Decoupling supply chains ‘necessary’ as US-China tensions continue

The US and China has been locked in a trade war, but supply chains keep the countries reliant on each other.

Eve Thomas June 07 2024

The golden era of globalisation is over, and a new emphasis on reliable supply chains is pushing a trend of self-reliance in the US and China, a new report has outlined.

GlobalData’s Geopolitics in Retail & Apparel report identifies a shift in US and Chinese priorities as a defining factor for global industries.

Highlighting the risks that are disrupting supply chains globally, it notes: “In the past, businesses and investors could largely ignore geopolitical events. That is no longer the case. Since 2019, the global economy has faced significant disruptions and will continue to do so in a world increasingly driven by geopolitics.”

US-China relations

the report refers in particular to the rivalry characterising US-China relations, as the countries vie for political, economic and military influence. China has seen massive economic growth since 1978 (when it began to reform its economy), and much of this is attributable to globalisation, as the lure of cheap and rapid production saw the country benefit from substantial foreign direct investment (FDI).  

Since then, competition has driven a trade war between the two countries. In 2019, the Trump administration placed a 25% tariff on $200bn worth of Chinese goods – an increase from the original 10%. Retaliation was swift, and China raised tariffs on $60bn worth of US goods.

More recently, current US President Joe Biden announced tariffs of $18bn on Chinese electric vehicles, batteries and computer chips. However, Donald Trump has plans for much bigger measures should he be re-elected for a second term. He announced this week that his administration would place a 60% tariff on all $427bn worth of goods imported from China annually.

Of the escalation, the report comments: “Originally, sanctions were justified by the US as a national security concern. With Chinese foreign policy being highly reactive, this led to a tit-for-tat trade war with more sanctions ensuing as the Uyghur genocide, Hong Kong protests and the Russian invasion of Ukraine deepened ideological differences.”

However, priorities are shifting, and neither country can afford to put “tit-for-tat” competition in the spotlight anymore. Instead, “domestic pressures in both countries will force foreign policy to take a backseat in 2024”, according to the report.

Decoupling supply chains

In looking to strengthen their own economies, the next chapter in the US-China trade war will be played out closer to home, as uncertain disruptive factors (including climate change, shifting demographics and widening geopolitical fractures) threaten to destabilise supply chains.

To avoid disruption and uncertainty (and to weaken the opposition’s standing), China and the US are both turning to domestic markets.

The report notes: “Optimising production costs remains important, but the new order places a higher weight on security and resilience. The fragmentation of US-China relations has bifurcated supply chains and incentivized retailers to reshore closer to domestic markets.”

For China, this new direction has been sparked by the need to focus on a new economic model, as its economy continues to experience sluggish domestic growth, with the ongoing real estate debt crisis causing deflationary pressures.

Meanwhile, the US is likely to look at moving manufacturing closer to home. It won’t be a straightforward task, and the report warns that a complete decoupling of the supply chain is “unrealistic”, noting that “in 2023, US-China trade still ran to $575bn, albeit this figure was 16.7% down on 2022, according to the US Census Bureau.”

It points to the likely adoption of a China Plus One business strategy, already employed by several retailers, involving the continuation of Chinese operations whilst other low-cost manufacturing opportunities are identified. For example, Apple’s Chinese operations have continued, but assembly lines in Vietnam and India have also been established.

The report adds: “Compliance with new laws and streamlining business operations across multiple locations make decoupling a long and expensive process, but a necessary one. Retailers must build supply chain resilience by diversifying and shortening supply chains closer to their customer and product bases. Doing so will minimize the impact of future supply chain disruptions and additional costs to consumers.”

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