The United States has spent the past five years trying to reduce its dependence on China for computer chips, solar panels and various consumer imports amid growing concerns about Beijing’s security threats, its human rights record and the dominance of key industries. industries.
But even as policymakers and business leaders 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 raise the question of whether the United States has actually reduced its dependence on China – and what a recent trade realignment means for the global economy and American consumers.
Changes in global manufacturing and supply chains are still underway as both the punitive measures imposed by the administration of former President Donald J. Trump and the tighter restrictions on technology sales to China imposed by the Biden administration , occur.
The chief architect of the latest restrictions – Commerce Secretary Gina Raimondo – is meeting with top Chinese officials in Beijing and Shanghai this week, a visit that underscores the challenge the United States faces as it attempts to reduce its dependence on are from China. a time when the economies of the countries share so many ties.
These revised trade rules, along with other economic changes, have caused China’s share of imports to the United States to fall, while the share of US imports from other low-cost countries such as Vietnam and Mexico has risen. The Biden administration has also ramped up incentives for domestic production of semiconductors, electric cars and solar panels, and manufacturing construction in the United States has exploded.
But new research discussed Saturday at the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyo, found that while global trade patterns have been realigned, U.S. supply chains remain highly dependent on Chinese manufacturing — just not as straight away.
In their paper, economists Laura Alfaro of Harvard Business School and Davin Chor of the Tuck School of Business at Dartmouth wrote that China’s share of U.S. imports will fall to about 17 percent in 2022, after peaking at about 22 percent in 2017. as the country accounted for. for a smaller portion of U.S. imports in categories such as machinery, shoes, and telephones. When that happened, places like Vietnam gained ground—providing the US with more clothing and textiles—while neighboring countries like Mexico began sending more auto parts, glass, iron, and steel.
That seems to be a sign that the United States is reducing its dependence on China. But there is a problem: both Mexico and Vietnam have themselves imported more products from China, and Chinese direct investment in those countries has soared, indicating that Chinese companies are setting up more factories there.
The trends indicate that companies may simply be moving the last steps in their long supply chains out of China, and that some companies are using countries like Vietnam or Mexico as staging points to ship goods that are still partly or largely made in China to the United States . States.
While proponents of decoupling argue that any move away from China can be a good thing, the realignment appears to have other implications. The article finds that shifting supply chains are also associated with higher prices for goods.
A 5 percentage point drop in the share of imports from China may have pushed up the prices of Vietnamese imports by 9.8 percent and those of Mexican imports by 3.2 percent, based on the author’s calculations. While more research is needed, the effect could contribute somewhat to consumer inflation, they say.
“That’s our first warning. This is likely to have cost effects, and the second caveat is that it is unlikely to reduce 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 from the World Bank and the International Monetary Fund, which examined how trade in specific imports from China had changed since Mr Trump began to impose tariffs on it.
That article found that tariffs had a substantial impact on trade, causing U.S. imports of the goods subject to the tariffs to fall even as the absolute value of U.S. trade with China continued to rise.
The countries that succeeded in capturing the market share lost by China were those that already specialized in making tariffed products such as electronics or chemicals, but also those that were deeply integrated into China’s supply chains and possessed many opportunities had. trade back and forth with China, Ms Freund said. That included Vietnam, Mexico, Taiwan and others.
“They are also increasing imports from China in the very products they export to the US,” she said.
What all this means for efforts to bring production back to the United States is unclear. The researchers come to different conclusions about the extent to which this trend is occurring.
Yet both groups of researchers—as well as other economists at Jackson Hole, the Fed’s most closely monitored annual conference—returned to the idea that these supply-chain shifts meant that global trade in general was contracting, or that the world was becoming increasingly become less economic. connected.
The pandemic, Russia’s invasion of Ukraine and tensions between the United States and China have led some analysts to speculate that the world may be turning away from globalization, but economists say this trend is not reflected in the numbers.
“We are not seeing de-globalization at the 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 described as a worrying shift in expectations.
“The rhetoric about de-globalization is gaining ground, fueling political tensions and subsequently policy-making,” she said. “My fear is that rhetoric could become reality and we could see this shift in investment patterns.”
Others at Jackson Hole warned of other consequences, such as product shortages.
A move towards production domestically or only in closely linked 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 statement. speech on August 1. 25.
Global supply chains tend to change slowly as it takes time for companies to plan, invest in and build new factories. Economists continue to monitor current changes in global purchasing.
Given the growing geopolitical tensions with China and the more recent problems in the country’s economy, further shifts in global supply chains may be inevitable.
One question for economists now, says Ms. Alfaro, is whether the economic benefits of moving factories back to the United States or other friendly countries – such as innovation in US manufacturing – will ultimately outweigh the costs of the strategy. higher prices consumers pay.
And separately, Ms. Freund said she believed the cost of reshoring by the government and others was “really understated.”
The typical story was, “we’re going to bring everything back and we’re going to have all these jobs and it’s all going to be pretty, but in fact it’s going to be extremely expensive to do that.” she said. “Part of the reason we had such low inflation in the past was because we brought in cheaper goods and improved productivity through globalization.”
