Chinese President Xi Jinping’s defiant reaffirmation of China’s push for technological independence and even dominance in his 20th Communist Party Congress speech, matched by U.S. bans on semiconductor and equipment sales, are just the latest escalations in a decoupling contest between the world’s two biggest economies.
The first cracks are appearing. More will follow. Yet U.S. workers and the U.S. economy more broadly may not benefit as much as they could from the global supply chain reshuffle. Here, the U.S. can learn something from its rival’s regional economic approach in Asia. To come out on top in this strategic competition, the U.S. needs to embrace its neighbors too.
“Chinese domestic market make it profitable for many U.S.-based and other international companies to stay on even in the face of policy frictions and costs. ”
U.S. efforts to pull back from China span administrations and cross party lines. Republicans and Democrats alike have doubled down on widespread tariffs, company blacklists, export controls, more rigorous investment oversight, and rules and investigations on forced labor, disrupting bilateral connections and commerce across a widening number of industries.
If anything, China has been more eager to disentangle from the United States, retaliating with its own tariffs and entities lists. It has spent the better part of a decade and hundreds of billions of dollars striving for independence or dominance in semiconductors, green technologies, medical devices, industrial robots, and aerospace equipment.
Undoing the latticework of supply chains that tie the U.S. and Chinese markets together won’t be easy, quick or complete. Sunk costs, economies of scale, established supplier networks and the allure of the Chinese domestic market make it profitable for many U.S.-based and other international companies to stay on even in the face of policy frictions and costs.
Still, commercial distancing, if not full decoupling, is happening. Chinese investment flows into the US have fallen to less than a sixth of their 2016 highs. U.S. investments into China’s opening financial sector haven’t offset the pullback in other sectors, leaving relative flows down. U.S. 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 products less profitable, China’s share of US-bound laptops, smartphones, and other electronics fell 10 percentage points to less than a third of U.S. imports.
Yet China’s losses won’t necessarily translate into U.S. gains. The geographic repositioning of the global electronics industry over the last four years is a case in point. Yes, nearly $50 billion are now made elsewhere. But almost all that manufacturing went to Asia, not the United States.
To bring back this and other types of production and expand its world class manufacturing hub, the U.S. needs more than policy sticks. It needs a proactive strategy brimming with carrots for its neighbors. Combining North America’s markets enables the economies of scale, the wide supplier base and the allure of sizable domestic markets that have made China and Asia so attractive for so long.
To be sure, the Biden administration and Congress have taken steps in this direction under the rubric of “friendshoring.” For instance, Canada and Mexico were given a green light to participate in subsidized EV batteries and have an opportunity to join U.S.-centered semiconductor supply chains, especially in the testing and packaging (now done almost exclusively in Asia).
But deeper commercial ties require support that goes beyond specific company or even sector subsidies. It means building out general infrastructure to connect the three economies and reduce the costs of regional production. Funds provided under the Bipartisan Infrastructure Law should be channeled to modernize physical border crossings, some last updated decades ago, add new road and rail connections, and invest in digital networks that will better monitor the cross-border movement of goods and people and speed their transit.
Greater labor mobility is necessary to make the goods and provide the services where they are needed along the supply chain. North American work visas, such as those initially created under the North American Free Trade Agreement, NAFTA, should be more plentiful and predictable. Expanding guest worker programs across skill ranges should follow. Envisioning and building a vibrant 21st-century continental workforce will also require more educational exchanges and cross-border vocational training opportunities.
None of this is easy in today’s U.S. political system. Nor is Mexico the eager participant and reliable partner it once was: Under President Andres Manuel Lopez 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, potential suppliers and markets, the production chains leaving China will bypass the United States. If Democrats and Republicans can cooperate to push away from China, surely they can extend that bipartisan effort to attract the exiting companies and capacity to U.S. shores.
China seeks to stitch together Asia into an even stronger commercial force under its control. It has combined loans and investments, such as those within the Belt and Road Initiative, with free-trade agreements, including the Regional Comprehensive Economic Partnership and its bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, as a way to solidify its power and global market share even as it diversifies its trade away from the U.S.
The U.S. should follow suit, moving away from the goal of reshoring to one of nearshoring, from an individual to a regional strategy for economic growth. Only then can its companies, products and workers more effectively compete with the most formidable challenge they face in the global marketplace.