Tariffs on Chinese imports imposed by the Trump administration have sparked discussions about the potential impact on international trade patterns. The key question has been whether these tariffs would lead to a decoupling of the United States from China, or if they would simply result in higher prices for American consumers. After a couple of years, we are now starting to see some detailed reports that shed light on this issue.
Price mechanisms, such as tariffs, work by increasing the cost of imported goods, thereby prompting companies to explore alternative sources to meet American demand. This could involve shifting production to other countries that do not have tariffs, giving them a price advantage. In some cases, this could lead to manufacturing returning to the United States, while in other cases, it may result in a shift to countries like Mexico and Vietnam.
There are a few specific concerns regarding the U.S. tariffs on China. Firstly, there is the worry that U.S. consumers would have to accept higher prices for Chinese imports if production cannot be moved to other countries. However, there is little evidence to support this concern. The Federal Reserve reports that the Chinese import price index for the United States actually fell after the imposition of tariffs in September 2018 and has remained lower than before the tariffs were implemented.
Secondly, there is the question of whether only the final assembly of products would be shifted away from China, while the components and inputs still come from China. If that were the case, there would be very little decoupling. However, data suggests that there are real shifts in supply chains occurring, with global manufacturers seeking to diversify their supply chains and find lower-cost manufacturing options due to rising costs in China.
On the other hand, Chinese firms have been avoiding tariffs by engaging in various behaviors to evade the “made-in-China” stigma and associated tariffs. For example, Chinese investment in Vietnam surged after the imposition of tariffs. While other countries like South Korea, Taiwan, and Japan remain major investors, Chinese firms are clearly increasing their presence in Vietnam to avoid tariffs.
Furthermore, there are certain products, such as computers and semiconductors, that appear to have high rates of transshipment. This means that goods are imported from China and then exported to the United States with minimal or no work done on them, allowing them to avoid tariffs. Given the specialized nature of these products, it is not entirely surprising that manufacturing is harder to move. However, given national security concerns related to Chinese electronic goods, the United States should focus on building resilient electronic supply chains that are not reliant on China.
To fully understand what is happening and effectively decouple from China, it is essential to define decoupling. Europe has emphasized the concept of derisking, but the exact definition of risk in relation to Chinese products remains unclear. Completely severing trade ties with China is unrealistic, considering its significant share of global manufacturing output. Instead, the United States needs to identify sectors and products where it needs to reduce reliance on Chinese suppliers.
The United States should prioritize sectors that pose security risks or have excessive concentration, such as electronics. Unauthorized access and data collection in this sector can present significant national security risks. Conversely, sectors like garment and textile imports from China do not pose such risks. The current approach targets specific firms rather than sectors or industries.
Once the United States has identified the sectors to target, it should collaborate with allies and provide incentives for firms looking to shift production away from China. While some manufacturing is returning to the United States, a significant portion of the work is shifting to other low-wage countries like Mexico and Vietnam. However, it is crucial that these countries do not simply become manufacturing centers for Chinese firms. The United States needs a comprehensive plan to encourage the relocation of targeted products away from Chinese control.
In conclusion, while the United States is experiencing some degree of decoupling from China, there is still more that can be done to expedite this process and enhance national security. By focusing on specific sectors, incentivizing countries and firms, and promoting diversification of supply chains, the United States can further reduce its reliance on China and ensure a more resilient and secure trade environment.
