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CICIR analysis: The Path and Dilemma of U.S. Reducing Supply Chain Dependence on China
U.S. policies generate visible external pressure on China and also influence China's policy choices. China's own flexibility and competitiveness should not be overlooked, however.
Pekingnology today presents an abridged translation of 《美国减少对华供应链依赖的路径及困境》The Path and Dilemma of U.S. Reducing Supply Chain Dependence on China published on the October 2022 issue of 《现代国际关系》Contemporary International Relations, a periodical of the China Institutes of Contemporary International Relations (CICIR), a major state thinktank.
The article, by 马雪 Ma Xue of CICIR, is very long. So the following is about 80% of its content. What has been omitted was a summary of U.S. moves to reduce its supply chain reliance on China, and only because I want to make it shorter.
This article is a comprehensive assessment of the U.S. strategy. Some of you may have read a lot about U.S. analysis on why and how to reduce supply chain dependence on China, and I think you may be interested in how a top Chinese state think tank researcher approaches it.
The analysis says
In terms of strategic intent, the U.S. reduction of supply chain dependence on China is to promote the formation of a supply chain dominated by the U.S.
On the demand side, the U.S. wants to diversify the sources of low- and middle-end industries that are "strategically dependent." On the supply side, the U.S. wants to impede China's access to advanced U.S. technologies for so-called strategic industries.
The U.S. seeks both to drive up the cost of Chinese manufacturing through trade restrictions and to integrate its own and its allies' resources, mainly through "friend-shoring" and "near-shoring." On the supply side, the U.S. wants to restructure the supply chain of so-called strategic industries to contain China's catch-up through innovation.
The Biden administration has adopted a middle-of-the-road strategy to strike a balance between security concerns and economic realities. It does not seek to decouple from China in areas of the supply chain that are less technologically advanced, more readily available, and cost-oriented, but instead shifted supply chains to "trusted suppliers" in areas that are more technologically advanced and prone to cybersecurity and other risks.
The current U.S. policy is more resilient, distancing itself from the bottomless confrontation and hard-decoupling approach of the Trump era and facilitating a balanced U.S. economic strategy and national security. Even so, U.S. policy faces many dilemmas that limit the scope, extent, and sustainability of its implementation.
The Biden administration believes that some degree of separation from China is necessary but that the separation process should be gradual.
The Biden administration has shifted from pursuing industrial repatriation to friendly shore and near-shore outsourcing and from maintaining absolute supply chain security to seeking relative security.
The Biden administration recognizes that building resilient and secure supply chains takes time and that building supply chain diversity requires the government to invest enough patience to give U.S. companies sufficient time to select suppliers, test product compatibility, and so on.
The Biden administration has shifted from containing China to focusing more on strengthening itself.
The Biden administration’s approach is hampered by
1) It is difficult to balance resilience and efficiency in the U.S. to reduce its supply chain dependence on China.
2) U.S. technology control over China faces information and control dilemmas: societal consequences of technology cannot be anticipated early in the life of that technology; the other is the control dilemma; when people discover that the consequences are not what they want, the technology will become integrated with the whole economy and society, thus extremely difficult to manage.
3) the U.S. policy to strengthen its own competitiveness in the country is difficult due to domestic politics, such as entrenched groups that will put their respective interests over the national interests.
U.S. allies are seeking to shape the supply chain adjustment process to avoid being held hostage by the United States.
The U.S. strategy undermines China's industrial security and curbed China's industrial upgrading.
Although U.S. policy has brought about some negative dynamics for China, China's own flexibility and competitiveness should not be overlooked.
If this is not your cup of tea, we have a very impressive list of content coming up on both The East is Read, which focuses on recent Chinese policies, and Pekingnology, which focuses covers bigger discussions.
For example, we will, on The East is Read, publish translations of three key Chinese Ministers in the last days of December, including a piece that appears to lay out some specifics of the “Common Prosperity.” Because the English-speaking world was at rest during the time, quite some important content didn’t receive proper coverage back then.
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Lin Xi is a master's student majoring in International Affairs (specializing in International Economics and Development) at the Lee Kuan Yew School of Public Policy at the National University of Singapore. She finished her undergraduate education in International Politics at Fudan University. She interned as an analysis assistant at Fudan Center for BRICS Institute, IPSOS, the Interllisia Institute, and Fudan Development Insitute. Her interests focus on rural development in the Asia-Pacific region, regional studies about Southeast Asia, and China-US relationships.
