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.
The idea occurred to me after reading Noah's post. He was positioning decoupling as something vaguely threatening, but I was realizing that economies decouple from past technologies and outmoded industries all the time.
Actually, I think any flight of western capital from China is due 95% to the distrust of capital in the unpredictability of the Chinese government, not to any antitrade measures taken by Trump and or Biden.
Please subscribe to my substack. I get a lot of my ideas in reaction to Noah.
Will do! You seem to have a big picture approach that includes the psychology of the actors involved and roles they assume.
Agree, we're seeing the downside of Xi's authoritarian tendencies. Foreign investors will accept a lot of shenanigans as long as they're predictable and quantifiable. In the current climate they would need a huge return on investment and it's just not there.
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 US (and China as well) will become a smaller percentage of Global GDP. It’s only natural that trade will shift towards the parts of the world with the most population.
I think Noah makes a great point that countries like Vietnam, Mexico and India will not be satisfied with doing just the low-value assembly work.
The future of manufacturing is much more robust competition for moving up the value-chain.
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.
Obtaining what we want on an international level almost always includes both carrots and sticks. Sticks that take 10+ years to be fully effective leave plenty of time for carrots.
Well (a) there had been a trend away from free trade towards protectionism for some time before WWI, and (b) don't draw strong conclusions from one data point. But it's true that free trade isn't an anti-war panacea. The saying that "if trade doesn't cross borders, soldiers will" isn't an empirical home run.
Still, probabilistically, if you really don't want war with China, a little less decoupling is probably a good bet to make
How is war likely at all? The US and China sit on opposite sides of a planet. China has no interest in interfering with the US in the Western hemisphere or the Atlantic littoral. That's more than half the planet. The US only has a beef with China when we stick our nose into East Asia, which has long been their area of interest. If we stay out, there is no problem.
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?
>I suspect that you would advise them to avoid war at all costs, since in no war scenario would the Chinese economy prosper<
I don't speak for Noah Smith, but your question already implies an answer to the question "What's the argument for China's leaving Taiwan alone?" That answer is: war would be very bad for China, and it's dumb to do things against one's own self-interest.
Sadly, it's not clear that "what's in China's self-interest?" is as important as the question "What does Xi fantasize would make for a great biopic in 50 years' time?"
Yes, same stupidity that Putin has exercised with his war in Ukraine. Russia would have been far better off by joining NATO and facing all its defensive forces more or less towards China. Governments often do things contrary to their long-term interests. I just haven't read anything that lays out a good argument for the Chinese to reconsider their posturing other than "...if you do, we might get mad..."
How is recovering Taiwan bad for Xi? By bad for China. I suppose you mean deaths from war and loss due to trade disruption. I will ask a question. The US lost 0.42 million in WW II while China and Japan each lost about 3 million. Adjusted for population, the US loses alone correspond to 4 million today. It is true that the Chinese deaths in WW II were in defense of their homeland and so not a policy choice on the part of Chinese leaders. But China has been willing to sustain large death tolls for state purposes during peacetime such as the 0.5-2 million dead for the Cultural Revolution 1966-76.
Looking at the information out there they all seem to assume that China will give up after sustaining a number of casualties that would cause the US to give up.
I see no reason why Xi would balk at as many as 2 million deaths to achieve victory. As for public reaction to these deaths I would point out that the 1.2 million US deaths from Covid (equivalent to 5 million in China) are not acknowledged as any sort of loss by the US political right (half the country). There is no evidence that Chinese leaders value the lives of their citizens any more than the American Right.
I would observe that the US experience with globalization since 1990 has not been anything Xi would want for his country. Xi is a dictator, in a way a modern Chinese emperor. Creating new Chinese moguls and making existing ones richer (goals for an American leader) it not something Xi wants to do. So Xi wants to avoid the post-1990 experience with globalization like the plague.
China is now a manufacturing powerhouse. She has completed industrialization and stands where the US was in 1920-50. She needs to build her service industry and that mostly relies on a domestic market. The idea of export-led growth originally developed around small economies trying to draft off of the demand from larger economies. China is too large to draft off of anyone's demand. Yes, I am being mercantilist, but so is Xi.
There are only two countries in history who achieved what Xi wants to achieve for his country without help from a bigger country helping them out. There is no one bigger than China so they have to achieve greatness on their own.
One of these countries is now in deep decline (UK) so they are no model. The other (US) had many natural advantages that China lacks, making its applicability as a model questionable. And yet many other countries in the Americas had these advantages too and failed to become great, so the Americans must have done something right.
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.
A country decoupling from its own industry is a very interesting way to describe this. I hadn't heard it framed this way.
