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U.S.-China Economic Dynamics: Navigating the New Normal

By 17 June, 2024No Comments

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The U.S.-China trade war, initiated in 2018, has significantly impacted their economic relationship, heightening concerns about deglobalization. This ongoing conflict, fueled by trade disputes, supply chain challenges, and geopolitical competition, has created a landscape of tension and complexity. Despite these challenges, the trade relationship remains robust, highlighting a nuanced dynamic where economic interdependence persists amid political rivalry. This article explores the current state of U.S.-China trade, supply chain realignments, and the strategic approaches multinationals are adopting to navigate this evolving landscape.

Trade Relationship Overview

The U.S.-China trade relationship has experienced significant fluctuations over the past decades. In 2023, China was the fourth-largest U.S. goods trading partner, with total trade amounting to $575 billion. China was also the fourth-largest U.S. export market ($147.8 billion) and the second-largest source of U.S. imports ($427.2 billion). Notably, Mexico’s exports to the U.S. reached $475.6 billion in 2023, surpassing China’s exports for the first time in 20 years, highlighting a shift in trade dynamics. As Mexico’s share of U.S. imports grows, there could be a relative decline in China’s share. This shift might impact China’s economic influence over the U.S. and could lead to a rebalancing of trade relationships.

Looking into the figures, U.S. goods imports from China dropped by 20.3% 2023 after reaching a record high the year before, meanwhile the exports to China decreased by 4.0% year-on-year. The ongoing tariffs and trade restrictions imposed during the U.S.-China trade war continue to affect bilateral trade, causing disruptions and a shift in trade patterns, with businesses becoming more cautious due to increased political and economic tensions. Trade with China fell for products that have high tariffs, like screwdrivers and smoke detectors, but trade in products that do not have tariffs, like hair dryers and microwave ovens, continued to grow.

Graph showing U.S.-China Goods Trade (2013-2023, billion USD)On the other hand, the services trade between the United States and China is a crucial component of their economic relationship, despite broader tensions and challenges in goods trade. In 2022, U.S. exported 41.8 billion USD in services to China in 2022, a 6.2 % increase from the year prior, but still below the level before the COVID-19 pandemic. Education, business management, software services, ocean freight and port services are top service sectors exported to China. The robustness of U.S. service exports to China is driven by China’s rising middle class, increasing demand for higher-quality services from the market, plus the high quality and innovation of U.S. services.

Graph showing U.S. Services Export to China (2013-2022, billion USD) Tariff is playing a significant role in shifting the locality of trade away from China. But some data shows that when it comes to those strategically important technological products from China not tariffed, China’s exports to the United States remain robust, in the advanced technology products (ATPs) including biotechnology, life science, information and communications, electronics, flexible manufacturing, advanced materials, aerospace, weapons and nuclear technology. From 2016 to 2023, China’s high-tech exports to U.S., excluding tariffed products, have grown from 109 to 129 billion USD, holding a prominent position compared with other countries like Vietnam and Mexico. U.S. imports of life-saving pharmaceutical drugs from China rise dramatically due to local production capacity constraints.

Supply Chain Realignments

In recent years, there has been a significant trend towards diversifying supply chains, aiming to reduce excessive reliance on the Chinese market and enhance resilience and flexibility. This shift is driven by concerns over tariffs, geopolitical risks, and strategic competition. For example, companies like Apple have started to diversify their manufacturing locations by moving some production to Vietnam and India, seeking to mitigate risks and build more robust supply chains.

Driven by concerns over tariffs, geopolitical risks as well as strategic competition, both the U.S. and China are focusing on securing supply chains for critical technologies and industries. The U.S. has implemented export controls and provided incentives for companies to relocate operations domestically or to allied countries. Meanwhile, China is investing in domestic production capabilities to reduce dependency on foreign technologies and inputs. ​

Under those shifts influenced by factors such as intellectual property protection, cost efficiency, market proximity, and regulatory environments​, foreign multinationals start to reassess the role China plays in their supply chains and consider “China+1” strategy, which is to maintain some production in China while diversify to other regions to mitigate risks. Countries like Vietnam, Mexico, and Taiwan have emerged as key beneficiaries of this realignment, capturing significant market share previously held by China in sectors such as electronics and apparel​.

Though the United States is lessening its reliance on China, Mexico and Vietnam have been importing more products from China, and Chinese direct investment into those countries has surged. This is a trend that companies are moving the last steps in their supply chains out of China, and using countries like Vietnam or Mexico as staging areas to send goods that are still partly made in China into the United States. In other cases, though shifting parts of manufacturing into other countries, some companies continue sourcing raw materials and parts from China. There may exist a significant portion of the value created in China but not shown in U.S. trade statistics.

To sum up, the U.S. moving the last steps of supply chains out of China and using other countries as staging areas has profound economic and geopolitical implications. Relocating supply chains can increase U.S. influence in regions like Southeast Asia and Latin America but reduces dependence on China. As U.S. companies relocate their manufacturing operations from China to Mexico, the volume of goods imported from China is likely to decrease. To some extent, this diversification can enhance resilience against disruptions caused by geopolitical tensions or tariffs, also to foster new strategic alliances and reshape global trade patterns. On the other hand, it presents challenges related to transitioning costs, quality control, and regulatory compliance when building new supply chains in other regions.

Competition vs. Cooperation

The Biden administration has maintained a tough stance on China, emphasizing strategic competition rather than decoupling. In the areas of climate change and global health, both are also seeking opportunities for cooperation. To address various aspects of the climate crisis, their collaboration is detailed in the “Sunnylands Statement on Enhancing Cooperation to Address the Climate Crisis,” which outlines several key areas in power sector emissions, non-CO2 greenhouse gases, carbon capture and storage, etc. In long-term health initiative, programs such as the US-China Healthcare Cooperation, seeks to leverage the strengths of the healthcare industries in both countries, plus to offer healthcare training programs and enhance public health infrastructures.