The Path and Dilemma of U.S. Reducing Supply Chain Dependence on China
The U.S. is reducing its supply chain dependence on China in three ways: restricting China, strengthening itself, and uniting with allies. In terms of strategic intent, the U.S. wants to promote the formation of a supply chain dominated by it; in terms of tactical means, the U.S. wants to adjust the supply chain to a compromise between full rejection of China and full engagement with China; in terms of policy design, the U.S. adopts cautious gradualism in the process of decoupling from China. However, the U.S. policy has four dilemmas, that are:
a) Difficulty balancing flexibility and efficiency when reducing dependence on China's supply chain
b) information and implementation dilemmas in controlling technology in China
c) the domestic barriers to policy implementation
d) the policy effect depends largely on the cooperation of allies. These dilemmas will limit the effectiveness and sustainability of U.S. policy implementation. However, the relevant U.S. policies have shown long-term and irreversible tendencies, and their impact cannot be ignored.
[Part I, which summarizes U.S. actions, is omitted.]
The U.S. strategic intent to reduce supply chain dependence on China is quite obvious, with gradually clear tactical means and step-by-step policy design.
In terms of strategic intent, the U.S. reduction of supply chain dependence on China is to promote the formation of a supply chain dominated by the U.S. The U.S. actually wants to reshape both the supply and demand sides of the supply chain. On the demand side, the U.S. wants to diversify the sources of low- and middle-end industries that are "strategically dependent" on China and maintain supply chain resilience to force the process of moving low- and middle-end industries out of China.
On the supply side, the U.S. wants to impede China's access to advanced U.S. technologies for so-called strategic industries and to lock and contain China's development opportunities. The U.S. is squeezing the supply and demand sides of China's supply chain in both directions, ultimately forming a supply chain that is subject to its domination.
On the one hand, the United States, as a buyer in global supply chains, is concerned about supply chains being constrained by China - a key seller. The U.S. fears both its own exposure to China's economy and China's use of key products as economic tools for "economic coercion." Therefore, the U.S. seeks to restructure its supply chain with strategic dependence on China by increasing the number of sellers in each segment of the supply chain, thereby weakening the power of Chinese sellers.
The United States refers to supply chains that meet three refined indicators as "strategically dependent on China": first, the United States is a net importer in that particular industry, sector, or category of products; second, the United States imports more than 50 percent of its total imports from China in that particular industry, sector, or category of products; third, China accounts for more than 30% of the global market share in this particular industry, sector, or product. Accordingly, the types of products on which the U.S. relies heavily on China are: metals such as tungsten, manganese, scandium, yttrium, etc.; vitamins such as vitamin B2, vitamin C, vitamin D, vitamin B1, vitamin B6, vitamin B12, and coenzyme Q10; antibiotics such as penicillin, tetracycline, chloramphenicol, etc.; industrial production needs such as welding chains, jacks, portal cranes, containers, safety glass, small metal casters, etc.; laptops, cell phones, projectors, TV game consoles, microphones, lithium batteries, and other high-tech products; anchors, fishing equipment and life jackets and other marine industry-related products.
In the supply chain adjustment involving these products, the U.S. seeks both to drive up the cost of Chinese manufacturing through trade restrictions and to integrate its own and its allies' resources, mainly through "friend-shoring" (limiting trade and direct investment to political allies) and "near-shoring"(outsourcing to neighboring countries or regions with close geography, time zones, and languages) to compete with China's existing products.
On the other hand, the United States is a provider of technology at the high end of the global industrial chain and is deeply alarmed by the climbing and catching-up dynamics of China, which was originally at the middle and low end of the industrial chain.
Therefore, the U.S. wants to restructure the supply chain of so-called strategic industries to contain China's catch-up through innovation to maintain its economic dividends in major technologies and the military and national security advantages that are a result. These strategic industries are primarily in core areas related to the Fourth Industrial Revolution, including artificial intelligence, computing hardware, materials, and manufacturing sciences, networking and data communications, synthetic biology, automated robotics, cryptography, nano, quantum, etc. With the advent of the Fourth Industrial Revolution, the United States is no longer highly responsive to globalization but is increasingly wary of hostile countries "stealing" its own technological innovations. The U.S. government views addressing and controlling the threats from China's technology as a key determinant of U.S. national well-being and strength and a central arena of strategic competition between the United States and China. The U.S. is adjusting the supply chains of these strategic industries essentially to make breakthroughs in key frontier technologies where China has not yet achieved a leading position, to maintain a lead while protecting existing U.S. technologies from being transferred to China, and thereby curbing China's space and pace of development.
