A new study presented at the Jackson Hole Symposium adds to the evidence that the U.S. is importing from other nations, and increasing its own production capabilities. But don’t count China out yet.
Economists, financial leaders, and central bank officials from around the globe flew into Jackson Hole, Wyoming over the weekend for the annual Jackson Hole Symposium, which examined some of the big shifts happening in the global economy.
One of the major papers presented at the conference examined global supply chains in the wake of the COVID-19 pandemic and increased tension between the United States and China. Authors Laura Alfaro of Harvard Business School and Davin Chor of the Tuck School of Business at Dartmouth argue in Global Supply Chains: The Looming “Great Reallocation” that while the United States is decreasing its direct sourcing of goods from China in favor of nations including Vietnam and Mexico — and increasing its own domestic production capabilities — it remains “unclear if these measures will reduce US dependence on supply chains linked to China.”
That’s because Vietnam and Mexico are increasingly importing a whole lot of stuff from China, the authors conclude. Their report mirrors similar findings in a recent study from the Descartes Systems Group, which noted that while U.S. imports of goods from Mexico are on the rise, Mexico’s imports of goods from China are increasing even faster.
Alfaro and Chor explain:
“Vietnam and Mexico have strong trade ties with the US. Nearly a quarter of Vietnam’s exports are shipped to the US. In the case of Mexico, the US is, in fact, its largest foreign market, absorbing nearly 80% of all Mexico’s exported goods.
“At the same time too, both Vietnam and Mexico have seen their import links with China step up progressively over time. … Despite a decrease in US direct reliance on China, there has been an increase in China’s import share in ‘friendly’ nations, including the EU, Mexico, and Vietnam.”
Vietnam has increased its trade with China significantly in recent years. In 1994, goods from China represented just 4% of Vietnam’s imports; that jumped to 40% by 2022, with the top Made in China items shipped to Vietnam including integrated circuits, telephone sets, and textiles. For Mexico, the growth in Made in China imports is also striking, from 1% in 1994 to 20% in 2022.
Things get especially interesting when you break down the data at the product level, as “China’s share of US imports are systematically correlated with gains in the import shares held by Vietnam and Mexico.”
“Both Vietnam and Mexico picked up market share in various categories of electrical and electronic equipment,” Alfaro and Chur write. “But there have been subtle differences too in the product mix of observed shifts, with Vietnam gaining ground in electronics, apparel and textiles, and Mexico increasing its US import share in automobile parts, as well as glass, iron, and steel products.”
It’s not just that China is using Vietnam and Mexico as a stopping point to get its goods to the United States. Many of the items that China exports to these countries are parts and components that are then assembled into final goods and sent to the U.S. market, meaning China ultimately will “continue to be a relevant player in the upstream stages of US supply chains” even if specific products have a Made in Mexico label.
The report also notes that China is increasing its own production capabilities in Vietnam and Mexico by opening manufacturing facilities in these two countries. Given the Chinese government’s penchant for running state-owned enterprises, this suggests Chinese leaders are working hard to maintain their hold on global manufacturing — along with dodging U.S. trade enforcement efforts.
“The upshot of this is that even though the US may be reallocating its sourcing and imports toward Vietnam and Mexico, it may de facto remain connected with and dependent on China through third-countries, including through Vietnam and Mexico,” Alfaro and Chor note. “These indirect supply chain links that the US may be retaining with China deserve closer investigation as more detailed data comes to light.”
That’s not to say that the work the U.S. has done to reshore production from China, especially in key sectors, isn’t working. In fact, the shift away from China is the result of purposeful policy choices — and some of those policy choices are paying off.
The tariffs placed on Chinese imports by the Trump administration have remained under the Biden administration, and that has “since started to tip many companies out of a ‘wait-and-see’ approach and prompted them to move their production out of China. Meanwhile, industrial policy like the Inflation Reduction Act and CHIPS and Science Act has shown the Biden administration’s “intent to bolster domestic manufacturing,” a policy direction “unlikely to change in the foreseeable future even past the next presidential election in 2024, given what appears to be bipartisan support for policies that support US manufacturing jobs.”
In their report, Alfaro and Chor examined four specific sectors: automobiles, automobile parts, electronics, and semiconductors, as they have been the sectors where policy has been focused on the past two years. All the sectors but auto parts saw employment increases between 2017 and 2022; it’s worth noting the auto parts sector was hit particularly hard by COVID-related supply chain shortages in 2022, and have begun to rebound.
“Overall, there are tentative signs of an uptick in manufacturing activity in several subsectors, particularly in semiconductors, although we should stress that this prognosis should be seen as a preliminary one: The developments and shifts in the US manufacturing sector are clearly ongoing, and what we are seeing are likely just the earlystage responses to the industrial policies introduced in the past two years,” the duo write.
What this paper suggests is that if the United States truly wants to decrease its reliance on imports from China, especially for goods critical to U.S. national and economic security, it can’t rely on “friendshoring” alone. China’s government is working hard to make sure its products continue to reach U.S. shores, from shipping them through third-party countries to setting up manufacturing facilities in these nations.
The only way the United States can guarantee our supply chains are secure is by increasing domestic production — and the good news is that the data shows the early work to do just that is starting to pay off. Now the United States must see it through by continuing to deploy industrial policy in critical areas to boost production and using trade enforcement mechanisms to stop those who seek to undermine America’s manufacturing capabilities.
It’s going to take a lot of work, and it is indeed a major shift away from the globalization status quo so strongly favored by much of America’s elite class. But it’s a shift that’s a long time coming, and one that is necessary to ensure the United States maintains its national and economic strength in the 21st century and beyond.