With relations between Washington and Beijing in freefall, the future of global supply chains is uncertain. Even as inconsistent White House messages continue to raise questions about the direction of U.S. trade policy, trade war tariffs remain in effect. Meanwhile, the fallout from Beijing’s proposed national security law, which threatens to constrain Hong Kong’s autonomy, further imperils the already fragile phase one trade agreement between the two superpowers. This friction, paired with the race to secure medical supplies and develop a coronavirus vaccine, is provoking a reevaluation of just-in-time supply chains that privilege efficiency above all else.
A chorus of ‘re’-themed supply chain buzzwords—resiliency, redundancy, reshoring, restructuring, and regionalization, to name a few—is music to the ears of White House protectionists, who launched the trade war and who think China’s global manufacturing role is long overdue for revision. U.S. President Donald Trump’s strategy of reducing the United States’ trade deficits and rejuvenating the U.S. economy stems from a nationalist view of supply chains. In this vein, Trump’s trade adviser Peter Navarro signaled the country’s $2 trillion in spending on stimulus packages in part aims to bring more manufacturing jobs back to American shores.
Though the coronavirus’s impact on supply networks could change the game, recently released trade data show the trade war’s early impact on the world’s two largest economies and the future of global commerce. Paradoxically, the results are largely the opposite of what the White House has been counting on. Tariffs have produced no real improvement in the United States’ underlying trade balance, while China’s trade surplus has increased and its export markets have become more diversified.
Significant Costs Without Real Improvement in U.S. Trade Balance
Trump’s reduction of the bilateral trade deficit with China was quite costly, with a significant contraction in economic activity and an inadvertent increase in China’s overall trade surplus. And, if not for a reduction in oil imports, the United States’ trade deficit actually would have widened—calling into question the logic of a protectionist strategy designed to improve the country’s trade balance.
Overall U.S. merchandise imports contracted by $44.3 billion in 2019 compared with 2018 (see figure 1). A sharp drop in imports from China drove the decline, with tariffs in place on about $370 billion in U.S.-bound Chinese goods. U.S. imports from China fell by $87.3 billion year-on-year. This is the largest annual decline in U.S. imports from any trade partner, excluding the year of the 2009 financial crisis.
Yet imports from China only fell by 16 percent in 2019 compared to the previous year—a testament to the difficulty of shifting trade relationships in the short run. In fact, the reported data likely overstate the true decline. One major reason is transshipment, when traded goods have a layover in a third country en route from where they were manufactured to their final destination. This practice is sometimes used to sidestep tariffs. Such a tactic can cause U.S. customs officials to classify goods as coming from intermediary trade partners, such as Vietnam or Mexico, when in reality they are still coming from China.
Who Benefits From the U.S. Tariffs?
Regardless, a drop in imports from China only actually reduces U.S. reliance on China if companies manage to find viable substitutes. But last year, the United States was not able to fully meet the need for alternatives to Chinese merchandise. Strong overall GDP growth in 2019 suggests that total imports would likely have increased without tariffs.
In the short term, other countries that already make products affected by U.S. tariffs on China are most likely to benefit. Instead of buying from China, U.S. companies are looking to buy similar products from countries that are not impacted by the tariffs. In Asia, the undisputed winner is Vietnam, whose exports to the United States rose by 35 percent, or $17.5 billion. Another standout, Taiwan, used its long-standing comparative advantage in hardware components to benefit from trade diversion.
Europe and Mexico filled in much of the gap, as U.S. imports from these economies rose by $31.2 billion and $11.6 billion, respectively (see figure 1). Also noteworthy, imports from Venezuela and the Middle East plummeted as a result of U.S. sanctions and increased energy self-sufficiency.
On the exports side, the United States was hurt by depressed demand due to retaliatory tariffs imposed by China and others in response to U.S. duties on steel and aluminum. Rather than increasing the competitiveness of U.S. producers, tariffs instead led to a net decline of $23.1 billion in exports.
Moreover, despite Trump’s vision of a “blue collar boom,” U.S. domestic manufacturing did not pick up the slack. Instead, the industrial production index experienced a year-on-year decline for the first time since 2015 in response to supply chain interruptions and tariff-induced increases in production costs. This yielded an overall welfare loss in the form of forgone consumption due to higher prices for retailers and households, contradicting the president’s persistent claim that China pays for the tariffs.
