I continue to think that the future of world trade is robust, and its shape will surprise us.
By the logic of this piece, one day China will decouple from China. The things that used to be done in China will be outsourced to cheaper venues.
In a similar way, there was a time when the US steel industry led the world, but the US decisively decoupled from its own steel industry, turning to cheaper sources.
Basic idea: Nothing stands still in a capitalist world economy, but the whole almost always grows.
There is an assumption (mostly it seems by US-based commentators) that just because there may indeed be decoupling (even accounting for the 'redwashing' of trade via Mexico, Vietnam etc) between the US and especially China, there is decoupling happening globally. No. Trade is growing and not only between China and the rest of the world but between and amongst multiple other third parties. That the US is being de-emphasised in the pattern of world trade (especially in the non-carbon part of that trade) is not in and of itself concrete evidence of "deglobalization". Perhaps what we are seeing instead is "reorientation", the return of global trade to being centred on Asia?
The article seems right about the facts, but a bit wrong-headed about what we should want. Robust trade with China makes war or less likely. War with China would be very bad. We shouldn't celebrate the death of "Chimerica." We should try to reverse it if we can.
Something else I notice is that Japanese exports have risen sharply. A good 30% in yen terms since precovid 2019
This is the sort of thing you would expect to see if Japanese companies are reshoring some of the production they outsourced to the PRC. I note that during the covid supply chain issues there was considerable talk of Japanese companies onshoring things. There have also been a number of announcements of new electronics related factories being built in Japan by companies like Murata
I haven't followed this for a long time, but to what extent is the fall in China's inbound FDI a natural development, not necessarily deliberate decoupling?
If I'm not mistaken there was a period around the turn of the century when China's capital account was fairly balanced: huge amounts of FDI flowing in while the People's Bank of China pumped it back out again by purchasing Treasuries and building up sovereign reserves.
China has a very high savings rate and has never needed foreign capital as such. What they needed was foreign expertise and technology. You could argue that at a time when China didn't have much domestic technical capacity, the undervaluation of the yuan was a very effective policy for sucking in FDI. (I think Yasheng Huang made a similar argument in one of his books.)
That's no longer the case, so it should be possible for China to invest domestic savings in export industries without having to round-trip the money. So to what extent does a fall in FDI (not matched by a fall in exports) really reflect decisions made by western governments and companies?
The data is bad - and probably always will be . But the thesis is correct . The trend is a decoupling . However , even that can change. Just seeing Presidents Xi and Biden in SF might produce some goodwill.
Excellent article. I know it’s anecdotal but most of the companies I talk with are actively diversifying their supply chains so as not to be so reliant on China. But, as you point out, it takes time. One company I met with is opening its first production facility in North America...within three years. We’ll see trade data gradually reflect decisions that have been made over the last year. Folks like Robin Brooks haven’t grasped that Xi’s Zero Covid policy and other policies severely impacted companies outlooks because of the production disruption they caused. It was one thing if Xi was imprisoning over a million Uyghurs, arresting human rights activists and cracking down on what had been a burgeoning feminist movement in China. But when his policies affected production? That was a bridge too far for companies and they have been adjusting accordingly.
I kind of suspect this sentence captures what is occurring with folks who claim decoupling is not happening..."Or perhaps they see the West’s push for decoupling as a threat to peace and stability in the world, and they want to declare it a failure so we can all go back to the world of 2015."
Anyone who looks at the FDI numbers would have to be pretty blinded not to see that money is going elsewhere. People are not going to instantly stop buying things or magically create the capacity to manufacture them elsewhere. Also, given Chinese labor costs and demographics this was going to happen to some degree regardless of geo-politics...there simply are not enough Chinese anymore.
Noah, suppose you were engaged by the Chinese government to advise them on economic matters, and whatever you told them would indeed be implemented (a fantasy, yes, but please run with it). I have no idea what you would tell them, but I suspect that you would advise them to avoid war at all costs, since in no war scenario would the Chinese economy prosper (am I right about that?). What would be your argument for leaving Taiwan alone for a few more decades and to begin to behave as an honest competitor in the world economy?
