When it comes to tracking the geography of global supply chains, few companies map it better than Foxconn, the world’s largest contract manufacturing company. Major Taiwanese companies have built or expanded factories in India, Mexico, Thailand and Vietnam this year. China’s manufacturing hubs, once beloved by Western companies, are now completely obsolete. Businesses are increasingly worried about geopolitical risks as relations between Washington and Beijing deteriorate. As a result, in the first half of this year, the U.S. traded more with China than it did with China for the first time in nearly 20 years, and trade with Mexico and Canada increased. The map of world trade is being redrawn.
At first glance, this is about what American policymakers want. First under Donald Trump and then Joe Biden, officials have introduced a series of tariffs, rules and subsidies. The most recent one, received on August 9, is an executive order introducing a review of foreign investment and banning some investments in China’s quantum computing, artificial intelligence projects, and advanced chips. The United States wants to weaken China’s grip on sensitive industries and prepare for a possible invasion of Taiwan by adversaries with mostly tacit motives. This attempt to “de-risk” trade with China is a cornerstone of the White House’s foreign policy. However, much of the apparent risk reduction is not what it seems, despite widespread efforts and trade restructuring evident in the headline statistics.
Far from being severed, the trade relationship between the United States and China continues in a more complex manner. The US government’s preferred trading partners include India, Mexico, Taiwan, and Vietnam, and it wants to promote “friendshoring” of production to replace imports from China. And trade with these allies is rapidly increasing. According to Carney, last year, only 51% of U.S. imports from “low-cost” countries in Asia came from China, up from 66% when the Trump administration introduced its first tariffs five years ago. Diminished. consulting. The problem is that trade between U.S. allies and China is also on the rise, suggesting that they often still effectively serve as packing hubs for Chinese goods. This flow of products means that even though the United States doesn’t buy as much directly from China as it used to, the two economies remain interdependent.
For proof, let’s look at the countries that would benefit from a reduction in direct trade between China and the United States. A study by Caroline Freund of the University of California, San Diego, and her co-authors explores this dynamic. The report found that countries that had the strongest trade relationships with China in certain industries were the biggest beneficiaries of the trade reorientation, with China’s deep supply chains remaining very important to the United States. suggests that it is important. This is even truer in categories involving advanced manufacturing products, where U.S. officials are most keen to limit China’s presence. Regarding these products, the share of Chinese imports in U.S. imports decreased by 14 percentage points between 2017 and 2022, while the share of Chinese imports from Taiwan and Vietnam, which have large imports from China, decreased by 14 percentage points between 2017 and 2022. Imported products gained the largest market share. This means that China’s activities remain essential in the production of even the most delicate products.
How rerouting actually works varies by country and industry. Some products can only be sourced in China. These include processed rare earths and metals, such as gallium used in chip manufacturing and processed lithium for electric car batteries, where Chinese companies control entire industries. Exports from allied countries to the United States and other Western countries are sometimes nothing more than Chinese products repackaged to avoid tariffs. But for the most part, the raw materials are simple mechanical and electrical parts that eager importers can find at high prices in other countries, but are cheap and plentiful in China.
hand over the parcel
All three types of false decoupling can be found in China’s backyard. According to the latest official data published in 2018 on exports by the regional club Association of Southeast Asian Nations (ASEAN), 7% of the value is actually attributable to some production in China, a figure that is likely due to the trade That’s an underestimate considering how difficult it is to disentangle. The latest data suggests that China’s importance has only increased since then. The country increased its share of exports to the region in 69 of the 97 items monitored by ASEAN. Exports of electronic equipment, the largest category covering everything from batteries and industrial furnaces to hair clippers, have exploded. In the first six months of this year, China’s sales of these goods in Indonesia, Malaysia, Thailand, the Philippines and Vietnam increased to $49 billion, an 80% increase compared to five years ago. There is a similar pattern in foreign direct investment, with Chinese spending in key Southeast Asian countries outpacing that of the United States.
Factories further afield are also active in China, perhaps most prominently in the auto industry. In Mexico, the National Association of Automotive Parts Manufacturers, a lobby group, reported that 40% of nearshoring investments last year came from sites moving to the country from China. Abundant supplies of intermediate goods also continue, of course. Over the past year, Chinese companies exported $300 million worth of parts to Mexico a month, more than double the amount they managed five years ago. In Central and Eastern Europe, where the automobile industry has grown rapidly in recent years, false decoupling is even more evident. In 2018, China provided only 3% of auto parts imported to the Czech Republic, Hungary, Poland, Slovakia, Slovenia, and Romania. Since then, imports from China have soared thanks to the rapid uptake of electric vehicles, and the country is increasingly taking the lead in production. China currently supplies 10% of all auto parts imported into Central and Eastern Europe, more than any other country outside the EU.
Closer trade ties between US allies and China are a paradoxical result of the US seeking weaker allies. Panicked by the deterioration of relations across the Pacific, companies are opting to keep some production in the world’s second-largest economy and move the rest to Uncle Sam-friendly countries such as Vietnam. ” pursuing a strategy. But U.S. demand for finished products from allies also boosts demand for Chinese intermediate inputs, creating incentives for Chinese companies to operate and export in alternative locations. Apple, the world’s largest company by market capitalization, has recently moved its production base outside of China, but this should be done with caution. Much of the production is still dependent on Chinese companies. The tech giant has listed 25 Vietnamese producers on its official supplier list. Nine are from mainland China.
How worried should American policymakers be? In the worst-case scenario, a war in which supplies between China and the United States are almost completely cut off, it is possible to trade with China only indirectly or with Chinese companies on third country soil. , perhaps China’s production will improve. Additionally, companies are adapting security rules to reduce costs for consumers. However, this also comes with risks. The idea that decoupling is underway could obscure how important Chinese production remains to the U.S. supply chain.
The fact that much of the production in Asia, Mexico, and parts of Europe ends up relying on imports and investment from China means that many governments, especially in Asia, believe that, at best, it will be smooth sailing for the United States, at least in terms of the shift. It helps explain why you are friends. supply chain. Exporters would be hit hard if forced to choose once and for all between the two countries. A recent study by IMF researchers models a scenario in which countries have to choose between the United States and China, with recent votes at the United Nations determining which of the two superpowers to side with. determined by the pattern. In such a scenario, the researchers calculated that the GDP of the worst-affected countries would decline by as much as 4.7%. People in Southeast Asia will be particularly hard hit.
The United States has been unable to persuade allies to reduce China’s role in supply chains, given that most countries crave the investment and jobs that trade brings. Many companies are content to play a dual role, accepting investment and intermediate goods from China and exporting finished products to the United States and other Western countries. Ironically, the process of driving the United States and China apart in trade and investment may actually be forging stronger financial and commercial ties between China and America’s allies. Needless to say, that’s not what President Biden had in mind.
Correction (February 8, 2024): The graph in this article has been updated to show the correct values for India.
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