RMA 2024) © Oxford University Press (China) Ltd 2024 1 Part 3 Changing industrial locaƟon Extended reading 1 Impact of US trade restrictions on the location of the IT industry In 2018, the US federal government announced extra tariffs on Chinese imports worth 34 billion US dollars. These tariffs applied to a range of IT products and related components such as hard disk drives (25% tariffs) and lithium-ion batteries (7.5% tariffs). As a result, between 2018 and 2022, US imports of IT products from China drastically decreased by 62%. To avoid these tariffs and the rising production costs in China, some multinational IT firms in the MDCs may become more determined to relocate part of their production operations in China to other lower-cost countries, such as Vietnam and Thailand (Figure 2). Credit: Mick Sinclair/Alamy Stock Photo Figure 2 Factory of Seagate Technology, a US hard disk drive manufacturer, located in Bangkok, Thailand 2 Impact of the COVID-19 pandemic on the location of the IT industry During the COVID-19 pandemic, the movement of goods worldwide was seriously affected. Moreover, when a country or region imposed strict lockdown measures, factories were forced to shut down or operated at reduced capacity. This led to disruptions in the production of IT components and the transportation of these goods, which destabilised the global supply chain. For instance, the supply chain of Apple's products was disrupted, partly due to the lockdowns on the Mainland (Figure 3 on p. 3). When the supply of components from one area was disrupted, factories in other regions were unable to function without these supplies. As a result, delays in the delivery of industrial goods were common during the pandemic. lithium-ion baƩery 鋰離子電池 Senior Secondary Exploring Geography Third Edition (RMA 2024) © Oxford University Press (China) Ltd 2024 2 Source: Online newspaper in April and May 2022 Figure 3 Disruptions to the Apple’s major assembly plants due to the lockdowns on the Mainland in 2022 As COVID-19 disrupted supply chains throughout the world, more multinational IT firms from the MDCs realised that it is too risky to locate their production lines and source their components mainly overseas, especially when it comes to key IT components such as chips and lithium-ion batteries. As a result, some of these firms have reshored or planned to reshore some of their production operations to their home countries. In addition, some MDCs have even offered incentives to foreign component suppliers to establish their production lines within their territories. All these are intensifying the movement of manufacturing jobs back to the home countries of the IT firms. The USA serves as a case in point (Figure 4). Source: Reshoring IniƟaƟve Figure 4 Reshored and FDI-created manufacturing jobs in the USA between 2010 and 2022 Suzhou 蘇州 Henan 河南 Foxconn 富士康 Jiangsu 江蘇 Pegatron 和碩聯合科技 Quanta 廣達電腦 Compal Electronics 仁寶電腦 Senior Secondary Exploring Geography Third Edition (RMA 2024) © Oxford University Press (China) Ltd 2024 3  Examples of reshoring and attracting key IT component suppliers to the MDCs Figure 5 shows some examples of reshoring and attracting foreign key IT component suppliers to the USA. Source: Websites of the corresponding firms Figure 5 Examples of reshoring and attracting key IT component suppliers to the USA From an economic point of view, reshoring may bring less profit to mulƟnaƟonal IT firms. For example, without any financial incenƟves, it is esƟmated that it is up to 50% more expensive to produce chips in the USA than in Taiwan. This is because of the higher labour costs and stricter regulaƟons in the USA. To aƩract reshoring and foreign investment in the local chip-making industry, the US federal government passed the CHIPS and Science Act in 2022 to provide tax credits to chipmakers that invest in the country. TSMC is a good case in point (Figure 5). Its investment in building chip factories in Phoenix, Arizona is backed by loans, grants and tax credits from the US federal government (refer to textbook p. 80 for details). Similarly, the Japanese government provided a subsidy of US$7.6 billion to TSMC to build a chip factory in Kumamoto. The factory opened in early 2024 and will produce chips to meet local demand in Japan. Contributed by: Ip Kim Wai, Lam Chi Chung, Ho Sau Hung, Tsui Sau Ngan, Chan Ting Yu, Lam Choi Ying, Ng Wing Chun and Yu Wai Ching Clay 克萊 New Albany 新奧爾巴尼 Taylor 泰勒 Texas 德州 arƟficial intelligence (AI) ⼈⼯智能 AusƟn 奧斯汀 Kumamoto 熊本 Senior Secondary Exploring Geography Third Edition (RMA 2024) © Oxford University Press (China) Ltd 2024 4