Hasty divorce from China not the right path to US economic resilience
- A US House select committee report calling for higher tariffs on Chinese goods underlines the prevailing bipartisan mood in Washington
- While it makes sense for the US to broaden its supply base beyond China, the disruptions in the Red Sea have shown that alternative locations must be chosen with care
A McKinsey Global Institute study found that, even in labour-intensive industries, Chinese worker productivity outstrips India’s by a significant 20-30 per cent. This translates to higher production costs and slower turnaround times, potentially negating the cost savings sought by shifting away from China.
For example, in 2021, Vietnam imported US$110 billion of goods from China and exported US$96 billion of goods to the US, suggesting that much of what Vietnam imports is intended for export to the US. As of June last year, Vietnam continued to rely on imported parts from China to produce electronic products for the US. This intricate interdependency exposes any “China-plus-one” strategy to the same vulnerabilities the US seeks to escape.
After experiencing attacks in the Red Sea in December, shipping giants such as Maersk and Hapag-Lloyd rerouted their container ships by suspending the quickest path between India and the US east coast through Egypt’s Suez Canal, and taking the longer Cape of Good Hope route around southern Africa.
Using this alternative route is safer, but it creates other supply chain disruptions. For instance, several European firms, including Sweden’s Ikea, have warned of delays on some products due to supply chain disruption.
This alternative route lengthens the shipping time between India and the US’ east coast by several days. The reduction in shipping capacity, which could be as much as 20 per cent, would increase the cost of shipping significantly. For example, French shipper CMA CGM increased its charges by US$500 for a 20ft container between Asia and Europe.
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Yemen’s Houthi fighters behind Red Sea attacks threaten to disrupt global trade
Amid the Israel-Gaza war, it is unclear when Houthi attacks in the Red Sea will end. In January, Maersk and Hapag-Lloyd both reported that they have not entered any agreements with Iranian-backed Houthi militants to prevent their ships from being attacked in the Red Sea.
However, a senior official of the Iranian-backed Houthi terrorist group said that the shipping lanes around Yemen are safe to ships from China and Russia, as long as the vessels are not connected with Israel.
Such disruptions, not to mention broader regional conflicts, can quickly unravel carefully constructed supply chains, exposing the importance of diversification. As such, severing ties completely with China is unwise, especially when the passage between China and the US over the Pacific Ocean has always been safe in the political sense.
Examples abound of successful diversification efforts. In 2022, Dell reportedly said it would move at least 20 per cent of its production of laptops to Vietnam. Apple was reportedly considering shifting 18 per cent of its global iPhone production to India.
For critical products, reshoring some production is sensible. Intel is building new semiconductor plants in Ohio and Arizona. Also, pharmaceutical giants like Pfizer and Merck are building new production facilities in the US, showcasing the potential for domestic reshoring. These incremental steps – coupled with measures to make the supply chain more robust, like stockpiling critical materials and developing alternative transport networks – pave the way for a more resilient economic future.
Establishing a balanced trade relationship with China requires a keen awareness of the risks and opportunities. Diversifying its supply base can secure the US’ economic future while navigating the intricate geopolitical landscape of the 21st century.
Christopher Tang is a distinguished professor at the UCLA Anderson School of Management