In terms of strategic means, the U.S. seeks to adjust its supply chain to a compromise between full rejection of China and full engagement with China. The U.S. supply chain adjustment to China is neither a complete change to the unified market nor a continued deepening of the division of labor network, but rather a locking of the space and depth of cooperation with China to control China's development direction and growth limits to the extent that it cannot challenge the United States. This is a compromise between two schools of thought that is deeply divided within the United States: those championing containment tends to define the bilateral relations as a "zero-sum game," in which China gains a long-term strategic advantage by exploiting U.S. technology industries and systems, while the United States obtains only marginal and temporary gains. The window for U.S. technological dominance is closing, so the United States must take tougher measures to significantly reduce bilateral technology exchanges and trade. The toughest proposals come from the former Deputy National Security Advisor Matt Pottinger, who has advocated expanding U.S. foreign investment restrictions "by at least an order of magnitude”. Also, Senator Tom Cotton has proposed a "research embargo" on China, which refers to comprehensive export controls on high-end semiconductors, secondary sanctions equivalent to the "death penalty" on leading Chinese companies, and the withdrawal of permanent normal trade relations.
Those championing cooperation believe that U.S.-China relations are "non-zero-sum" in nature and that exchanges and cooperation benefit the United States, so the U.S. should maintain bilateral contacts with China. This camp includes some business interests, technology experts, globalization activists, and progressives concerned about overreaction, inflated threat perceptions, and the overuse of restrictive tools. The Semiconductor Industry Association argues that broad restrictions on Chinese exports of commercial chip technology would threaten long-term U.S. leadership in the semiconductor sector. Some independent technologists and technology activists remain committed to the ideals of technology globalization and see decoupling as a curse. The World Wide Web Foundation (joined by Amazon, Facebook, Microsoft, Twitter, and others) warns against Internet fragmentation and technological protectionism, while the Internet Society argues that political considerations, rather than technological ones, run counter to the idea of the Internet.
Since Biden took office, he has intentionally downplayed "decoupling" and instead emphasized "supply chain resilience". In outlining the new path of the Biden administration's trade policy with China, U.S. Trade Representative Katerine Tai clearly stated that the U.S. and China need to "recouple" and achieve "durable coexistence." This reflects the cautious choice of the "middle path," which incorporates the views of the two camps mentioned above. The "middle path" believes that the U.S.-China relationship is both "zero-sum" and "non-zero-sum" in nature and that the U.S. must base itself on reality and focus on the long-term and carry out more precise and targeted decoupling in supply chains from China. This camp differs from both the "containment" camp of China hawks and human rights defenders (politically a minority) and the "cooperationist" group of business interests and global activists in technology (not at the center of the political stage). It is mainly represented by political "moderates," state and local leaders, and analysts from mainstream think tanks, who are the actual gatekeepers of U.S.-China relations. In fact, the United States seeks to adopt a gradual approach based on current uncertainties, recognizant of the fact that interdependence is likely to continue to exist. That’s because it is balancing the risks from pursuing higher levels of free trade and continuing to deepen the global division of labor network and unified international market, and the costs of a radical change toward exclusive market segmentation and technological control that undermines the global supply chains it has built. The United States had to minimize the potential losses while ensuring the relative security of the supply chain and guarding against Chinese technological catch-up.
Specifically, the Biden administration has adopted a middle-of-the-road supply chain adjustment strategy. To strike a balance of supply chain between security concerns and economic realities, the Biden administration did not seek to decouple from China in areas of the supply chain that are less technologically advanced, more readily available, and cost-oriented, but instead shifted to "trusted suppliers" in areas that are more technologically advanced and prone to cybersecurity and other risks. This approach will inevitably bring certain costs, but it is more economical and feasible than "complete decoupling." In refining the areas involved, the Biden administration took into account both strategic and selective approaches, adopting industry-specific decoupling methods for industries of different natures and different degrees of dependence, Also, it set priorities in different industries and used "small yard, high fence" to illustrate that technology controls should only be applied to the most sensitive and strategic areas. In fact, the U.S. does not control more mature technologies for commercial interests, such as some semiconductor equipment manufacturing tools, aerospace components, etc. Still, it mainly strengthens its control over the most sensitive and core technologies.
