Is the US Decoupling From China?

CommentarySince the Trump administration first levied tariffs on China, the open question has been how the tariffs will change international trade patterns.Will the tariffs merely raise prices for U.S. consumers, or will companies seek out new sources to meet American demand?A couple of years into this process, we are starting to see the first detailed reports of whether the United States is actually decoupling from China.Price mechanisms, like tariffs that raise the price of imported goods, in this case from China, work because they force firms to reevaluate whether they can shift production to other countries that do not have the tariffs, giving them a price advantage. In some cases, this may bring manufacturing back to the United States, and in other cases, it may be to shift it to other countries like Mexico and Vietnam.There are a couple of specific concerns about the U.S. tariffs on China.Related Stories11/16/2023First, U.S. consumers would be forced to accept higher prices from tariffs on Chinese imports if production could not be moved to other countries. In fact, there is little evidence of the surging of import prices from China. According to the Federal Reserve, the Chinese import price index for the United States fell after the imposition of tariffs in September 2018, dropping slowly but steadily until the COVID-19 pandemic in early 2020, then rose in line with other prices until April 2022, after which they have resumed falling. Today, the price index for imports from China is actually lower than it was prior to the imposition of tariffs.Second, while a lot of final assembly could be shifted from China, what about the inputs and components that went into the products Chinese workers were making? In other words, if only the final assembly point had changed, but all the components had still come from China, there would be very little decoupling. However, the data indicate that while the rise in imports from countries like Mexico and Vietnam is not entirely devoid of Chinese inputs and firms, the rise comes from real shifts in supply chains by global manufacturers seeking to diversify their supply chains, finding lower cost manufacturing due to China’s rising costs, and avoiding tariffs. There are very real supply chain shifts taking place that are decoupling the United States from China.Third, there are, however, also areas where Chinese firms are avoiding tariffs by engaging in multiple behaviors to avoid the made-in-China stigma and tariffs. For instance, after the imposition of tariffs, Chinese investment in Vietnam surged. While South Korea, Taiwan, and Japan remain major investors, Chinese firms are clearly increasing their presence to avoid tariffs.Additionally, there are some products like computers and semiconductors that appear to have high rates of transshipment where a good is imported from China and then exported to the United States with minimal or no work on the product so it can avoid tariffs. Given that computers, electronics, and semiconductors are harder to move manufacturing given their more specialized nature, this is not entirely unexpected. However, given the national security concerns about Chinese electronic goods, the United States needs to do more to build resilient electronic supply chains that are not dependent on China.As we consider the data issue and try to figure out what is happening, we need to define decoupling. Europe has tried to emphasize the concept of derisking, though what exactly constitutes risk with regard to Chinese products remains unclear.In a world where China constitutes more than 30 percent of global manufactured output, a complete cessation of trade ties between the United States and potentially allied states is unrealistic. What is needed is a clear understanding of the sectors and products where the United States needs to move away from Chinese suppliers and risks to the United States. For instance, China holds more than a 90 percent market share of key products ranging from basic pharmaceutical inputs to metals and minerals used in high-tech component manufacturing.To derisk and decouple from China, the United States needs a few things.First, the United States needs to prioritize sectors that present a security risk or excessive concentration. This would include sectors such as electronics, where the risk of unauthorized access or data collection presents a valid national security risk. Conversely, garment and textile imports from China present no national security or excessive concentration risk. The current pattern targets a specific firm but not sectors or industries.Second, if the United States has a clear list of targeted sectors, it must work with allies and incentivize firms looking to shift production away from China. Some of the manufacturing is moving back to the United States, but lots of the work will shift to other low-wage countries like Mexico and Vietnam. However, nothing is accomplished if those countries simply produce more g

Is the US Decoupling From China?

Commentary

Since the Trump administration first levied tariffs on China, the open question has been how the tariffs will change international trade patterns.

Will the tariffs merely raise prices for U.S. consumers, or will companies seek out new sources to meet American demand?