China Comes Out Ahead
How did China respond? Unsurprisingly, exports to the United States and Hong Kong—an intermediary hub—declined significantly as a result of tariffs (see figure 2). However, China was able to compensate by ramping up sales to nearly everyone else, so much so that exports contracted by the relatively small amount of just $2.8 billion on net.
Chinese exports to Southeast Asia alone rose by $38.5 billion, largely due to the Association of Southeast Asian Nations (ASEAN), which overtook the United States as China’s second-largest trading partner. Exports also increased to Europe and sub-Saharan Africa, regions where China has sought to deepen economic ties under its Belt and Road Initiative.
Chinese imports from the United States fell by $33 billion in 2019 due to retaliatory tariffs. And because of the sharp decline in exports of processed manufactured goods to the United States, China further cut back on imported components from Japan, South Korea, and Taiwan. This led to a huge decline in China’s total imports—resulting in an improvement in the country’s overall trade balance of over $60 billion last year despite the trade war. These ripple effects underscore the fact that, contrary to the misguided view of the White House, trade is a multilateral phenomenon, not a bilateral one.
Future Supply Chain Impacts in Three Stages
In 2019, the United States’ share of Chinese imports and exports fell to a twenty-seven-year low. Many observers agree that U.S.-China trade tensions have made some degree of decoupling all but inevitable. The pandemic only adds to that likelihood. The eroding phase one trade agreement, even if miraculously fulfilled, would do little to reverse that. But while governments can prod along decoupling, the outcomes will ultimately come down to the commercial decisions that companies make. The impact of these decisions on global supply chains will take years to fully materialize, in potentially unexpected ways.
In the short run, manufacturers will continue to divert trade and search for temporary tariff-dodging workarounds such as transshipment and adjusting suppliers. In the medium run, manufacturers will scale production and reallocate personnel at preexisting facilities. Only in the long run can significant decoupling take place, given the large upfront costs and requisite advance planning.
Uncertainty in the policy environment due to the increasingly unstable U.S.-China relationship complicates major investment decisions, and the pandemic only compounds this risk. But the principle underpinning supply chains based on comparative advantage—a country’s ability to produce certain goods and services more efficiently and cheaply than its competitors—remains powerful. This encourages high-skill products to be produced in developed economies, and more labor-intensive assembly activities to take place in countries with lower wages. Protective tariffs work against this free-market principle by shifting incentives toward political rather than commercial objectives.
In truth, China’s dominance in global manufacturing has been gradually waning since its peak in 2015, due to structural shifts in the Chinese economy, such as its continued graduation from low-skill manufacturing such as clothing and textiles, the decline of China’s role as a location for final assembly, and rebalancing toward consumption and services, which are less trade-intensive than capital investment. The trade war and pandemic-induced supply chain shifts only further accelerate these trends.
Ironically, offshoring has come full circle. Chinese firms are already moving to lower-cost venues that better serve the U.S. market—as exemplified by Chinese electronics manufacturer Hisense’s choice to double investment in its electronics plant in Mexico. The White House’s protectionist policies, which threaten to escalate ahead of the November 2020 elections, may be shaking up supply chains. But Trump’s goal of reducing trade deficits and weakening China’s economic prospects is yet unrealized.
Comments(12)
Forget about trade war - think about Covid war.
Javed Mir. There is a difference between well thought out vs poorly thought out comments. Unfortunately, yours is the latter.
