'Avoid China'? American companies: Tough!

Under intense pressure to reduce dependence on China, American companies are increasingly turning to factories in places like Vietnam, Indonesia and Mexico. Yet many find it hard to avoid China.

Trade data, corporate announcements and new academic studies show that a significant portion of the products shipped to the United States from places like Southeast Asia and Mexico are made in factories belonging to Chinese companies. These companies are expanding overseas, in part to avoid U.S. tariffs.

Other countries produce goods that use key ingredients from Chinese suppliers, meaning they simply could not be made without Chinese participation.

These realities underscore the challenges facing policymakers and companies as they seek to separate the United States from China's vast manufacturing machine. Some of the supply chains connecting the United States and China have not decoupled at all, but simply added a link or two, adding complexity and cost.

A study published in October by the Bank for International Settlements found that supply chains between the US and China have become more complex since 2021 as more trade moves through other places. However, many of the goods supplied to the United States still originate in China, meaning there has been limited progress in diversifying.

"We have to acknowledge that there is a continuing interdependence," said Frederic Neumann, chief Asia economist at HSBC.

Since 2018, Washington has imposed tariffs on hundreds of billions of dollars' worth of Chinese goods, from shoes to chemicals, as part of a broad effort to reduce America's dependence on China. From Apple to Tesla, American companies have moved some production out of China or encouraged suppliers to follow suit.

Economists say the moves could help reduce U.S. dependence on China for some products, such as consumer electronics and furniture. They also spur investment in American manufacturing, which creates new jobs for Americans.

But a closer look at the available data reveals a more complex picture: Some parts of the US and Chinese economies are breaking away, while others are not. In some cases, economists say, U.S. policies are triggering supply-chain adjustments that effectively lock in greater reliance on Chinese suppliers.

In a September report, Rhodium Group said the growth in U.S. imports from Mexico and Vietnam over the past five to seven years has closely matched the growth in Chinese exports to those markets.

China's push into smaller countries could raise costs for other industries as more links are added to the production process, economists say.

If tensions between Washington and Beijing continue to escalate, continuing to rely heavily on China - even if final products are assembled elsewhere - could expose some US companies to further business risks.

A study late last year by German research firm Allianz found that China is a key supplier of 276 goods to the United States, including consumer electronics, household equipment and chemicals. Allianz Research said these products accounted for 1.3% of U.S. gross domestic product (GDP), up from 0.7% in 2018 and 0.4% in 2010. The study also found that the United States is the key supplier of just 22 goods to China today, worth 0.3 percent of China's GDP.


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