A couple of years into this process, we are starting to see the first detailed reports of whether the United States is actually decoupling from China.

Price mechanisms, like tariffs that raise the price of imported goods, in this case from China, work because they force firms to reevaluate whether they can shift production to other countries that do not have the tariffs, giving them a price advantage. In some cases, this may bring manufacturing back to the United States, and in other cases, it may be to shift it to other countries like Mexico and Vietnam.

There are a couple of specific concerns about the U.S. tariffs on China.

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11/16/2023

Biden: ‘We’re De-risking and Diversifying’ Economic Ties With China, ‘Not Decoupling’

First, U.S. consumers would be forced to accept higher prices from tariffs on Chinese imports if production could not be moved to other countries. In fact, there is little evidence of the surging of import prices from China. According to the Federal Reserve, the Chinese import price index for the United States fell after the imposition of tariffs in September 2018, dropping slowly but steadily until the COVID-19 pandemic in early 2020, then rose in line with other prices until April 2022, after which they have resumed falling. Today, the price index for imports from China is actually lower than it was prior to the imposition of tariffs.

Second, while a lot of final assembly could be shifted from China, what about the inputs and components that went into the products Chinese workers were making? In other words, if only the final assembly point had changed, but all the components had still come from China, there would be very little decoupling. However, the data indicate that while the rise in imports from countries like Mexico and Vietnam is not entirely devoid of Chinese inputs and firms, the rise comes from real shifts in supply chains by global manufacturers seeking to diversify their supply chains, finding lower cost manufacturing due to China’s rising costs, and avoiding tariffs. There are very real supply chain shifts taking place that are decoupling the United States from China.

Third, there are, however, also areas where Chinese firms are avoiding tariffs by engaging in multiple behaviors to avoid the made-in-China stigma and tariffs. For instance, after the imposition of tariffs, Chinese investment in Vietnam surged. While South Korea, Taiwan, and Japan remain major investors, Chinese firms are clearly increasing their presence to avoid tariffs.

Additionally, there are some products like computers and semiconductors that appear to have high rates of transshipment where a good is imported from China and then exported to the United States with minimal or no work on the product so it can avoid tariffs. Given that computers, electronics, and semiconductors are harder to move manufacturing given their more specialized nature, this is not entirely unexpected. However, given the national security concerns about Chinese electronic goods, the United States needs to do more to build resilient electronic supply chains that are not dependent on China.

As we consider the data issue and try to figure out what is happening, we need to define decoupling. Europe has tried to emphasize the concept of derisking, though what exactly constitutes risk with regard to Chinese products remains unclear.

In a world where China constitutes more than 30 percent of global manufactured output, a complete cessation of trade ties between the United States and potentially allied states is unrealistic. What is needed is a clear understanding of the sectors and products where the United States needs to move away from Chinese suppliers and risks to the United States. For instance, China holds more than a 90 percent market share of key products ranging from basic pharmaceutical inputs to metals and minerals used in high-tech component manufacturing.

To derisk and decouple from China, the United States needs a few things.

First, the United States needs to prioritize sectors that present a security risk or excessive concentration. This would include sectors such as electronics, where the risk of unauthorized access or data collection presents a valid national security risk. Conversely, garment and textile imports from China present no national security or excessive concentration risk. The current pattern targets a specific firm but not sectors or industries.

Second, if the United States has a clear list of targeted sectors, it must work with allies and incentivize firms looking to shift production away from China. Some of the manufacturing is moving back to the United States, but lots of the work will shift to other low-wage countries like Mexico and Vietnam. However, nothing is accomplished if those countries simply produce more garments, leaving China in control of electronics, or if those countries serve as manufacturing centers for Chinese firms.

The United States needs a broad plan to target specific sectors and incentivize countries and firms to move targeted products away from Chinese control. The United States is decoupling, but it can accelerate this process and improve security by doing more than just increasing tariffs.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.