The idea occurred to me after reading Noah's post. He was positioning decoupling as something vaguely threatening, but I was realizing that economies decouple from past technologies and outmoded industries all the time.
Actually, I think any flight of western capital from China is due 95% to the distrust of capital in the unpredictability of the Chinese government, not to any antitrade measures taken by Trump and or Biden.
Please subscribe to my substack. I get a lot of my ideas in reaction to Noah.
Will do! You seem to have a big picture approach that includes the psychology of the actors involved and roles they assume.
Agree, we're seeing the downside of Xi's authoritarian tendencies. Foreign investors will accept a lot of shenanigans as long as they're predictable and quantifiable. In the current climate they would need a huge return on investment and it's just not there.
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 US (and China as well) will become a smaller percentage of Global GDP. It’s only natural that trade will shift towards the parts of the world with the most population.
I think Noah makes a great point that countries like Vietnam, Mexico and India will not be satisfied with doing just the low-value assembly work.
The future of manufacturing is much more robust competition for moving up the value-chain.
We can do well locally in our hemisphere if we hold together - milei in brazil, bukele in el
salvador, chaves in costa rica offer hope
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.
Obtaining what we want on an international level almost always includes both carrots and sticks. Sticks that take 10+ years to be fully effective leave plenty of time for carrots.
The never-before-seen levels of trade and economic interdependence that existed in the year 1914 did absolutely nothing to prevent World War 1.
Well (a) there had been a trend away from free trade towards protectionism for some time before WWI, and (b) don't draw strong conclusions from one data point. But it's true that free trade isn't an anti-war panacea. The saying that "if trade doesn't cross borders, soldiers will" isn't an empirical home run.
Still, probabilistically, if you really don't want war with China, a little less decoupling is probably a good bet to make
How is war likely at all? The US and China sit on opposite sides of a planet. China has no interest in interfering with the US in the Western hemisphere or the Atlantic littoral. That's more than half the planet. The US only has a beef with China when we stick our nose into East Asia, which has long been their area of interest. If we stay out, there is no problem.
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?
>I suspect that you would advise them to avoid war at all costs, since in no war scenario would the Chinese economy prosper<
I don't speak for Noah Smith, but your question already implies an answer to the question "What's the argument for China's leaving Taiwan alone?" That answer is: war would be very bad for China, and it's dumb to do things against one's own self-interest.
Sadly, it's not clear that "what's in China's self-interest?" is as important as the question "What does Xi fantasize would make for a great biopic in 50 years' time?"
Yes, same stupidity that Putin has exercised with his war in Ukraine. Russia would have been far better off by joining NATO and facing all its defensive forces more or less towards China. Governments often do things contrary to their long-term interests. I just haven't read anything that lays out a good argument for the Chinese to reconsider their posturing other than "...if you do, we might get mad..."
How is recovering Taiwan bad for Xi? By bad for China. I suppose you mean deaths from war and loss due to trade disruption. I will ask a question. The US lost 0.42 million in WW II while China and Japan each lost about 3 million. Adjusted for population, the US loses alone correspond to 4 million today. It is true that the Chinese deaths in WW II were in defense of their homeland and so not a policy choice on the part of Chinese leaders. But China has been willing to sustain large death tolls for state purposes during peacetime such as the 0.5-2 million dead for the Cultural Revolution 1966-76.
Looking at the information out there they all seem to assume that China will give up after sustaining a number of casualties that would cause the US to give up.
I see no reason why Xi would balk at as many as 2 million deaths to achieve victory. As for public reaction to these deaths I would point out that the 1.2 million US deaths from Covid (equivalent to 5 million in China) are not acknowledged as any sort of loss by the US political right (half the country). There is no evidence that Chinese leaders value the lives of their citizens any more than the American Right.
I would observe that the US experience with globalization since 1990 has not been anything Xi would want for his country. Xi is a dictator, in a way a modern Chinese emperor. Creating new Chinese moguls and making existing ones richer (goals for an American leader) it not something Xi wants to do. So Xi wants to avoid the post-1990 experience with globalization like the plague.
China is now a manufacturing powerhouse. She has completed industrialization and stands where the US was in 1920-50. She needs to build her service industry and that mostly relies on a domestic market. The idea of export-led growth originally developed around small economies trying to draft off of the demand from larger economies. China is too large to draft off of anyone's demand. Yes, I am being mercantilist, but so is Xi.
There are only two countries in history who achieved what Xi wants to achieve for his country without help from a bigger country helping them out. There is no one bigger than China so they have to achieve greatness on their own.
One of these countries is now in deep decline (UK) so they are no model. The other (US) had many natural advantages that China lacks, making its applicability as a model questionable. And yet many other countries in the Americas had these advantages too and failed to become great, so the Americans must have done something right.
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".