In terms of policy design, the United States has adopted a gradual adjustment. The U.S. believes that some degree of separation from China is necessary but that the separation process should be gradual for two reasons. One, a hard decoupling strategy is impractical. Hard decoupling under Trump has left U.S. businesses in limbo. The establishment of a new, complete supply chain within the United States can create jobs, stimulate economic vitality, and is politically attractive, but the cost of a complete relocation of the supply chain is high and needs to be accompanied by strong fiscal policy and protectionist measures. In the context of high debt, the United States obviously lacks the corresponding financial means, hard decoupling is bound to increase the cost for businesses and consumers. Second, if the speed and scope of decoupling are not controlled, blind decoupling will bring about self-decoupling by enterprises in various countries to avoid being sanctioned by the U.S. The spiral resulting from mutual countermeasures between China and the U.S. will end up in a broader and more chaotic manner.
The progressive adjustment is mainly reflected in three dimensions: target, time, and path. Regarding target, the U.S. has shifted from pursuing industrial repatriation to friendly shore and near-shore outsourcing and from maintaining absolute supply chain security to seeking relative security. Temporarily, the U.S. no longer aims to promote the return of all manufacturing jobs but to promote the establishment of supply chain alliances to accelerate the transfer of low-end manufacturing to replace "Made in China" in the global supply chain. Currently, the Biden administration is focusing on industries such as semiconductors, health care, and new energy materials and not prioritizing low-end manufacturing and consumer goods, which have a high degree of foreign dependence, for repatriation. The U.S. has focused on working with "like-minded" countries, especially technologically advanced "liberal democracies," to establish a common policy framework so that partial economies of scale can still be achieved.
In terms of time, the Biden administration recognizes that building resilient and secure supply chains takes time and that building supply chain diversity requires the government to invest enough patience to give U.S. companies sufficient time to select suppliers, test product compatibility, and so on. The U.S. abandoned the idea of quick fixes and adapted to supply and demand through long-term planning, constantly evaluating the cost, availability, and stability of changes to ensure long-term gains under diversification.
In terms of path, the U.S. has shifted from containing China to focusing more on strengthening itself. The early U.S. path of containing China with a view to thwarting it in the short term entailed significant costs and risks and could cut off key sources of labor and capital needed to develop important technologies for U.S. firms and universities, as well as trigger various forms of Chinese retaliation that could further damage the sensitive bilateral relationship.
As a result, the United States has turned its attention to the path of strengthening itself through technology investment and incentives, strengthening its talent pool, and building infrastructure to achieve the long-term goal of absolute supply chain security. Given that strengthening itself is time-consuming and slow, the U.S. is complementing the process by containing China, thereby buying time for the U.S. to gain supply chain advantages.
The current U.S. policy is more resilient, which is distancing itself from the bottomless confrontation and hard-decoupling approach of the Trump era and facilitating a balanced U.S. economic strategy and national security. Even so, U.S. policy faces many dilemmas that limit the scope, extent, and sustainability of its implementation.
First, it is difficult to balance resilience and efficiency in the U.S. to reduce its supply chain dependence on China. Balance can only be achieved when supply and demand match each other. When demand deteriorates, it is futile for the U.S. government to invest more in the supply side, which cannot support forming a so-called "reliable" supply network. As the potential growth rate of the U.S. decreases, the U.S. economy will be smaller and less dynamic than it should be, and it will be increasingly difficult for U.S. demand alone to drive the reshaping of supply chains. When demand is relatively small and specialized, what’s required of the supply side becomes highly uncertain, and government support and commitment to manufacturing are unlikely to foster business innovation. The effort to enhance the defense industrial base and supply chain resilience in the United States is a classical example. The defense industry is the production of a highly specialized system by large defense contractors, but the contractors themselves cannot provide all the mechanical, electronic, chemical, software, and other intermediate products, and thus the defense industry relies on other commercially oriented manufacturers, particularly in China. The U.S.-China trade friction that began in 2018 made these foreign supply chains a weakness for large U.S. defense contractors. At the time, the Trump administration demanded that these chains be relocated back to the U.S. in the name of national security and boosting domestic jobs. That (however) involves a hefty amount of production where the demand for specific products is very small in size and very specialized in nature, making it impossible to seek reliable alternative suppliers.
