"The United States is trying to lessen its dependence on Chinese goods, but research is showing how tough it is to truly alter global supply chains.
The United States has spent the past five years pushing to reduce its reliance on China for computer chips, solar panels and various consumer imports amid growing concern over Beijing's security threats, human rights record and dominance of critical industries.
But even as policymakers and corporate executives look for ways to cut ties with China, a growing body of evidence suggests that the world's largest economies remain deeply intertwined as Chinese products make their way to America through other countries. New and forthcoming economic papers call into question whether the United States has actually lessened its reliance on China -- and what a recent reshuffling of trade relationships means for the global economy and American consumers.
Changes to global manufacturing and supply chains are still unfolding, as both punishing tariffs imposed by the administration of former President Donald J. Trump and tougher restrictions on the sale of technology to China imposed by the Biden administration play out.
The key architect of the latest restrictions -- Gina Raimondo, the commerce secretary -- is meeting with top Chinese officials in Beijing and Shanghai this week, a visit that underscores the challenge facing the United States as it seeks to reduce how much it depends on China when the countries' economies share so many ties.
These reworked trade rules, along with other economic changes, have caused China's share of imports into the United States to fall as the share of imports from other low-cost countries like Vietnam and Mexico have climbed. The Biden administration has also pumped up incentives for producing semiconductors, electric cars and solar panels domestically, and manufacturing construction in the United States has been rising quickly.
But new research discussed at the Federal Reserve Bank of Kansas City's annual conference at Jackson Hole in Wyoming on Saturday found that while global trade patterns have reshuffled, American supply chains have remained very reliant on Chinese production -- just not as directly.
In their paper, the economists Laura Alfaro at Harvard Business School and Davin Chor at the Tuck School of Business at Dartmouth wrote that China's share of U.S. imports fell to about 17 percent in 2022 after peaking at about 22 percent in 2017, as the country accounted for a smaller share of America's imports in categories like machinery, footwear and telephone sets. As that happened, places like Vietnam gained ground -- supplying the United States with more apparel and textiles -- while neighbors like Mexico began sending more car parts, glass, iron and steel.
That would seem to be a sign that the United States is lessening its reliance on China. But there's a hitch: Both Mexico and Vietnam have themselves been importing more products from China, and Chinese direct investment into those countries has surged, indicating that Chinese firms are setting up more factories there.
The trends suggest that firms may simply be moving the last steps in their lengthy supply chains out of China, and that some companies are using countries like Vietnam or Mexico as staging areas to send goods that are still partly or largely made in China into the United States.
While proponents of decoupling argue that any move away from China may be a good thing, the reshuffling appears to have other consequences. The paper finds that shifting supply chains are also associated with higher prices for goods.
A drop of five percentage points in the share of imports coming from China may have pushed prices on Vietnamese imports up 9.8 percent and Mexican imports up 3.2 percent, based on the authors' calculations. While more research is needed, the effect could be slightly contributing to consumer inflation, they say.
"That is our first caution -- this is likely to have cost effects -- and the second caution is that it is unlikely to diminish dependence" on China, Ms. Alfaro said in an interview.
The research echoes findings from a forthcoming paper by Caroline Freund of the University of California, San Diego, and economists at the World Bank and International Monetary Fund, which examined how trade in specific imports from China had changed since Mr. Trump began imposing tariffs on them.
That paper found that tariffs had a substantial impact on trade, reducing U.S. imports of the goods that were subject to the levies, even as the absolute value of U.S. trade with China continued to rise.
The economies that were able to capture the market share lost by China were those that already specialized in making the products that were subject to tariffs, like electronics or chemicals, as well as locations that were deeply integrated into China's supply chains and had a lot of trade back and forth with China, Ms. Freund said. They included Vietnam, Mexico and Taiwan.
"They're also increasing imports from China, precisely in those products that they're exporting to the U.S.," she said.
What this all means for efforts to bring manufacturing back to the United States is unclear. The researchers come to different conclusions about how much that trend is occurring.
Still, both sets of researchers -- as well as other economists at Jackson Hole, the Fed's most closely watched annual conference -- pushed back on the idea that these supply-chain shifts meant that global trade overall was retrenching, or that the world was becoming less interconnected.
The pandemic, events in Ukraine, and tensions between the United States and China have prompted some analysts to speculate that the world may turning away from globalization, but economists say that trend is not really borne out in the data.
"We don't see de-globalization at a macro level," Ngozi Okonjo-Iweala, the director general of the World Trade Organization, said during a panel at the Jackson Hole symposium. But she pointed to what she characterized as a worrying change in expectations.
"Rhetoric on de-globalization is taking hold, and that feeds into the political tensions and then into the policymaking," she said. "My fear is that rhetoric might turn into reality and we might see this shift in investment patterns."
Others at Jackson Hole warned of other consequences, such as product shortages.
A move toward production domestically or in only closely allied countries could "imply new supply constraints, especially if trade fragmentation accelerates before the domestic supply base has been rebuilt," Christine Lagarde, the head of the European Central Bank, said in a speech on Friday.
Global supply chains tend to change slowly, because it takes time for companies to plan, invest in and construct new factories. Economists are continuing to track current changes to global sourcing.
Given growing geopolitical tensions with China as well as more recent troubles in the country's economy, further shifts in global supply chains may be unavoidable.
One question for economists now, Ms. Alfaro said, is whether the economic benefits from moving factories back to the United States or other friendly countries -- like innovation in the U.S. manufacturing sector -- will ultimately outweigh the costs of the strategy, for example, the higher prices paid by consumers.
And separately, Ms. Freund said she believed the costs of reshoring had been "really under considered" by the government and others.
The typical narrative was that "we're going to bring it all back and we're going to have all these jobs and it's all going to be hunky-dory, but, in fact, it's going to be extremely costly to do that," she said. "Part of the reason we had such low inflation in the past was because we were bringing in lower-cost goods and improving productivity through globalization."" [1]
We pump out the propaganda about democracy and human rights every day, and in reality no democracy has increased in China or elsewhere, we only increase the earnings of intermediaries between us and China with our ideas. The same with Russia, whose refined oil in the form of diesel and petrol is sold to us by India at high prices. We need to stop electing babbling fools to high positions in our states.
1. Cutting Ties With China Isn't So Easy: [Business/Financial Desk]. Swanson, Ana; Smialek, Jeanna.
New York Times, Late Edition (East Coast); New York, N.Y.. 01 Sep 2023: B.1.
