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US-China trade war
OpinionComment
Yukon Huang
Jeremy Smith
Yukon HuangandJeremy Smith

Why US-China supply chain decoupling will be more of a whimper than a bang

  • While China managed to keep export volumes stable by diversifying to other trading partners, the US’ overall trade balance has deteriorated
  • Some degree of economic decoupling is under way, but it’s unlikely that a large number of American firms will cut China out of their supply chains

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Chinese workers sew US and other flags at a factory in Fuyang, in China’s eastern Anhui province, in July 2018. China has increased trade with the rest of the world to offset the reduction of exports to the US. Photo: AFP
Yukon HuangandJeremy Smith
Whether by tariffs or by decree, US President Donald Trump has long sought the silver bullet that would decrease dependence on Chinese goods and revive American industry, all the while compelling China to reform its controversial trade and investment practices and reduce the bilateral deficit.

In a recent interview, Trump railed against “stupid supply chains that are all over the world”, further threatening to “cut off the whole relationship” with China and rejecting the notion that undoing the extensive links between the two largest economies comes with any trade-offs.

But to the extent that economic decoupling actually occurs, it would represent a major disruption of the market-driven evolution of supply chains over the past several decades. For all the talk of sweeping change, US dependence on Asian manufacturing is both deeply rooted and remarkably stable over time.

Over the past two decades, US manufacturing imports from the Pacific Rim region – East Asia, Association of Southeast Asian Nations, Australia, New Zealand and Papua New Guinea – consistently hovered at around 40 to 45 per cent of the total. However, the composition of trade partners within the region has shifted dramatically along with the rise of China.

In 2001, having just joined the World Trade Organisation and having recently emerged from the Asian financial crisis relatively unscathed, China’s processing trade took off. At this inflection point, China accounted for only a quarter of US manufacturing imports from Asia, with three-quarters coming from the rest of Asia, and Japan as the major source.

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