Global economic growth is currently under downward pressure due to the ongoing outbreak of the Covid-19 pandemic and reduced fiscal support from countries. The World Bank expects global economic growth to slow significantly, from 5.5% in 2021 to 2.9% in 2022. Meanwhile, the U.S. is taking its worst inflationary hit in 40 years. This further amplifies the problem of balancing supply chain resilience and efficiency in the United States. By prioritizing security and political issues over economic efficiency, the U.S. has undoubtedly shattered the low-tariff and rules-based global trading system established after the Cold War. Inflation will remain higher than on the eve of the pandemic, even after energy and food prices have fallen back. In a weakened world economy, private companies will find it more difficult to make a profit and will tend to place more emphasis on short-term solutions that can improve efficiency and productivity and opt for cost-saving options that will make U.S. policies to restructure supply chains less effective than expected. China is no longer just a manufacturing base but the final consumer market for all types of products. If foreign companies move their supply chains out of China, the cost of re-exporting goods to China will skyrocket. In view of this, many foreign companies believe that moving the supply chain out of China will incur a great cost - not secure or cost-effective.
Second, U.S. technology control over China faces information and control dilemmas. The U.S. wants to control the long-term development of technology but cannot escape a dilemma. One is the information dilemma that the societal consequences of technology cannot be anticipated early in the life of that technology; the other is the control dilemma. When people discover that the consequences are not what they want, the technology will become integrated with the whole economy and society, thus extremely difficult to manage.
In October 2020, the Trump administration released its list of "Critical and Emerging Technologies," which includes energy technologies, communications and networking technologies, data science and storage, medical and public health technologies, and biotechnology. The list is broad and vague. In February 2022, the Biden Administration updated this list, and the critical and emerging technologies were not significantly different from the Trump era. The selection criteria and purpose of the decision remained unclear. It emphasized that "the list should not be interpreted as a priority list for policy development or funding” while recommending that agencies refer to the list when designing "responses to U.S. security threats" and "research and development technologies. This list should be consulted when designing "measures to address U.S. security threats" and "research and development technologies."
Historically, the U.S. government has also made efforts to anticipate hotspots of future innovation and to draw manageable boundaries in fuzzy technology areas. In the 1990s, economic competition from Japan prompted the U.S. government to develop a number of so-called critical technology lists. Influenced by different interest groups, the U.S. government's definition of "criticality" lacked scientific rigor, resulting in lists that were too broad to be used in policymaking. In hindsight, many of the items designated as critical were not, and some of the technologies left off the list ended up having a huge economic impact.
At the same time, the U.S.'s incremental adjustments allow resources to continue to gather in China through "third countries," "bypasses," or even "diversions," and allow China to adjust and repair its supply chain. That will make the U.S. lose its leverage. The United States does not have a complete monopoly on cutting-edge research, and most techniques are already embedded in technology products, so many advanced techniques are not exclusive or indispensable. This means that U.S. unilateral control is often ineffective, making it difficult to cut off the path of technology exports to China and leading to self-created competitive disadvantages and friction with international partners.
Besides, U.S. control of frontier technology areas will accelerate the development of alternative supplies to China. This means that the U.S. is cutting off its strategic leverage, leaving the "relatively disadvantaged" side with no more scruples. In addition, political control of strategic industries could undermine the future competitiveness of the United States in technology. Export controls, entity list designations, and other similar restrictions reduce U.S. companies' sales to China and reduce the revenue available to reinvest in R&D. Visa bans and supply chain security requirements limit U.S. access to Chinese talent and components, imposing higher costs on U.S. innovators. Inbound investment restrictions limit opportunities for U.S. companies to raise capital from and collaborate with Chinese entities.
Third, the U.S. policy to strengthen its own competitiveness in the country is difficult to land domestically. On the one hand, some U.S. policies were introduced to target industries with broken supply chains, such as biopharmaceuticals and raw materials, new energy vehicle batteries, key minerals, and semiconductors under the impact of the epidemic, while in the production process, companies either opted out due to scarcity of raw materials or reduced reliance on scarce materials and semi-finished products, resulting in biased government inputs.
