Donald Trump and Joe Biden don’t agree on many things, but they think alike when it comes to America’s trade relations with China. They believe that the largest economy in the world is simply too dependent on the second largest economy. For example, US officials travel the world touting the benefits of ‘friendshoring’ – or moving production from China to less risky markets. Business leaders are sounding positive and expressing genuine concern about China’s weak economic growth, not to mention volatile politics. The number of comments on earnings calls referencing “reshoring” has exploded.
But how much of this is more than talk? Last year The economist argued that much of the supposed disconnect between America and China is in fact an illusion. Take a closer look, we wrote, and the economic relationship between the two countries is holding strong, even if this fact is masked by tricks from both sides. Since then, a growing body of evidence confirms and strengthens our original findings. The economies of America and China are not falling apart. Some changes in supply chains could tie the two countries even more closely.
From TikTok and solar panels
A complete picture of Sino-American trade would include trade in services, including America’s use of Chinese apps and China’s love of American movies. But these flows are difficult to track, leading economists to focus on trade in goods, which customs officials measure fairly accurately. Here the headlines will cheer Messrs. Biden and Trump. Last year, Mexico overtook China as America’s largest source of imports. According to US figures, the share of US imports from China has fallen by a third since 2017 to around 14%. Some of that decline came after Trump imposed high tariffs in 2018. Another part reflects growing concerns about China’s territorial ambitions: If China invades Taiwan, many Asian supply chains will become unworkable.
However, the headline figures do not tell the whole story. To understand why, we have to start with Trump’s tariffs, which Biden has largely kept in place. Before their introduction in 2018, US statistics suggested that America received far more imports from China than Chinese statistics. Now the opposite is true. China reports that its exports to America increased by $30 billion between 2020 and 2023, while America says its Chinese imports fell by $100 billion. If China’s figures are correct, the country’s share of US imports has still fallen, but to a much lesser extent.
What explains the gap between the measures? Adam Wolfe of consultancy Absolute Strategy Research suggests the switch reflects the fact that US importers have an incentive to underreport how much they buy from China in categories subject to tariffs. Mr Wolfe estimates that as a result, America is now underestimating its imports from China by 20 to 25%. At the same time, the Chinese government has cut taxes on exporters in recent years, reducing the incentive for domestic companies to undercharge for goods leaving the country.
Other data provide additional reason for skepticism about decoupling. “Input-output” tables, such as those published by the Asian Development Bank, show the share of a country’s economic activity that can be traced back to others. Examining 35 industries, we calculate that China’s private sector contributed an average of 0.41% of U.S. firms’ inputs in 2017. That may not sound like much, but it was better than the 0.38% from Germany and the 0.24% from Japan. By 2022, China’s share had more than doubled to 1.06%, a proportionately greater increase than for Germany or Japan. It’s hard to know exactly what’s behind this trend. America’s efforts to build clean energy infrastructure could be one factor, making imports of Chinese electrical equipment much more important. American service sector companies also appear to be increasingly dependent on intellectual property in China. Whatever the cause, the numbers are difficult to reconcile with a supposed disconnect.
Developments on the Chinese side are also pushing back against decoupling. China’s leaders have no intention of giving up their country’s role in global supply chains, even as its largest trading partner half-heartedly tries to cut that role. In December, the Central Economic Work Conference, China’s agenda-setting economic council, made expanding trade in intermediate goods (used to make final products) a priority. State-owned banks are shifting credit from real estate to manufacturing, raising the prospect of a glut of Chinese exports. And many of the new titans of Chinese industry, such as Contemporary Amperex Technology, a battery manufacturer; BOO Technology Group, a manufacturer of organic light-emitting diode displays; And LONGi Green Energy Technology, which makes components for solar panels, is well positioned to benefit from this strategy.
Green with envy
The growth of these types of companies is already having an impact. We estimate that global Chinese exports of intermediate goods have increased by 32% since 2019, compared to an increase in other types of exports, such as finished goods, of only 2%. The increase is caused by exports to countries such as India and Vietnam, two of the US government’s favorite trading partners. In turn, US trade with these countries is increasing: from 4.1% of goods imports in 2017 to 6.4% now. Combined, these trends imply that the two countries often act as packaging hubs of sorts for goods made with Chinese inputs destined for American shores.
Many such schemes are emerging around the world. Take the case of India, where the government is trying to build its industrial base. After the introduction of subsidies, mobile phone exports have soared, indicating that India is eating China’s lunch. However, in a recent article, three economists Rahul Chauhan, Rohit Lamba and Raghuram Rajan point out that imports of mobile phone components such as batteries, displays and semiconductors have also increased. India seems more like a mobile phone middleman than a smartphone powerhouse.
Vietnam’s trade with America is booming. But its production remains closely intertwined with Chinese supply chains, meaning much of the increase can be attributed to products with little Vietnamese content. In the most extreme cases, Vietnamese exports are largely diverted from China, as the US Commerce Department occasionally complains. The correlation between Vietnamese exports to America and imports from China is now significantly higher than before Trump’s tariffs were implemented. This suggests that the South-East Asian manufacturing high-flyer is increasingly playing a role as a middleman, aligning Chinese production with US demand.
In Mexico the situation is more complicated. The standards set out in the United States-Mexico-Canada Agreement require higher “regional value content,” meaning exports are scrutinized to ensure production took place in North America. In some sectors where Mexican exports to America are booming, such as car manufacturing, the growth is difficult to attribute to decoupling, as China has never exported large quantities of vehicles and parts to America: in 2018 it was the source of only 6% of US imports of such goods. Nevertheless, Mexican imports of Chinese industrial supplies have soared, up about 40% since 2019. Even in America’s backyard, the decoupling will not go according to plan.
The overall picture is therefore clear: Chinese supply chains may be less visible, but remain extremely important for the American economy. Will they retain their central role? Trump has threatened massive tariffs on all Chinese products if he becomes president in November. Such tariffs could be enough to encourage some companies to leave China for good. Aggression from Xi Jinping – both in Taiwan and elsewhere – could have a similar impact. Over the decades, some countries that currently serve as the last step in the production lines could develop more impressive industrial capabilities and challenge China’s position.
Unless there are drastic shifts in American or Chinese policy, don’t expect much to change anytime soon. Many countries like to play it both ways: they receive Chinese investments and semi-finished products and export finished products to America. The economic efficiency provided by China’s vast scale and manufacturing expertise is a powerful force in favor of the status quo. Decoupling may be a powerful rhetoric, but it is not quite the same thing. ■