President Xi Jinping’s defiant reaffirmation of China’s drive for technological independence—and even dominance—in his speech at the 20th Communist Party Congress, coupled with US bans on the sale of semiconductors and equipment, are just the latest escalations. in a decoupling competition between the world’s two largest economies.
The first cracks are appearing, but more will follow. However, American workers and the broader US economy may not benefit as much as they could from the global supply chain reshuffle. Here, the US can learn something from its Asian rival’s regional economic focus. To emerge victorious in this strategic competition, the US must also include its neighbors.
US efforts to distance themselves from China cut across administrations and cross party lines. Both Republicans and Democrats have redoubled efforts in imposing sweeping tariffs, blacklisting businesses, export controls, tougher investment oversight and forced labor regulations and investigations, disrupting bilateral connections and trade in a increasing number of industries.
China’s interest in disassociating itself from the US has also increased and it has retaliated by applying its own tariffs and entity lists. It has spent the better part of a decade and hundreds of billions of dollars fighting for independence or dominance in the sectors of semiconductors, green technologies, medical devices, industrial robots and aerospace equipment.
Unraveling the supply chains linking the US and Chinese markets will not be easy, quick, or complete. Sunk costs, economies of scale, established supplier networks and the attractiveness of the Chinese domestic market make it profitable for many US-based and other international companies to stay even in the face of political frictions and costs.
Even so, a commercial distancing, if not a total decoupling, is taking place. Chinese investment flows to the US have fallen to less than a sixth of their 2016 highs. US investments in the Chinese financial sector have not offset the pullback in other sectors, reducing relative flows. US energy exports to China have taken a significant hit in the wake of Russia’s invasion of Ukraine. Between 2018 and 2021, as tariffs made Chinese goods less profitable, China’s share of US-bound laptops, smartphones and other electronics fell 10 percentage points to less than one third of US imports
However, China’s losses will not necessarily translate into US gains. The geographic repositioning of the global electronics industry over the last four years is a case in point. Yes, the equivalent of nearly $50 billion is now made elsewhere. But almost all of that manufacturing went to Asia, not the US.
To bring back this and other types of production, and expand its world-class manufacturing hub, the US needs more than political sanctions. You need a proactive strategy full of incentives for your neighbors. The combination of North American markets enables the economies of scale, broad supplier base, and the appeal of significant domestic markets that have made China and Asia so attractive for so long.
Undoubtedly, the Biden Administration and Congress have taken steps in this direction under the rubric of “friendshoring.” For example, Canada and Mexico were given the green light to participate in the manufacture of subsidized batteries for electric vehicles and have the opportunity to join US-centric semiconductor supply chains, especially in the areas of testing and packaging (now done almost exclusively in Asia).
But deeper commercial ties require support that goes beyond subsidies to specific companies or even the sector. It means building general infrastructure to connect the three economies and reduce regional costs of production. Funds provided under the Bipartisan Infrastructure Act should be channeled to modernize physical border crossings — some of which have not been renovated in decades — add new road and rail connections, and invest in digital networks that will better monitor the cross-border movement of goods. and people, and will speed up their transit.
Greater labor mobility is needed to make goods and deliver services where they are needed along the supply chain. North American work visas, like those initially created under the North American Free Trade Agreement, NAFTA, should be more plentiful and predictable. Expansion of guest worker programs across all skill ranges should continue. Envisioning and building a vibrant 21st century continental workforce will also require more cross-border educational exchanges and vocational training opportunities.
None of this is easy in the current American political system. Mexico is also not the enthusiastic participant and reliable partner it once was: Under President Andrés Manuel López Obrador, economic nationalism and isolationism are on the rise, at least in the federal leadership. Yet without access to a broader base of workers, skills, resources, suppliers, and potential markets, supply chains flowing out of China will bypass the US. If Democrats and Republicans can cooperate to distance themselves from China , surely they can extend that bipartisan effort to attract existing businesses and capacity to US soil.
China seeks to unite Asia into an even stronger trading force under its control. It has combined loans and investments, such as those under the Belt and Road Initiative, with free trade agreements, including the Regional Comprehensive Economic Partnership and its offer to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, as a way to consolidate its power and share in the world market, even as it diversifies its trade outside the US.
The US should do the same and take a nearshoring approach, from an individual to a regional strategy for economic growth. Only then will their companies, products and workers be able to compete more effectively with the most formidable challenge they face in the global marketplace.