For example, the United States launched a series of industrial policies focused on providing funding for new semiconductor plants. After they are completed in three years, the market demand for semiconductors may have been significantly reduced. In addition, the manufacturing layout of developed countries has matured, and investment in a certain area cannot incentivize a production cluster enough to revive the related industries. From the 1980s to 1990s, Japan implemented a similar policy to provide subsidies to attract high-tech industries to some regions, but what has been attracted are mostly low-tech enterprises. This is because even with subsidies, innovative companies are reluctant to leave industrial clusters where technology and information are concentrated.
On the other hand, U.S. investment in domestic infrastructure is vulnerable to capture by commercial interests. U.S. interest groups will lobby aggressively for the allocation and flow of public resources, leading to changes in government decision-making criteria, with projects that ultimately benefit legislators politically taking precedence over those that maximize consumer welfare. The most obvious example is the Infrastructure Investment and Jobs Act that Congress has passed to address the "supply chain crisis," but with the political maneuvering of special interests, left-wing radicals, and labor unions, the money is not going where it is needed most for traditional infrastructure. Instead of solving the supply chain crisis, it will deepen the crisis by diverting resources and disrupting troubled transportation networks.
Currently, the most important infrastructure issue the U.S. wants to address is the lack of automation at ports However, since union groups have been fighting against port automation upgrades, the Act explicitly prohibits funds from being spent on automation but on energy efficiency and emissions reduction. The sections of the Act on roads and railroads are also mostly projects that have no relationship to the actual transportation network, such as the demolition and reconstruction of highways that divided minority communities, with the vast majority of funds going to maintaining roads rather than expanding the transportation network. In addition, the Act further empowers federal government bureaucrats to control infrastructure projects across the country. The red tape in approvals will increase costs, with benefits to society as control shifts from the state and local levels to the federal government.
Fourth, the effectiveness of U.S. policy is constrained by its allies. To contain China's development, the U.S. must unite its allies and coordinate the layout of its supply chain, but this move limits the strategic autonomy of allies such as the EU and Japan. The U.S. has repeatedly reminded its allies of China's poor democratic and human rights situation, unfair trade practices, and expansionist actions in the Asia-Pacific region and has constantly exerted diplomatic and strategic pressure on them to reduce their dependence on China. This has led to the gradual politicization of some trade frictions and technological security issues between China and its trade partners, for instance, the EU and Japan. The U.S. may not carefully consider the interests of its allies, but allies must bear the unpredictable risks and costs associated with China-U.S. competition.
Currently, most U.S. allies maintain a balance of power within the alliance through a diverse mix of resources and strategies to avoid the drawbacks and risks of a single strategy. Even though the U.S.-European Trade and Technology Committee (TTC) provides a platform for U.S.-European coordination, the U.S. resisted the EU firmly when the latter tried to promote a legal framework for digital regulation with the TTC. This exposes the conflict of interest between the U.S. and the EU and shows that the EU has its own insistence and freedom of action. In the 1980s, Japan signed a semiconductor agreement with the U.S. Then, its semiconductor industry declined. Japan is also concerned about its own development if it follows the U.S. in containing China. Some Japanese politicians believe that they should not be "forced to choose sides" between China and the U.S. but "should develop a strategy that is not buried in the contradictions between China and the U.S.,” so the Japanese government is aiming at the new field of semiconductors, which China and the U.S. have yet to enter and is indispensable for future innovation.
It can be seen that U.S. allies are seeking to shape the supply chain adjustment process to avoid being held hostage by the United States. Indeed, most U.S. allies are currently far from ready to reduce their economic interdependence with China. Moreover, given that U.S. foreign economic policymaking is heavily influenced by its domestic politics and is subject to considerable uncertainty, it is difficult for the United States to make credible commitments to its allies.
The U.S. claims that it should reduce supply chain dependence on China to reduce U.S. supply chain vulnerability and security threats, but in reality, it has undermined China's industrial security and curbed China's industrial upgrading. "Reducing supply chain dependence" has become a favorable economic lever and competitive tool for "great power competition." By restricting China, strengthening itself, and uniting with its allies, the U.S. is squeezing both the supply and demand sides of China's supply chain in both directions, seeking to diversify into low- and mid-range industries that are strategically dependent on China, and restricting the export of core sensitive technologies to China, ultimately forming a supply chain at its disposal. Under the trade-off between U.S. economic interests and national security, the U.S. has chosen a compromise between full rejection of China and full engagement with China, a rebalancing away from excessive economic dependence on China, and the process of separation takes cautious gradualism. The relevant U.S. policy has shown a long-term and irreversible tendency.
