Why US-China decoupling failed

By Bao Huaying Source: Global Times Published: 2020/12/1 0:07:55

China US Photo: GT

The economic decoupling between the US and China is not a new trend. A decade ago, US manufacturing factories began to leave China because of increasingly expensive labor costs. The more recent bilateral trade war brought a second dimension into the flight of US companies as high tariffs threatened to disrupt China imports alongside rising costs. This year COVID-19 has brought a third dimension into the complex situation. 

According to global manufacturing consulting firm Kearney’s China Diversification Index, China accounted for 67 percent of all US manufacturing imports in 2013, while that figure fell to 56 percent in the final quarter of 2019. Boston Consulting Group estimated that “two-way trade between the US and China in 2023 will have shrunk by around 15 percent, or about $128 billion, from 2019 levels.” Meanwhile, the world’s supply chains have become less China-centric while a “strategic breakup” with China is looming amid the global pandemic.

In the Chinese mainland, however, the strength of its manufacturing base makes it hard to write off.

The “2020 China Business Climate Survey Report” released by the American Chamber of Commerce said 83 percent of American companies had no plans to relocate manufacturing or sourcing outside of China, while only 8 percent have considered but have not taken steps, and 9 percent have started the process of relocating manufacturing or sourcing outside of China. Although nearly 20 percent of American companies have moved or are considering leaving China primarily due to rising costs and US tariffs on products exported from China, this exodus from China is declining. More than half of those surveyed wanted to continue to produce in China to sell in its huge domestic market. Still 20 percent of US companies rank China as their “first priority” and 39 percent rank China a “top-three priority” in their near-term investment plans. 

A total of 197 American companies participated in the 3rd China International Import Expo held from November 5-10 in Shanghai, ranking them third, while 1,373 American products were exhibited, ranking them first in the expo. 

Statistics show that the decoupling of US companies from China has not occurred on a big scale.  

Several factors make a complete US-China decoupling impossible. 

China’s role in global supply chains is too important to be replaced. As a production base for industries such as electronics, automobiles, machinery manufacturing, and chemicals, China has formed a huge mature industrial cluster, where enterprises can benefit from a high efficiency of integrated supporting facilities with a large amount of raw materials, cheap upstream products and proprietary technologies. 

In the world of globalization, a supply chain has been fully optimized around Chinese factories as the result of a long process of industrial growth. To date, there’s no country that can perfectly replace China.

A long-term shortage of professionals in the manufacturing industry in the US makes Chinese expertise indispensable. Apple, for example, has been asked to move its production line to the US since the Obama administration, but a severe lack of professional engineers in the US is a hurdle too high. Today most of Apple’s production is still based in China. 

Then there’s the Chinese market itself, which remains robust. In “World Economic Outlook Report” released in October, the IMF predicted that the global economy will shrink by 4.4 percent in 2020, while the Chinese economy will grow by 1.9 percent, making it the only major economy in the world to achieve positive growth. Furthermore, China has vowed to forge a more “open and inclusive” environment to keep multinational companies onshore and woo foreign financial giants to its huge domestic market. According to “2020 China Business Climate Survey Report,” 91 percent of American companies surveyed said their businesses in China remain profitable.

The coronavirus pandemic has all but brought the US economy to its knees, with production dropping dramatically and costs on the rise. The Economic Prosperity Network initiated by Trump administration aimed to transfer manufacturing industry from China to other countries like Australia, India, Japan, New Zealand, South Korea and Vietnam, has failed as companies found it hard to pull out of China without an effective financial government incentives. 

The Trump administration’s tariffs on Chinese goods backfired as it was American companies that were forced to absorb the extra cost. According to media reports, in September about 3,500 US companies have sued the Trump administration over the tariffs on more than $300 billion in Chinese-made goods.

In his article published in Financial Times, “Thucydides trap”  Graham Allison pointed out that although some American politicians advocate “decoupling” from China, the gravitational pull of China’s growing economy will be irresistible for US key companies. So the new US administration must deal with the difficulties of reshoring.

In its 92-page platform outlines, the Democrats say they will “take aggressive action against China or any other country that tries to undercut American manufacturing.” Biden vows to leverage tax policy to move jobs and manufacturing to the US. On this point, there is little difference between Biden and Trump. As US-China conflict tend to be long term and structural in nature, it doesn’t matter much who comes to power, the two countries will remain locked in a strategic competition for economic and technological dominance. 

The US will find it hard to achieve a sustainable manufacturing reshoring until every effort is made to expand its competitiveness as professional labor training, effective tax incentives and investments to grow research and development. China, meanwhile, will also have to confront challenges from the world supply chain restructuring over the long run, due to its own rising labor cost, US-China trade disputes, and as de-globalization raises geopolitical competition and global public emergencies. Under these circumstances, China’s economic shift into an “domestic circulation” is expected to tackle the crucial external environment. In the long run, an escalation of domestic industrial structure through innovation and high-tech development is critical to increasing China’s competitiveness.

The author is visiting fellow at GW NRC for East Asian Studies, chief of Division for International Exchange, Office for International Exchange and Cooperation, Beijing Foreign Studies University. bizopinion@globaltimes.com.cn


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