Technological rivalry is likely to become a central theme in the US-China economic relationship. with two nations investing heavily in their own tech sectors to reduce reliance on each other. The U.S. has taken steps to restrict China’s access to critical technologies such as semiconductor and software, while China pushes for self-sufficiency in critical technologies through strategic policies.

Regarding strategic shifts, the two countries are increasingly looking to assert their economic and strategic interests globally, with China enhancing its influence through investments in global infrastructure and the U.S. focusing on reinforcing alliances and partnerships through initiatives in other regions such as the Indo-Pacific Economic Framework, to counter China’s growing influence. The 2024 U.S. presidential election is poised to significantly influence U.S.-China relations across multiple dimensions: it may harden the competitive aspects of U.S.-China relations while maintaining selective cooperation in areas of mutual interest.

The future of U.S.-China relationship will see a blend of rivalry and cooperation, shaped by broader geopolitical and economic trends. Navigating this complex landscape will require balance domestic priorities with international dynamics, making the future relationship fluid and multifaceted.

Strategic Approach

In the face of the complex and evolving U.S.-China relationship, multinational corporations find themselves at a crucial juncture, tasked with reevaluating their strategies for growth in China while navigating the uncertainties and challenges inherent in this dynamic environment.

It is imperative to recognize that despite the heightened strategic competition between the U.S. and China, particularly in areas such as technology and global influence, the two countries remain economically interdependent. For instance, though expanding production in Southeast Asia and India, Apple remains heavily reliant on Chinese manufacturing for its products. Since 2020, Chinese suppliers have become the largest group within Apple’s supplier network, growing to 52 in 2023 from 48 in 2022. In aviation industry, Boeing continued to play a significant role in China last year. Despite geopolitical tensions, China’s demand for aircraft to support its growing aviation industry remains high.

While trade between them may have slowed amidst global uncertainties, it has not collapsed entirely.

Managing Risks

Managing risks effectively emerges as a core priority for businesses operating within this geopolitical landscape. This entails a comprehensive approach that involves:

  • Geopolitical Risk Assessment: Multinationals must conduct thorough assessments of geopolitical risks, considering factors such as trade tensions, territorial disputes, and diplomatic relations. Understanding the geopolitical landscape allows businesses to anticipate potential disruptions and adapt their strategies accordingly.
  • Regulatory Changes: Given the fluid nature of regulations in both the U.S. and China, companies must stay vigilant and agile in response to regulatory changes. This involves closely monitoring policy developments, engaging with relevant stakeholders, and developing contingency plans to mitigate the impact of regulatory shifts.
  • Contingency Planning: Developing robust contingency plans for various scenarios, such as increased tariffs or sudden regulatory changes, is essential for maintaining operational resilience. This may involve diversifying supply chains, reallocating resources, or renegotiating contracts to minimize disruptions and mitigate potential losses.

Strengthening Supply Chain Resilience

Enhancing supply chain resilience emerges as another critical aspect of navigating the U.S.-China relationship. Multinationals can adopt several strategies to bolster the resilience of their supply chains:

  • Reviewing Global Production Network: Multinationals should conduct a comprehensive review of their global production network to identify vulnerabilities and areas for improvement. This may involve assessing the concentration of manufacturing operations in China and exploring opportunities to diversify production locations to mitigate risks.
  • Local Sourcing and Manufacturing: For companies that produce goods in China primarily for the domestic market, increasing local sourcing and manufacturing can enhance cost-effectiveness and competitiveness. By reducing reliance on imported components and materials, these companies can minimize the impact of tariffs and trade disruptions.
  • Diversifying Suppliers: Companies that produce goods in China for the global market can explore strategies to diversify their supplier base. This may involve sourcing new suppliers in other regions to reduce dependence on Chinese suppliers and mitigate risks associated with regulatory uncertainties.
  • Supporting Supplier Expansion: Multinationals can also support their China-based suppliers in expanding into other geographies, thereby diversifying their production capabilities and reducing exposure to regulatory risks. This may involve providing financial assistance, technical expertise, or strategic guidance to facilitate supplier expansion initiatives.

By implementing these strategies, multinational corporations can adapt to the evolving U.S.-China relationship, mitigate risks, and position themselves for sustainable growth in this complex geopolitical landscape.

Emerging Trends & Outlook

Looking ahead, emerging trends indicate a continued blend of rivalry and cooperation in U.S.-China relations. Geopolitical and economic dynamics will shape this relationship, with both countries navigating challenges such as technological competition, supply chain realignments, and global health crises.

While trade and technological ties may face challenges, the economic interdependence between the two nations suggests that a total severance is improbable. There are also areas where the U.S. and China have found common ground like climate change, high education and health security.

Based on the analysis, multinationals should keep a close watch on economic indicators and trade statistics to gauge the health of both economies and make reasonable strategic decisions. It is of vital importance to continuously monitor and adapt to the evolving U.S.-China economic landscape, so they can better position themselves for long-term success in an uncertain global environment.

The strategic recommendations mentioned earlier are crucial for multinationals operating in the complex U.S.-China economic environment. Comprehensive risk evaluation and management, supply chain resilience enhancement can help companies navigate the challenges and leverage opportunities in this dynamic landscape. By adopting a proactive and strategic approach, multinationals can maintain their competitive edge and continue to thrive in both the U.S. and Chinese markets, ensuring long-term success and stability.

Read more about our sourcing & supply chain expertise or our wider financial advisory & strategic solutions.


Trade Relationship Overview

Supply Chain Realignments

Competition vs. Cooperation

Strategic Approach

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