China's economic woes: An opportunity for U.S. manufacturing?

Reshoring will be very tough, but China's stumbles may make it easier.

During the 2000s and the early 2010s, the world economic system fell into a new equilibrium. China became the center of global manufacturing and of trade in Asia. U.S.-China trade became dominated by very large and persistent imbalances — roughly speaking, China shipped manufactured goods to the U.S. and the U.S. paid for these with a combination of agricultural products and IOUs. This system was sometimes called “Chimerica” — a pun that reflected the fact that it probably wasn’t sustainable. Here, via the Bank for International Settlements, is a picture of that change:

When Donald Trump came to power, he started trying to knock the world out of that equilibrium. The resulting trade war damaged the U.S. economy a little bit and damaged the Chinese economy a little bit more, but ultimately failed to change the basic pattern of trade. Meanwhile, efforts to bring manufacturers back to American shores had only limited impact. Then Covid came, and there was much talk of a ballooning U.S.-China trade deficit as Chinese factories came back online while U.S. factories were still idled by the pandemic. But in fact, nothing really happened. the U.S.-China trade deficit has bumped along at about the same level it’s been at since before Trump ever took office. At most you can see a slight downtrend, when adjusting for inflation (meaning a slightly shrinking deficit):

China’s trade surplus as a whole has grown since the start of the pandemic, but not to unprecedented levels:

And China’s ratio of exports to imports is about the same as it’s been since the mid-1990s.

All of which raises the question: Are trade patterns simply too big for governments to control? Is the structure of world trade basically fixed by geography, population, economic size, and other things that governments can’t easily alter, such that only the most ruinous extreme policies can shift the fundamental trends?

Maybe. But I think it’s far too early to jump to that conclusion. China’s economy, which looked like an unstoppable juggernaut just two years ago, is now being menaced by a perfect storm of negative shocks — a real estate crash, an industrial crackdown, and a “Zero Covid” policy that may not be able to deal with the highly contagious Omicron variant. And at the same time, U.S. manufacturing is undergoing a quiet but modest renaissance. The question is whether China’s difficulties present an opportunity for U.S. manufacturers to claw back some of the market share they’ve lost. It’s going to be an uphill battle, but the “Chimerica” relationship may not be set in stone.

China stumbles