By: Toh Han Shih
Attempts by the US, the world’s largest economy, to decouple from its strategic rival China, the world’s second largest, aren’t working and risk negative economic blowback against Indo-Pacific nations as goods are merely rerouted through friendlier countries, particularly Vietnam and Mexico, according to analysts at a recent hearing of the US-China Economic and Security Review Commission (USCC), which advises US Congress on US-China relations. As evidence, Mexico replaced China last year as the single largest direct-source country for US imports, accounting for 15.4 percent of US imports.
“The reduction in the share of direct imports from China does not necessarily imply that the US is now less reliant on supply chain partners that are ultimately headquartered in China,” testified Davin Chor at the conclave. “This is because Chinese companies have very noticeably upped their degree of engagement in Vietnam’s and Mexico’s economies.”
For many products shipped into Vietnam (respectively, Mexico) from China, said Chor, an associate professor of the Tuck School of Business at Dartmouth College, “there has also been strong growth in these same product categories in Vietnam’s (respectively, Mexico’s) exports to the US, raising the concern that what may be going on is just a re-routing of goods that are ultimately made in China.”
China’s exports to Vietnam were already growing at a fast 10.2 percent annually between 2013 and 2017, but increased even further to 11.5 percent between 2017 and 2023, Chor pointed out. “This trend is even more stark for China’s exports to Mexico: These grew at an annual pace of 5.5 percent between 2013 and 2017, and accelerated to 14.6 percent between 2017-2023.”
In Mexico, Chinese firms’ foreign direct investment (FDI) in the manufacturing sector grew fivefold from US$31.6 million in 2017 to US$151.5 million in 2022, Chor cited. China’s share in the total value of FDI into Vietnam rose sharply from 0.004 percent in 1999 to 7 percent in 2017, Chor added.
That Vietnam and Mexico have gained the most amid this reallocation in US import shares points to how US-based companies are engaging in more “friendshoring” and “nearshoring” from these locations, Chor added. Both countries have each seen their share in US imports rise around two percentage points between 2017 and 2023, Chor noted. Friendshoring refers to shifting supply chains away from China to countries which the US deems are friendly, like Vietnam. Nearshoring means shifting supply chains away from China to countries near the US, like Mexico.
Mexico and Vietnam experienced significant increases in their shares of US imports in various types of electrical and electronic equipment: in the case of Vietnam, these were microphones, electric generating sets, and telephone sets, while in the case of Mexico, these were discs, tapes and storage devices and calculating machines, Chor noted.
US tariffs on Chinese goods
Another facet of the decoupling is tariffs on Chinese goods imported into the US following then-President Donald Trump’s move to slap tariffs on US$250 billion of Chinese goods imported into the US. On 1 August 2019, President Trump announced 10 percent tariffs on another US$300 billion in Chinese imports. Trump’s successor Joseph Biden continued that practice. On May 14, Biden announced more tariffs on Chinese goods, including a 50 percent charge on semiconductors made in China as well as a 100 percent tariff on Chinese electric vehicles.
“The prices are unfairly low because Chinese companies don’t need to worry about a profit because the Chinese government subsidized them and subsidized them heavily,” Biden alleged. “And the Chinese rely on other anticompetitive tactics as well, like forcing the American companies to transfer their technology in order to do business in China…. It’s not competition. It’s cheating. And we’ve seen the damage here in America.”
“The 2018-19 trade war undoubtedly reduced the US reliance on China both as an import source and an export destination. In its place, the US increased its trade with other exporters, notably Vietnam, Taiwan, and Mexico,” said Mary Lovely, a senior fellow of the Peterson Institute for International Economics, a US-based international economic research organization, in her testimony at the USCC hearing.
“While bilateral trade with China appears to be diminishing, there is little evidence that China’s place in global supply chains is being dislodged. The evidence shows that China maintains its dominant share of global manufactured goods exports; third countries have raised the share of their imports from China in pace with their share of the American market; and it is likely that some transshipment of exports from China to third countries is occurring,” said Lovely.
Chinese goods fell from 21.6 percent of US total import value in 2017 to 14 percent in 2023, Lovely acknowledged. Nevertheless, China has been able to quickly reroute its exports, and its share of global exports reached 27 percent in 2021 and 2022, she pointed out. “Third countries have raised the share of their imports from China in pace with their share of the American market.”
Almost all middle-income countries in the Indo-Pacific region have increased their reliance on Chinese intermediate goods imports since 2010, Lovely said. “The upshot is that as the US relies more on alternative trading partners, it continues to rely on China because of the intermediate goods these countries use to produce the goods they ship to America.”
An additional explanation for China’s ability to maintain its weight in global supply chains may be rerouting of exports to third countries for transshipment to the US,” Lovely continued. “The level of such transshipment is not known, but it is consistent with trends in Southeast and South Asian imports from China that track trends in these countries’ exports to the US.”
“Many of the actions taken by the US against China have also had unintended consequences for the rest of the region. Tariff rate hikes against Chinese imports … also affected trade between the region and China and from the region to the United States,” testified Deborah Elms, head of trade policy at the Hinrich Foundation, an Asian organization which promotes global trade. “While some countries like Vietnam benefitted from supply chain changes driven by tariff escalation, the short-term dislocation has caused challenges for many firms in the region, including US firms operating in the region.”
A 25 percent tariff hike for finished electronic products from China can affect suppliers across the Indo-Pacific region, Elms warned, adding that nearly all Indo-Pacific nations have very high trade links to both the US and China. “For most of the Indo-Pacific, in fact, trade in goods is increasingly dominated by bilateral flows to China and not to the United States.”
She cited Indo-Pacific nations which do more merchandise trade with China than the US, including Australia, Brunei, Indonesia, Malaysia, Philippines, Singapore, Vietnam, and New Zealand. For example, Australia exported nine times more to China than to the US in 2023, while importing twice as much from China as the US.
“The assessment of the threat posed by China is simply different in the region (from the US),” said Elms.
Toh Han Shih is chief analyst of Headland Intelligence, a Hong Kong risk consultancy