Clearly, U.S. businesses and Washington want to decouple from China, if not entirely, then to a greater degree than in the past.
The Biden administration has focused on national security and the pressure of important interest groups. Business has its own reasons. The efforts at decoupling are, however, proving to be more difficult than either player expected or hoped.
Apart from narrow interest groups, Washington, as it should, wants to thwart Beijing’s ambition to rival this country on economic, diplomatic, and military levels. To lessen U.S. dependence on Chinese imports and production generally and to promote domestic U.S. sources of economic strength, President Joe Biden, in contradiction to his campaign promises, has kept in place the Trump tariffs on Chinese imports first put in place in 2018 and 2019.
The White House has also forbidden the export of advanced semiconductors to China and limited the extent to which Americans can invest in Chinese technology. President Biden has also denied electric vehicle tax credits to any car constructed in China or containing a significant proportion of Chinese parts. Beyond these specifics, Washington wants to limit the vulnerability of the U.S. economy in general should Beijing limit exports of vital products, as it did during the COVID-19 pandemic and even afterward under its zero-COVID policy.
U.S. businesses share some of these concerns but emphasize their decoupling motivations differently. A big one centers on the question of cost. For some decades after China first opened to the world in the 1970s, low production costs were a big reason to source in China and build production facilities there. But for some time now, Chinese wages have risen more rapidly than elsewhere in Asia and Latin America. China has ceased to be a low-cost place, and that important consideration has become a major factor impelling businesses to consider decoupling.
Reliability is another issue. Earlier, China was considered supremely reliable, respectful of contracts, and timely in delivering. During the pandemic, however, and for a long time afterward, Chinese producers failed to deliver in designated amounts or on time under Beijing’s zero-COVID measures. Moreover, during the COVID-19 pandemic emergency, Beijing banned the export of certain critical products, notably medicinal inputs and surgical masks. Even if these failures are understandable, U.S. businesses want to avoid such problems in the future. Still, more recently, Chinese leader Xi Jinping’s obsession with national security has made it more difficult for foreigners to operate in China.
On the surface, it appears as though these shared interests are making significant progress. According to the U.S. Census Bureau, Chinese products amounted to 22 percent of all U.S. imports in 2017, whereas so far this year, they amounted to only 13 percent. But these otherwise striking figures disguise some practical difficulties with the decoupling effort.
The problem is that Americans—when moving their sourcing to Vietnam, Indonesia, or even Mexico—are discovering that the best facilities there are often Chinese-owned. It seems that when the Trump administration first imposed tariffs, many Chinese firms set up facilities in other countries to avoid the levy. Direct Chinese investment in Southeast Asia rose, for example, from the equivalent of some $7 billion in 2013, before the tariffs went into effect, to some $20 billion in 2022, the most recent period for which complete data are available.
Now that U.S. businesses are investigating alternatives to China, they’re finding out that the best options in Vietnam, Indonesia, or elsewhere have this Chinese link. Despite the Chinese ownership, the products of these firms show up in the Census Bureau accounting not as Chinese exports but rather from the host country. To be sure, ownership matters little in finding economic relief from China’s rules and efforts to thwart U.S. economic advantage. However, it does matter a lot if these Vietnamese, Indonesian, or whatever facilities require Chinese-produced inputs, as is often the case.
In time, U.S. efforts at decoupling will overcome these impediments. As is apparent from buying and investment trends, as well as attitudinal surveys, U.S. businesses’ desire to diversify away from China has staying power. U.S. companies will continue for some time to move away from sources that retain a Chinese dependence. Meanwhile, facilities in these other countries—even those that are Chinese-owned—will, as they become more sophisticated, depend less on Chinese sources.
For the time being, however, the great decoupling about which so many talk—in Washington and business circles—will run a little less smoothly than either Washington or businesspeople would like.
