Sea Change in Consumer Experiences

The global consumer’s ability to compare and contrast across countries has not always been the case. While markets have been traditionally separated by geography and language barriers, the study examines the implications of consumers observing first-hand through experiences abroad or word-of-mouth, the quality and varieties of products available in other markets, often amplified by social media. As a result, consumer demand may be substantially influenced by the products and services in other countries.

To analyse how this phenomenon affects international trade and related policies, Prof. Lien, in collaboration with Prof. Zeng Lian from Beijing Foreign Studies University, Lin Lu and Prof. Jie Zheng from Tsinghua University, conducted a study titled International Trade with Social Comparisons. They proposed a number of “social comparison” scenarios, or situations in which consumers socially compare their own consumption to that of consumers who are abroad, for home-produced goods, foreign goods, and combinations of such social comparisons for the domestic and foreign country, and looked at the implications for economic well-being.

The consumer comparisons are meaningful in that they may be able to become a matter of national policy. A “Home Comparison preference” (where consumers in one country make an international social comparison regarding a home-produced good), brings consumption and greater welfare benefits to the home country. On the other hand, global welfare is enhanced when both countries maintain these kinds of preferences for their own home goods, a situation the study calls a “Dual Home Comparison”. This is where each country’s consumers have a preference for its own home goods, but holds no preference over the other country’s endowed good. “For example, consumers in China want to have more Moutai than Americans do, while U.S. consumers want to consume more Bourbon whiskey than Chinese consumers do,” Prof. Lien explains.

Governments Should Highlight Domestic Products

Astute governments will cultivate a preference for home goods domestically. In the case of Hollywood movies for example, this can make their performance better off in the world market. “Governments should highlight the benefits of their domestically supplied product, especially if this product is not as readily available in other countries,” says Prof. Lien.

For example, China may highlight the widespread availability of fast and abundant home delivery services which may not be as abundant in other countries. The Chinese government might even want to internationally promote the likes of Chinese hard liquor Moutai, considered prestigious and high quality domestically. Since it has yet to become a trendy drink globally, there is very little for consumers to compare it to, which may have a net benefit in boosting consumption.

Be Careful of Who You Admire

A concept of “Mutual Foreign Envy” is also raised by the study, which the authors say contributes positively to global welfare. Analysis helps to explain the social welfare incentives of policy-makers in promoting cross-country comparisons of domestic goods among their own consumers, while advocating domestically produced goods as status symbols abroad.

For example, the study says U.S. consumers may want to have prevalent access to high-speed rail like China does, while consumers in China want to have spacious houses with backyards that are commonplace in the United States. Since there is mutual envy, the effects balance each other out.

“Encouraging admiration and social comparison of foreign products can be a risky and possibly disadvantageous approach, unless a country is confident that consumers in other countries reciprocate by viewing their products as status items.”

Prof. Jaimie Lien

On the other hand, the study finds “Foreign Envy” (comparison of a foreign-produced good) is disadvantageous to the home country, contributing negatively when the other country either prefers its own produced good or has no particular social preference. “A country which is alone in its admiration and consumption comparison of foreign products experiences lower utility outcomes than it would otherwise. Such welfare losses can only be avoided (and welfare gains obtained) if the other country simultaneously adopts its own analogous Foreign Envy preference,” says Prof. Lien.

One-sided Foreign Envy reduces the welfare of the home country and enhances the welfare of the foreign country. In the case of Mutual Foreign Envy, both countries experience welfare gains. Each country consumes less of its home-produced good and more of the foreign-produced good, and there is no conflict of interest. As Prof. Lien points out: “In other words, our model shows that encouraging admiration and social comparison of foreign products can be a risky and possibly disadvantageous approach, unless a country is confident that consumers in other countries reciprocate by viewing their products as status items.”

Governments Focus Inward While Comparisons Stay

As technology and travel continue to be an essential part of the economy, social comparisons across countries through social media, internet and travel are inevitable, with the dichotomy of inward-focused trade policies by several world economic powers.

By analysing a simple global economy that is free from geopolitical concerns, cultural factors and other complications, the study’s model explains why world leaders want to cultivate comparison-based preferences among citizens. This might be carried out in the media and government policies by emphasising the home-produced product and how fortunate domestic consumers are to have the consumption advantage in it compared to consumers in other countries.

“Domestically inward focused framing of consumption, and a cultivation of the feeling that home-produced goods are more desirable, has welfare advantages which policy-makers may be motivated to pursue,” Prof. Lien says.

The study provides a potential explanation for why countries go through periodic episodes of inward-focus, but very seldom encourage domestic citizens to idolise foreign products. A country can benefit in terms of both wealth and utility by promoting its products as comparison symbols abroad, hence as the study notes “the incentive to advertise is thus not only at the individual firm level, but at the national policy level.”

Prof. Lien notes that it would be ideal if a country can make its domestically supplied products globally admired and incite social comparisons internationally. In addition, “countries would like to avoid specialising in the production of items which consumers have little opportunity to form strong comparisons over, such as mundane household or personal use items,” Prof. Lien adds.

It is likely that consumer goods and brands will continue to play a significant role in the geopolitical landscape. As countries strive to establish themselves as global players, the products they produce and promote will be a critical factor in their success.

China is expected to maintain a prominent role in global supply chains despite the COVID-19 pandemic, which has renewed discussions about whether countries around the world have become too reliant on Chinese manufacturing, according to one of The Chinese University of Hong Kong’s (CUHK) leading researchers on global economic networks.