It took 3 decades or more to phase out American manufacturing from pillows to high tech gadgets. Surely, there’s going to be a problem to are build manufacturing sites and the infrastructures that complement with building more technically advanced manufacturing to satisfy the demands of the Americans and their customers abroad. With rebuilding manufacturing will include redesigning the country from universal public education that cultivates high thinking minds from preschool to universities by focusing on science, technology, engineering, math - STEM. Nothing new here. This goal is already in place in many public schools. Half a century ago, the public education for the masses was focused on preparing them to work in factories. Today, the goal is to increase the students’ critical minds and thinking skills through STEMS. Literature plays an important role in bringing these high critical thinking skills into action. The strength of education in this country is it wants to mold responsible and independent individuals to tap their creative, mathematical, and scientific minds. Testing is only a tool that reflect concepts that were not taught or taught very differently or that the culture embedded in testing reflect a certain part of culture in a big nation. I’d say give it a decade to rebuild American manufacturing - and this must be so... call it protectionist or whatever name you want to call it. It has to be done and at the same ... on the level of Tesla’s concept in manufacturing. We are entering a new phase of wanting to create a modern, high tech companies that serve the country and simultaneously share our products with friendly countries What will it take? Invest in building them here. We are not in competition with other countries. We are in a friendly competition with ourselves - to be the best we can be individually and collectively enjoy what we produce in this country. Yuen must start thinking out of the box. Tariff is just one factor. The US has so many assets and resources and I sense the millennials want to do away with environmental degradation, manufacturing waste, senseless shopping, redundant information, ridiculous gap between the rich and poor. They want high results from living in a meaningful environment - better infrastructures but at the same time protect the environment, Create more meaningful products that will truly enhance one’s health and connection with all the surroundings. What’s a currency if these products don’t exist? Create these things, enhance existing products, repair environmental damages, protect the nation, region, continent, truly respect the neighbors. Build all these ideas into curriculum from pre school to universities... There’s so much to do in this country. Build supply chains in this country as much as possible, make the consumers in this country satisfied, protect the industries with “community lense” . We now know how devastating it is to close a factory. The community dies. The profit will come with good intentions. Greed, immediate profits, short term investments must be in check. That’s why it is, we need a new lense to reboot this nation. Focus on this nation before China o4 Europe. Let’s get rid of the cobwebs. Start anew.
Greed- The pursuit of the lowest wage to be found,As Americans we are conditioned to view Communism as a "Dirty" way of life,Yet we seek the Communist wage,and allow our companies to relocate operations to this type of environment. Cut all ties with China and Communism, if it is completely necessary to achieve the lowest paid workforce,do this in Mexico.At the very least its on the same continent,stall the Wall,we as US citizens may need to cross the border south to have a job. =)
One of the great mysteries of that China growth is the fact that China was allowed to become the “workshop of the world” after 2001, first in lower-skill industries such as textiles or toys, later in pharmaceuticals and most recently in electronics assembly and production. The mystery clears up when we look at the idea that the PTB and their financial houses, using China, want to weaken strong industrial powers, especially the United States, to push their global agenda. Brzezinski often wrote that the nation state was to be eliminated, as did his patron, David Rockefeller. By allowing China to become a rival to Washington in economy and increasingly in technology, they created the means to destroy the superpower hegemony of the US. by F. William Engdahl
Most of this is fairly correct, if not spot on. The current mood to disengage trade from China is gaining steam, not the least of all because of the conflict brought on by both US and China. If it was merely a matter of fairer trade balance there could be some remedies (albeit short term), but we are at a geopolitical turning point to shape the next 50 years for who leads the world's stage. Yet, unfortunately, our consumer base is being misled as to just how far we are from the necessary supply chains needed to re-shore manufacturing, as opposed to the current model of windowing dressing overseas manufactured goods being passed on as "made in the USA". To actually re-shore manufacturing the whole "kit and caboodle", we are at least 10 to 20 years away from having the necessary supply chain, and the skilled labor needed to re-shore even some of the strategically vital industrials, like pharmaceuticals. Unfortunately, we have neither the manpower nor the demand (actual without the patriotic pretense) to bring back many of the other lesser valued goods to sell profitably in the US. Therefore, we will probably remain an import dependant country that talks reshoring but manufactures elsewhere for the foreseeable future. The likely potential for any positive change will come in the way we consume (less) and renew.
Tariffs hurt US more than China
Trump missed the mark again. Instead of requiring corporations to use their tax break money for new factories and worker pay increases, he lets them keep the money for themselves and their shareholders. Pure greed motivated by his own profit taking. Now, instead of using the tariffs as a tool for creating supply chains here in the U.S. in order to supply our factories, he uses it to punish, an act that causes low income people here to suffer from higher priced goods in short supply. The tariffs could have been removed completely on steel and textiles imported from countries that produce them as an incentive to increase their exports. Our supply chains could have been steadily built as the factories ramped up production. We could have balanced the trade deficit without harming business relationships with valuable world trade partners. A lost opportunity but consider the inane, thoughtless person in charge. Time for leadership that even a 10 year old could figure out.
