Beijing named “a strategic rival” and “most serious competitor” © Zhang Qiao/VCG via Getty Images
Beijing named “a strategic rival” and “most serious competitor” © Zhang Qiao/VCG via Getty Images

What is the cost of decoupling US-China supply chains?

24 February 2021

A White House policy of drastically decoupling US companies’ supply chains from China could cost hundreds of billions of dollars in lost global competitiveness and additional production expenses, a report has warned.

The report, by the US Chamber of Commerce and Rhodium Group, comes as the Biden administration considers its course with regards to US-Sino relations.

“In both Washington and Beijing, political trust is at a nadir, and a return to the cooperative engagement policy that dominated the relationship since 1972 is difficult to imagine absent a sea change in both capitals,” the report said.

Biden’s team has dubbed Beijing “a strategic rival” and the US’s “most serious competitor”, words which have been interpreted to mean a similar line to the Trump administration.

As a result of a sharp decoupling, businesses could lose $190bn a year in US output if tariffs on trade with China were to rise by 25%. Over a full decade such tariffs could cost up to $1tn.

Should the US halve its direct investment in China, costs could rise to $500bn while American investors could see shortfalls of up to $25bn a year.

US businesses could lose between $15bn and $30bn a year in exported services if the trade war causes Chinese tourism and education spending to fall by half of what it was prior to the coronavirus pandemic.

The report urged Washington to find the best degree of economic engagement with Beijing and be mindful of the costs of its actions.

“Identifying the real consequences and costs of decoupling is urgent because initial steps toward such an act have already been taken,” it said.

Rather than broad actions to cut the US off from Chinese markets, the US government should consider “narrow tailored actions” such as restrictions on the export of specific technology licenses to address national security goals.

“A rational approach would be partial (tolerant of goods and services that have no bearing on national security or economic resilience), provisional (adjustable in response to future Chinese changes), and peaceful (stated without malice, to avoid gratuitous, costly escalation),” the report said.

Among the costs the administration may not be taking into account are the effects of a trade decoupling on other countries, which may force them to reconsider their relationships with the US, limiting the capacity of US firms to compete globally.

The report said the impact of wide-ranging White House policy in the aviation industry could cost the US $875bn in lost aircraft sales by 2038.

As the US currently faces a chip shortage, the report urges chip firms to retain access to the Chinese market so they can reinvest revenues from their China sales back into US-based chip production and R&D.

The latest edition of SM magazine contains an exploration of the issues around delinking supply chains from China.

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