Jing Wu, Assistant Professor at CUHK Business School’s Department of Decision Sciences and Managerial Economics, acknowledges that the pandemic, which resulted in an extended shutdown of factories across China following Chinese New Year, may lead firms which operate global supply chains to diversify their manufacturing base in addition to China as part of a stronger focus on risk management.

For decades, China has provided the bulk of components to manufacturers around the world. But even after new infections tapered off within its borders, factories have been slow to resume their normal production capacity. This has been blamed on a number of challenges including a shortage of labour due to the slow recovery of transportation links post lockdown, as companies scramble to ensure adequate protection for the workers against infection, and a shortage of parts from upstream suppliers.

A recent survey of companies in the U.S. by the non-profit Institute for Supply Management reported 75 percent of respondents said their supply chain had been disrupted due to the coronavirus, with one in six, or 16 percent, having already revised their revenue guidance down by an average of 5.6 percent. There has also been media reports the the U.S. administration is accelerating an initiative to pull global supply chains out of China as it considers new tariffs in reaction to the Asian country’s handling of the coronavirus outbreak.

It also comes amid reports that Japan, one of China’s biggest trade partners, has earmarked US$2.2 billion of its record US$1 trillion stimulus package to help its manufacturers shift production out of the world’s second-largest economy.

Prof. Wu says it is not unexpected that, as a result of the pandemic, national governments may become more aware of the importance of supply chain security in national security concerns and strengthen themselves against their exposure to foreign manufacturing risks.

“It is no surprise that Japan, the U.S. and other countries would want to reconsider which products can be purchased from abroad and which products should be encouraged by policies to build local production capacity,” he says. “From a risk management perspective, it makes sense to produce essentials such as medical supplies close to the market, just-in-time when demand surges.”

He notes that Japanese culture in particular has traditionally focused on risk management. He expects some essential parts produced for the Japanese market to be brought home or to coastal areas in China which are closer to Japan. For the products that are sold to the overseas market, especially in China, their production is expected to remain in China.

Commercial Decisions

Noting the increasingly political nature of the discussion on China’s role in global manufacturing, which in recent years gained steam with the election of U.S. President Donald Trump who has pledged to return manufacturing to the North American country and heightened by the pandemic, Prof. Wu notes that at the end of the day it is the firm which makes the supply chain decisions, rather than a government or a nation.

“Capital will always chase opportunities and avoid risks. Whether it is a man-made trade war or a natural pandemic, to a certain extent, international capital has seen the need to diversify China’s manufacturing risks,” he says, citing the results of a research paper he co-authored, entitled Not Coming Home: Trade and Economic Policy Uncertainty in American Supply Chain Networks.

“Companies may seek to diversify their manufacturing options while maintaining their main sourcing base in China,” Prof. Wu says, despite the fact that the country has been able to wrestle control of new coronavirus infections. “It cannot be ruled out that some companies will shy away from ‘putting all its eggs the same basket’ when evaluating the future configuration of their supply chains.”

“Companies may seek to diversify their manufacturing options while maintaining their main sourcing base in China.”

Prof. Jing Wu

“China’s advantage in manufacturing cannot be replaced in the short-term. At the same time, it is inevitable for China to upgrade its economy from polluting, export-led manufacturing economy towards a high-tech and service-driven one,” he says, adding that the share of low to mid-tier manufacturing would likely decrease slowly as a result of the further economic development and industry upgrades. That process may be expedited by the pandemic due to weaker foreign demand.

The effects of this would be offset by China’s ongoing industrial migration towards high-tech manufacturing, which is high-margin and tends to be less sensitive to labour costs and more likely to stay within the country once the industry is developed, he says.

To help it adapt to changing attitudes in global sourcing, China needs to change its strategic thinking on price advantage to continue its move up the value chain away from low-cost manufacturing reliant on cheap labour, understand the strategic considerations of foreign customers on supply chain resiliency and security under trade barriers, and strive to establish strong international brands.

At the same time, China should keep reforming-and-opening-up, including opening and entering potential new markets, he adds.

Globalisation 2.0

Given that the global supply chain shock has since spread around the world, a crucial question is whether the pandemic spells the beginning of the end for the current age of globalisation?

Prof. Wu notes that COVID-19 has disclosed disadvantages related to relying too much on sourcing, or off-shoring. It makes sense that more companies may try to produce their products locally, or closer to consumers.

“Globalization also takes many forms besides in the physical product market or in the form of manufacturing supply chains. It also includes financial globalization, knowledge, and technology globalization,” he says, citing another study he co-authored entitled Global Supply Chains and Cross-Border Financing. “While supply chain globalization has matured, financial and technology globalization is quite incomplete and accelerating.” He refers to this extended definition of globalisation as “Globalisation 2.0”.

On the other hand, while China continues to face the threat of tariffs and taxes in its as-yet concluded trade war with the U.S., he notes that the companies in the Asian economic behemoth may seek to accelerate the reconstruction of their global supply chain structure to effectively avoid trade barriers. In recent years, a growing number of Chinese companies have sought to widen its global manufacturing footprint, such as by directly building factories in destination markets such as the U.S., or ship components and assemble the final products in other countries. “A more global layout can enhance the flexibility of the supply chain, thereby reducing the negative effects of sudden risks,” he says.

In the new era of Globalisation 2.0, China should keep transforming from export trade to overseas investment, encouraging its firms to acquire or open foreign subsidiaries, produce local and participate in overseas market competition, he adds.