Do you know why China able to print more than 3 trillion Yuan a year for the past 5 years, without much inflation ? China has been printing more than 1 trillion Yuan every year since 2005, to stimulate the economy. China able to print such huge trillions of Yuan yearly, with minimum inflation, is because China have US$300-400 billion trade surplus with USA every year. In addition from 2000-2014, China have accumulated more than US$3.5 trillion in forex holdings overseas. This included US$1.3 trillion in US Treasury bonds making China the largest owner. Therefore trillions Yuan China printed yearly are actually supported by China trillions in forex holdings and billions in yearly trade surplus. This trillion Yuan printed every year, allow China to pay for all the expensive infrastructure, such as high speed railway network system, big dams, huge wind turbine farms, country wide telecom infrastructure, vast road network, south to north water transfer canal project,etc. Also China was using the trillion Yuan printed to subsidise exporters such as Huawei, ZTE, etc. China able to invest and build such giant infrastructure projects WITH NO NEED to depend on IMF, World Bank and foreigners investment. Don't you think this is very amazing ? I have discuss this with very brilliant and knowledgeable economists in the internet forum, and they all did not believe my analysis and observation. But these so called brilliant academic also unable to explain why and where China get all the billions of Yuan or USD to build such advanced infrastructure for the past 10-15 years. So there are no secrets of China economic success. It is all due to trade surplus earned from USA, and printed trillions Yuan to invest in their huge infrastructure projects, and subsidise exporters, to ensure can continue to earn trade surplus with US. Americans consumers are the real suckers all along. None of them benefit from trade with China.
Manufacturing jobs are unlikely to ever return to America, and if they do, it will result in extraordinary price increases in almost all consumer goods. Why would companies pay US workers for one 40 hour workweek little more than what they can pay a Chinese worker for a month. And many, if not most, work 60 hour weeks. China also controls 90% of the planet's rare earth minerals. It gives them incredible leverage, as these are need to produce everything from battery chargers and smart phones to wind turbines (which apparently cause cancer anyway) and catalytic converters. It's why he wanted to buy Greenland - to get to the rare earth minerals that lie under all that ice. The article already mentioned how China, and several other Asian countries have already become the winners of Trump's Trade War. Trump prides himself on his "great instinct" but it turn out there are very good reasons previous administrations have relied upon guidance from experienced advisors with expertise and base decisions on their advice and the data presented. Avoiding wars tends to be a good thing, trade wars included.
Germany is one of the top exporter of manufacturing goods and have higher worker salary than US. So why can't US be top manufacturing exporter ?
WHY CHINA IS THE BIGGEST GLOBAL CURRENCY MANIPULATOR ? China will forever trapped in ultra cheap Yuan policy due to their own initial greed and incompetencies, in a currency war with the US. China started the trade war against the US in 1994, by weaponising the Yuan with the full approval and support advice from Kissinger. In 1994, US$1 = 8.9 Yuan In 1993, US$ 1 = 5.7 Yuan In 1992, US$ 1 = 5.3 Yuan In 1990, US$ 1 = 4.8 Yuan ( after Tiananmen Incident ) In 1989, US$ 1 = 3.7 Yuan ( before Tiananmen Incident ) The above shows there is a drastic devaluation from 1992 to 1994, which China weaponised the Yuan to be more exports competitive. China cannot even compete with the South East Asia countries such as Thailand, Malaysia and Indonesia in 1993 when US$ 1 = 5.5 Yuan. After 1994, China become the cheapest labor cost value for money in the world, and caused the Asia Financial crisis 1997-1998. This Asia Financial crisis destroyed economy of South Korea, Taiwan,Thailand, Malaysia and Indonesia. Before 1994, most of the global supply chain are from south east asia countries, Taiwan and South Korea. After 1994, when the Yuan is drastically devalued, most of the MNC supply chain moved to China, thus destroyed south east asia , Taiwan and South Korea economy. ……there has been considerable debate over whether China’s 1994 devaluation triggered the Asia regional crises of 1997 and concerns in the region. China claim they have the most advanced technology in the world. Then why does China continue to devalue Yuan to be competitive ? China is the biggest global currency manipulator which was approved by Kissinger/IMF/World Bank. China biggest mistake is to peg foolishly the Yuan at such low rate in 1994 USD1=8.9 Yuan. China unintelligent leaders are very desperate to get FDI from American and Japanese MNC, to create jobs and earn enough foreign exchange surplus in US dollars. This ultra cheap Yuan policy is a big mistake and has now come back to haunt the unintelligent leaders of China. China has been manipulating its currency for years, taking advantage of the global partnership that has existed for decades. If anything they’ve been trying to cheat and their people are the ones who have been suffering for it.
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