Globalization Under Threat 

Nicholas Mitsakos

The paranoia is building. From the CHIPS Act to proposals for absurdly high tariffs (60% on goods from China isn’t going to help anyone) to banning TikTok, the world is on the verge of reversing decades of progress and exchanging real progress for delusionary gains.

Efforts to localize production and economic development with vast government subsidies are being proposed or enacted in the United States, the EU, China, India, and any other economic center that can think of it.

Hiding behind walls has never worked and makes life worse for everyone.

The Lunatics in Control

Since the U.S.-China trade war began in 2018, and with increasing intensity during COVID, the world has become less interconnected through trade, investment, financial markets, GDP growth, and shared prosperity.

The Good News

As of late 2023, the world’s economies were not rapidly deglobalizing. Economic integration and its benefits to corporate profit margins remained intact. That’s despite two serious hits: the tariffs the United States put on many Chinese imports and the unprecedented sanctions placed on Russia for invading Ukraine. The Russian sanctions generated an initial shock for energy markets and supply chains – layered on top of COVID-19 supply chain interruptions.

The most recent trade data shows flexible and resilient supply chains and production shifting elsewhere. Supply chains are mostly diversifying—what might be called a slow-moving maturation away from excessive concentration in China. This is positive for economic growth in various countries and bodes well for the resiliency of the global trading system against future economic shocks.

The Less-Good News

For several critical imports—most crucially pharmaceuticals (life sciences and biotech) and advanced weapons components—the United States still relies heavily on China, raising significant bipartisan concern as a national security risk. Of course, the latest and most mystifying national security risk is TikTok.

Clearly, “national security” will be used as a tool and justification for legislative interference in free trade (not to mention First Amendment rights violations, etc.). The steamship of bad policy is turning in the wrong direction.

The latest folly is President Biden, in late November, invoking the Defense Production Act (used in the Second World War to convert factories to military use) to stimulate the reshoring of critical production. The intent is to return to the United States, where corporate operations were previously moved to another country. The primary motivation is the perceived vulnerability of the production of critical technology components at risk because of tension between the United States and China over Taiwan.

The Bogeyman Is Not Real

As we know, Taiwan Semiconductor is the world’s leading producer of the most critical semiconductors and technically advanced integrated circuits. Losing access via any maneuver by China would devastate the global technology industry and the world economy, so China is our bogeyman.

China is also a critical market for US technology, and government policy is doing its best to shut that source off. As unintended consequences always do, China is now developing its own technology. US policy may simultaneously strip significant revenue opportunities from US companies while enabling China to create world-beating technology that threatens the United States in commerce, and however one wishes to define “security.” It’s a losing game that the US and Western Europe are enthusiastically playing.

The reality of this is something to question. As much as anything, the potential loss of integrated circuit design and manufacture and access to pharmaceutical production may not be realistic. Still, it is a politically expedient catalyst to subsidize the shoring and remanufacturing of critical technical components regardless of their economic viability or competitiveness.

Changing Supply Chains

Since China was at the center of the trade tensions beginning in 2018, one would expect to see China’s share of global trade decline if the world were de-globalizing. Yet China’s share of global exports is up – so is the ratio of global trade in goods to global industrial production.

Yet trade is diverging underneath the surface. China asserted its export dominance beginning in the 2000s, but its share of U.S. imports has dropped materially.

Once the U.S. imposed tariffs on about 66% of imports from China as part of the trade war, the locality of trade shifted markedly. While China’s share of U.S. imports declined from 2016 to 2023, those declines were offset by gains made by member nations of ASEAN, India, and countries in Latin America. (The nations of Central and Eastern Europe, the Middle East, and Africa did not see U.S. trade share gains.

If examined another way, trade gains are shifting. Mexico, Vietnam, India, and Thailand are two key beneficiaries of increased trade with the US.

U.S. imports of tariffed items from China fell by about $70 billion. As that occurred,  Vietnam saw the most significant percentage gain in exports of tariffed items: a rise of 170%. However, Mexico has seen the largest gains at over $153 billion. The most significant exports are semiconductors and related electronic components, auto parts, and other items hit by 25% tariff rates imposed on China.

Some trade migration from China would likely have occurred without the trade war. China has been climbing the value chain, offshoring lower value-added production to less expensive locations. For example, China’s value-add in machinery and equipment exports rose markedly, while its value-add in apparel exports shrank. Increasingly, keeping less complex and labor-intensive production in China hasn’t made sense as its labor costs have risen.

It Goes Both Ways

Today, The US depends on sophisticated Chinese exports, including biotech and advanced weapons components. The more China establishes a moat around these exports, the harder it will be for the US to de-risk from China in critical areas related to national security.

Furthermore, trade rerouting (the transshipping of goods through a third country) has been more pronounced in Vietnam than in Mexico. Value-added domestic production has likely driven Mexico’s material export gains more. This feature of Mexico’s U.S. export gains supports the notion that greater resiliency is being built into the U.S. import base, helped by Mexico’s proximity and linkage to the U.S. rail system.

Companies are increasingly looking to strengthen their supply chains via reshoring (or “near”-shoring) of production.

Reshoring activity in Mexico, however, is unlikely to be a boon for jobs: The share of employment in manufacturing in Mexico has fallen in recent years, likely because of industrial automation. This may reflect a larger shift – As industrial automation gathers steam globally, the global trading system will emphasize costs other than labor, such as shipping and distribution. Mexico has a significant advantage with its substantially lower shipping costs to the United States.

