The great reshuffle in global supply chains
Assessing China’s hidden trade with America.
- The great reshuffle in global supply chains by companies in China to get around US tariffs, is well underway. In fact, excluding China, the US trade deficit with the rest of the world has continued to increase to a near record high.
- The US has widening trade deficits with Mexico and Vietnam, but less well appreciated is the sizable deterioration in US trade positions with the next five countries: Canada, Taiwan, Ireland, South Korea and Thailand.
- We find evidence that the deterioration in US bilateral trade deficits with several countries has indirect links to China, or what some might call China’s hidden trade with America.
As the US presidential election approaches, one of the few mutual and bipartisan agreements between President Joe Biden and Donald Trump has been to be tough on China. Regardless of who wins the election, the US is expected to levy more tariffs on China, adding yet another layer to trade barriers against the Asian nation. While America did succeed in reducing its trade deficit with China by US$66bn since 2017, this has been more than offset by its trade deficits with the rest of the world swelling by US$400bn to a record high.
The great reshuffle
It is not that US trade barriers on China have had no effect. Rather, they triggered the great reshuffle in global supply chains by Chinese companies and multinational companies operating in China, proving just how agile they are at circumventing US tariffs. They redirected their production and trade by exporting intermediate products to other countries, where they were assembled and packaged before being shipped to America.
According to Nomura analysis, apart from rising US tariffs on China, the great reshuffle was also catalyzed by the pandemic, which suddenly revealed how vulnerable economies had become to breakdowns in the elaborate network of global value chains, with China being at the nerve center of these; the secular rise in geopolitical and climate change risks, which heightened concerns around national security and China being disproportionately affected, as it was at the center of the trade networks; and the marked downshift in China’s potential economic growth rate, which incentivized multinational companies to diversify their production bases.
China’s hidden trade with America
To analyze the great reshuffle in global supply chains, Nomura first looked at the drivers of America’s swelling trade deficit with the rest of the world excluding China. Unsurprisingly, the US’s deficit with Mexico surged the most, followed by Vietnam. There are also sizeable deteriorations with Canada, Taiwan, Ireland, South Korea and Thailand. There are no data that simply reflect how much of the deterioration in the US bilateral trade deficits is caused by Chinese firms or multinationals operating in China diverting their exports to a third country to be then exported to the US — what American politicians call China’s hidden trade with America. However, there are ways to obtain approximations.
One method is to assess the correlation between other countries’ exports growth to America and their imports growth from China. The economies with which the US trade balance has suffered the most – notably Mexico, Vietnam, Canada and Taiwan – are also among countries with the highest increases in imports from China.
The other method is to look at China’s outward foreign direct investment, or FDI. This is based on the hypothesis that, to bypass US tariffs, Chinese companies increase FDI spending to build manufacturing plants in other countries that export to the US. China’s outward FDI increased to US$377bn over 2017-22, a 22% gain from the 2011-16 period. Over the same five years, from 2017 to 2022, China’s FDI toward the 25 countries with which US bilateral trade balances deteriorated the most, rose to US$142bn, a much larger 87.4% gain from the 2011-2016 period.
Conclusion
Our analysis shows that the great reshuffle in global supply chains by Chinese companies and multinationals operating in China is well underway. No matter who wins the US election, the prospects are for even more US tariffs on China.
Slapping more tariffs, however, would likely only accelerate the great reshuffle. If America truly wants to reduce its trade deficit through tariffs, it needs to increase levies on all US imports regardless of origin.
For a more in-depth analysis, read our full report.
Contributor
Rob Subbaraman
Head of Global Macro Research
Yiru Chen
Macroeconomic Research Analyst
Vicky Chen
FX Strategist
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