Looking at the chart within Robert Brooks's tweet, just focusing on Mexico, it looks like from the dotted vertical line onwards, Mexico's exports to the US rose by ~$60bn, while Mexico's imports from China rose by a bit over $20bn, so unless Mexico is grabbing a massive slice of the value within the supply chain, it looks like the argument that China is adding intermediate steps to the supply chain falls apart.
On the other hand, and this could be entirely be an ignorant question on my part, but does looking at overall trade data actually provide insight into the ultimate beneficial owner of the goods that are exported? Could it be that Chinese companies set up subsidiaries in Mexico and other countries, which themselves export the goods to the US, and then they send the money back to China? Because if that's the case, then it's hard to argue that China is not in fact circumventing tariffs.
Thank you so much for writing this post and the reply to Mike Bird. I'm utterly confused why smart informed people like Bird are so confused by what's happening. Obviously big changes in global supply chains don't happen over night but they are happening. And it's not a surprise why. China's Zero Covid policy when production was shut down and business in China became unreliable, caused companies, who were already looking at diversifying their supply chains, to kick it into high gear. Again, they can't move production overnight and it takes time to move up the value chain but we see it in the data that you showed as well as in conversations with companies. The "rerouting" idea is particularly nonsense. You are doing a huge service with this article to explain what is happening in our world and in global supply chains. Thank you!
Since we now have multiple generations of this process to learn from, shouldn't the current generation of India, Vietnam, Mexico, etc be able to ramp their learning curve faster than China did? Of course it would require some smart folks with the right kind of energy, intelligence and power in those countries to pull it off. India should have the best chance at this, but they seem also the most burdened with corruption and political/religious craziness to overcome. Vietnam seems to be executing the best so far. And why can't the US get back into the game at a higher rate? (Oh yeah, we have our own political/religious craziness...)
I wonder how your analysis of what happened with companies in Russia - which, of course, is and was a much smaller part of the world economy - looks. I'd wager that, correctly or not, this is the yardstick against which decoupling from China will be measured - "leave in a locally economically harmful way, leave against your own statements (see: Uniqlo), if you don't leave at least pretend you do".
I continue to think that the future of world trade is robust, and its shape will surprise us.
By the logic of this piece, one day China will decouple from China. The things that used to be done in China will be outsourced to cheaper venues.
In a similar way, there was a time when the US steel industry led the world, but the US decisively decoupled from its own steel industry, turning to cheaper sources.
Basic idea: Nothing stands still in a capitalist world economy, but the whole almost always grows.
There is an assumption (mostly it seems by US-based commentators) that just because there may indeed be decoupling (even accounting for the 'redwashing' of trade via Mexico, Vietnam etc) between the US and especially China, there is decoupling happening globally. No. Trade is growing and not only between China and the rest of the world but between and amongst multiple other third parties. That the US is being de-emphasised in the pattern of world trade (especially in the non-carbon part of that trade) is not in and of itself concrete evidence of "deglobalization". Perhaps what we are seeing instead is "reorientation", the return of global trade to being centred on Asia?
India, it's finally your turn. Make us proud.
The article seems right about the facts, but a bit wrong-headed about what we should want. Robust trade with China makes war or less likely. War with China would be very bad. We shouldn't celebrate the death of "Chimerica." We should try to reverse it if we can.
Something else I notice is that Japanese exports have risen sharply. A good 30% in yen terms since precovid 2019
This is the sort of thing you would expect to see if Japanese companies are reshoring some of the production they outsourced to the PRC. I note that during the covid supply chain issues there was considerable talk of Japanese companies onshoring things. There have also been a number of announcements of new electronics related factories being built in Japan by companies like Murata
I haven't followed this for a long time, but to what extent is the fall in China's inbound FDI a natural development, not necessarily deliberate decoupling?
If I'm not mistaken there was a period around the turn of the century when China's capital account was fairly balanced: huge amounts of FDI flowing in while the People's Bank of China pumped it back out again by purchasing Treasuries and building up sovereign reserves.
China has a very high savings rate and has never needed foreign capital as such. What they needed was foreign expertise and technology. You could argue that at a time when China didn't have much domestic technical capacity, the undervaluation of the yuan was a very effective policy for sucking in FDI. (I think Yasheng Huang made a similar argument in one of his books.)
