Growing political and economic tensions are leading to supply chain diversification efforts, with new regional trade hubs emerging in Asia, Europe and the Americas. However, it remains unclear if new manufacturing hubs can fully replace China in global supply chains due to China's dominance in the hi-tech goods sector and underdeveloped supporting industries in other countries.
Growing political and economic tensions to support supply chain diversification efforts
The global economy faces the risk of continued disruption and increasing fragmentation as a result of intensifying geopolitical tensions. Growing geopolitical rivalries could raise the risk of deepened economic fragmentation and further disruptive geopolitical events as more countries use economic means to advance strategic interests.
For global trade, this raises the risk of new trade wars, potentially higher tariffs and, in general, more complex administration of trade for companies. At the same time, the largest economies also remain heavily reliant on critical goods imports from Asia, especially in electronic components, batteries and computer sectors. This leaves global supply chains vulnerable to potential future shocks. In order to better shield from potential supply and economic risks, countries and companies are aiming to establish alternative trade routes and develop regional supply hubs.
Rising geopolitical tensions and supply chain disruptions are reshaping the industrial policies of countries and the companies. As a result, over the long term, global trade and investment will increasingly be driven by geopolitically-motivated global infrastructure and investment strategies, such as China’s Belt and Road Initiative or the India-Middle East-Europe Economic Corridor.
This also drives the changes in global trade landscape, with new production and trade hubs emerging in Asia, Europe and the Americas. Countries such as Indonesia and Vietnam are emerging as fast-growing trade hubs, for example, as the exports value of both countries soared by 50% over 2018-2023.
Changes in global supply chains are also benefiting regional production hubs located close to the major economies, such as Poland or Mexico. The latter benefits from geographic proximity and free trade with the US and plays a key role in the US electronics, automotive and machinery supply chains. Poland is also emerging as a key exports hub in the EU, benefiting from new investments in the batteries, machinery and transport equipment sectors.
Despite the ongoing production diversification efforts, it remains unclear if new manufacturing hubs such as India, Vietnam or Mexico will be capable of fully replacing China in global supply chains.
In certain manufacturing sectors, the progress is already visible. For example, Mexico and India have managed to boost production and exports of machinery. These countries are expected to further expand domestic machinery industries by 2030 and gain greater exports share, especially in the US and EU markets.
However, China’s dominance in the hi-tech goods sector seems to last for longer. Due to the already large production scale of electronics in China and cost advantages, it will take time for other countries to catch up. For example, forecast production of electronic components in Vietnam, India and Mexico combined in 2030 would represent only 38% of China’s exports value in 2023, indicating a large supply gap from other countries.
Absence of supporting industries remains the key challenge hindering faster development of new manufacturing hubs. Countries such as India or Vietnam will require stronger domestic supply chains and improvements in trade policies to fully capitalise on new opportunities.