Even if its exact form evolves, entrenched Sino-US interdependence will ultimately be difficult to unpick.

Trade war meets friend-shoring

China’s appeal as an export-orientated manufacturing base has been declining, especially for the most wage-sensitive industries. By early 2021, the number of foreign manufacturing companies in China had declined 24% from the 2014 peak to 43,700.³

China has long since passed the point where its primary advantage is cheap labor. As the economist Michael Pettis has argued, China’s competitiveness lies more in its costs relative to productivity, rather than absolute cost base.⁴ A proliferation of direct and indirect subsidies has sustained this relative advantage for industries higher up the value chain.

The upshot is that additional incentives or indeed disincentives are going to be required to engender a more radical shift in the composition of US supply chains. Former President Trump’s imposition in 2018 of tariffs on Chinese exports epitomized the trend. Tariffs were progressively expanded to cover almost all Chinese exports.

Still, some firms were initially on the fence about moving production out of China. However, the exogenous shock to US supply chains caused by COVID-19 further shifted the dial towards a more interventionist economic policy to re-shore US production.

President Biden has ignored calls for Trump’s tariffs to be rescinded. The revival of US industrial policy, coupled with persistent exhortations for US business to “friend-shore”, the Biden administration’s moniker for the policy to push corporate relocation to “friendly” nations, has put to bed any doubts about the prevailing tenor of US economic policy.

Supply chain reconfiguration in motion

There has been an abundance of data-based evidence on the relocation of supply chains out of China to evade US sanctions and tariffs from 2018 onwards.

Though global trade has continued to grow in value, in part in recent years due to inflationary commodity prices, China’s share of US imports peaked at 21.6% in 2017, dropping to 16.7% by 2022, and to just 14.6% in the 12 months to July 2023.⁵

China’s apparent “loss” has been Vietnam and Mexico’s gain. Across 2017-2022, Vietnam increased its US import market share from 2% to 4%. From 2017 to July 2023, Mexico’s exports grew 1 percentage point off an already high base to 15%, making it the largest source of US imports.⁶ Mexico’s manufacturing exports to the US have boomed, growing 26% from US$320 billion to US$402 billion across 2020-2022. The US now absorbs around a quarter of Vietnamese exports.