That's no longer the case, so it should be possible for China to invest domestic savings in export industries without having to round-trip the money. So to what extent does a fall in FDI (not matched by a fall in exports) really reflect decisions made by western governments and companies?
The biggest surprise of all will be a great HimalayN war between India and China fought exclusively with snowballs
The data is bad - and probably always will be . But the thesis is correct . The trend is a decoupling . However , even that can change. Just seeing Presidents Xi and Biden in SF might produce some goodwill.
Excellent article. I know it’s anecdotal but most of the companies I talk with are actively diversifying their supply chains so as not to be so reliant on China. But, as you point out, it takes time. One company I met with is opening its first production facility in North America...within three years. We’ll see trade data gradually reflect decisions that have been made over the last year. Folks like Robin Brooks haven’t grasped that Xi’s Zero Covid policy and other policies severely impacted companies outlooks because of the production disruption they caused. It was one thing if Xi was imprisoning over a million Uyghurs, arresting human rights activists and cracking down on what had been a burgeoning feminist movement in China. But when his policies affected production? That was a bridge too far for companies and they have been adjusting accordingly.
I kind of suspect this sentence captures what is occurring with folks who claim decoupling is not happening..."Or perhaps they see the West’s push for decoupling as a threat to peace and stability in the world, and they want to declare it a failure so we can all go back to the world of 2015."
Anyone who looks at the FDI numbers would have to be pretty blinded not to see that money is going elsewhere. People are not going to instantly stop buying things or magically create the capacity to manufacture them elsewhere. Also, given Chinese labor costs and demographics this was going to happen to some degree regardless of geo-politics...there simply are not enough Chinese anymore.
Noah, suppose you were engaged by the Chinese government to advise them on economic matters, and whatever you told them would indeed be implemented (a fantasy, yes, but please run with it). I have no idea what you would tell them, but I suspect that you would advise them to avoid war at all costs, since in no war scenario would the Chinese economy prosper (am I right about that?). What would be your argument for leaving Taiwan alone for a few more decades and to begin to behave as an honest competitor in the world economy?
Looking at the chart within Robert Brooks's tweet, just focusing on Mexico, it looks like from the dotted vertical line onwards, Mexico's exports to the US rose by ~$60bn, while Mexico's imports from China rose by a bit over $20bn, so unless Mexico is grabbing a massive slice of the value within the supply chain, it looks like the argument that China is adding intermediate steps to the supply chain falls apart.
On the other hand, and this could be entirely be an ignorant question on my part, but does looking at overall trade data actually provide insight into the ultimate beneficial owner of the goods that are exported? Could it be that Chinese companies set up subsidiaries in Mexico and other countries, which themselves export the goods to the US, and then they send the money back to China? Because if that's the case, then it's hard to argue that China is not in fact circumventing tariffs.
Thank you so much for writing this post and the reply to Mike Bird. I'm utterly confused why smart informed people like Bird are so confused by what's happening. Obviously big changes in global supply chains don't happen over night but they are happening. And it's not a surprise why. China's Zero Covid policy when production was shut down and business in China became unreliable, caused companies, who were already looking at diversifying their supply chains, to kick it into high gear. Again, they can't move production overnight and it takes time to move up the value chain but we see it in the data that you showed as well as in conversations with companies. The "rerouting" idea is particularly nonsense. You are doing a huge service with this article to explain what is happening in our world and in global supply chains. Thank you!
How fast did decoupling take place between France and Germany in 1914?
Since we now have multiple generations of this process to learn from, shouldn't the current generation of India, Vietnam, Mexico, etc be able to ramp their learning curve faster than China did? Of course it would require some smart folks with the right kind of energy, intelligence and power in those countries to pull it off. India should have the best chance at this, but they seem also the most burdened with corruption and political/religious craziness to overcome. Vietnam seems to be executing the best so far. And why can't the US get back into the game at a higher rate? (Oh yeah, we have our own political/religious craziness...)
I wonder how your analysis of what happened with companies in Russia - which, of course, is and was a much smaller part of the world economy - looks. I'd wager that, correctly or not, this is the yardstick against which decoupling from China will be measured - "leave in a locally economically harmful way, leave against your own statements (see: Uniqlo), if you don't leave at least pretend you do".