At the global level, the trend of a sharp decline in global trade growth and a pullback in the participation rates of the global supply chain (GSC) has been observed. Localization and regionalization are accelerating in lieu of the globalization of supply chains. Sourcing by U.S. companies is shifting from global best price to closer proximity to buying customers. Data from the 30 largest U.S. manufacturing customers with average annual revenues of more than $30 billion show that from 2020 to 2021, large U.S. manufacturers increased their purchases of chemicals, manufacturing and construction materials, and other commodities from suppliers in Mexico by 514% and from Latin America by 155%, while purchases from the Asia-Pacific region decreased by 26% over the same period.
At the same time, the autonomy and sovereignty of key technologies are replacing international cooperation. The U.S. has reinforced the authority and effectiveness of government decision-making through supply chain adjustments to China, reshaping technological sovereignty, pushing countries to be more inclined to their own interests, and stimulating the return of economic nationalism to momentum in Western countries. Concepts such as technological sovereignty and economic sovereignty have become the most hotly debated issues in the industrial, political, and strategic circles of developed countries today, prompting them to pursue the ability to independently control the application and development of technology and thus influence the global supply chain.
At the geopolitical level, the U.S. is forging economic alliances to reshape the U.S.-centric global supply chain, potentially changing the geopolitical landscape. Through the TTC platform, the U.S. is bridging the transatlantic divide. It is also forcibly reversing the existing supply chain dynamics and economic trends in the region through the "Indo-Pacific Economic Framework." Among the countries the U.S. is drawing over, the weaker ones want to get the tangible benefits of supply chain transfer but also want to improve their international status by concluding economic alliances with the U.S. and gain the capital to confront and balance with the stronger countries. In particular, the U.S. has adopted the slogan of "democracy against authoritarianism" to enhance the cohesiveness and collective action ability of its alliances by "ideologizing economic issues."
In terms of the impact on China, U.S. policies generate visible external pressure on China and also influence China's policy choices. The relevant initiatives of the U.S. to restrict China and joint partner countries will raise the cost of China's manufacturing industry, stimulate some of the middle- and low-end manufacturing industries to skip the industrial migration in China's central and western regions, and move out to Southeast Asian countries with lower labor costs, disrupt China's domestic economy and labor market, and deepen the adverse impact on China in the context of China's aging population and overall shrinking labor force.
At the same time, the U.S. has established a network of economic allies that includes coordinated distribution of high-tech products and a full industrial chain of design, production, equipment, and materials, as well as investment controls, to create a siege on China. Although U.S. policy has brought about some negative dynamics for China, China's own flexibility and competitiveness should not be overlooked. At the industrial level, China's huge advantage in market resources and deep base of manufacturing industry clusters make it necessary for the countries concerned to consider their geographical proximity to China when building their own supply chains, which determines that U.S. obstruction is unlikely to undermine China's core position as an Asian economy.
At the technology level, China's large consumer market drives rapid commercialization of innovation, and the advantages formed in high-technology fields can effectively spill over to other fields, thus gaining greater returns to feed the high-technology industry; China's developed manufacturing ecosystem prompts companies to rapidly expand production, while also helping them to accelerate the pace of upward movement in the learning curve, giving China, as a latecomer catching-up country, the potential for iterative catch-up and differentiation. Thus, reducing U.S. supply chain dependence on China may limit China's economic options in the short run, but in the long run, China's economic rise is unstoppable by the United States. (Enditem)
Again, if your company has internship or employment opportunities that may be suitable for the contributors to Pekingnology, you're more than welcome to reply to this email and get in touch. This would be one of the best ways to show your support. Many thanks in advance.
Lin Xi is a master's student majoring in International Affairs (specializing in International Economics and Development) at the Lee Kuan Yew School of Public Policy at the National University of Singapore. She finished her undergraduate education in International Politics at Fudan University. She interned as an analysis assistant at Fudan Center for BRICS Institute, IPSOS, the Interllisia Institute, and Fudan Development Insitute. Her interests focus on rural development in the Asia-Pacific region, regional studies about Southeast Asia, and Sino-US relationships.