It’s the Chips

A sharp decline in China’s semiconductor (and equipment) exports to the United States has also been reflected in the U.S.-China trade war: These have declined by about 54% from 2016. China’s semiconductor exports could not be easily substituted by other chipmakers, mainly because China specializes in “legacy” (less sophisticated) chips with low profit margins.

This lack of substitution likely played an important role in the inflation shock that hit the U.S. economy in 2021the severe shortage of chips for automobiles and other discretionary items began the 2021 inflation shock.

This exposes the vulnerability of the global trading system and why such a high reliance on China for critical imports can represent a national security risk and an economic risk. It also illustrates why, in the long run, the reshoring of supply chains can build greater resiliency into the trading system, helping guard against future shocks.

If any of it makes economic sense because substantial government subsidy is required, it is likely causing waste and inefficiency and making achieving these goals questionable.

Changing Critical Components

Reliance on China for several crucial products, including technology, life sciences, biotech, and advanced weapons components, is a source of bipartisan concern and a serious risk to U.S. national security.

Surprisingly, US imports for these strategic goods (including biotechnology, life science, optoelectronics, information and communications, electronics, flexible manufacturing, advanced materials, aerospace, weapons, and nuclear technology) have been less impacted by U.S. tariffs than other categories of goods.

The US needs what it needs, and all the lip-service and politically motivated legislation will not change the attractiveness of Chinese products in these categories. Tariffs were moderate, and exports to the United States are increasing today – up approximately $20 billion since 2016.

This could turn as trade tension continues, and businesses may make preemptive choices for supplies and supply routes. However, strategically important technological products from China are not easily sourced. Despite tariff threats, the US would be much worse off with an aggressive tariff or trade restriction policy for these products.

What Happens Next?

Upon initial inspection, the US-China trade war significantly impacted China’s exports to the United States. However, the details matter because the picture is much more nuanced. The United States still heavily relies on China for certain strategically important trade categories. US lawmakers need to understand this nuance (something likely to be too optimistic) because sweeping trade restrictions will impair the United States.

Two Case Studies

Russia is a dramatic example of trade flexibility, illustrating how resilient supply chains can preserve a nation’s imports despite unprecedented global sanctions. On the other hand, South America’s lack of rising U.S. export share shows how key factors (including infrastructure and human development) can stymie trade despite the potential offered by a flexible global trading system.


Trade with Russia since the outbreak of the war in Ukraine presents a dramatic recent example of trade flexibility. Global manufacturing supply chains have demonstrated such resilience over the last 18 months that they saved Russia’s economy. Trade flexibility drives economic growth in Russia, an unpredictable event two years ago. Then, the IMF projected a 10.6% drop by 2023 (relative to the 2021 level). Now, the IMF sees the Russian economy as larger.

As the share of exports from the United States and Europe to Russia collapsed, it was offset by large export share gains by China and (to a lesser extent) India and countries in Western and Central Asia, including Turkey, Armenia, Kazakhstan, Kyrgyzstan, and Azerbaijan. The world is interconnected, and trade restrictions are increasingly like playing “whack a mole.” Essentially, Russia is an example that should illuminate the futility of trade restrictions to achieve specific goals. Sanctions and punishments do not work.

South America

There is so much potential, so little gain.

Trade diversification would have produced strong U.S. export share gains for countries in South America. These countries have favorable proximity to and historically close geopolitical ties with the United States. Instead, the export shift has been almost nonexistent for Brazil, Colombia, Argentina, Chile, and Peru.

South America essentially has no advanced technology to offer the United States. It produces commodities: iron ore in Brazil, copper ore in Peru and Chile, and crude petroleum (and coffee) in Colombia. While these are in global demand, their prices are also cyclical and set on a global market. There is no value added to make them a particularly desirable product source.

Additionally, infrastructure is limited and poor. By one estimate, South American countries’ exports would be 30% higher with proper infrastructure (other estimates are almost twice this number). Whatever reality is, it is a significant hindrance that will not be remedied anytime soon.

Shipping costs to the United States are high (unlike Mexico, the continent lacks a direct link to the U.S. rail system). This restriction will not be remedied anytime soon, given political paralysis and environmental and native culture concerns.

Finally, the population is not well educated. It lacks the knowledge, skills, education, and fundamental health and well-being to contribute to the higher end of the economic spectrum, which requires advanced skills and knowledge.

Globalization Remains

Globalization remains intact despite several large shocks in recent years. Its preservation is a testament to the flexibility of manufacturing supply chains globally. Multinational corporations have shown they can quickly adapt to new policies and pivot around heightened geopolitical risks. This flexibility has helped corporate profit margins maintain the historic gains made in recent decades due to globalization.

Yet, in several areas of critical strategic importance, the United States still relies heavily on imports from China. The US will not be able to source critical components from other countries anytime soon and must face the reality that China and the United States economies are linked. As much as 25% of each country’s GDP is interconnected. It is absurd for political leaders to believe they can flip a switch, turn this off, and source the necessary materials and products elsewhere.

US political leaders use “national security” to minimize dependence on China. While this may be an insurmountable challenge, it is also an opportunity for various emerging market nations. Trade infrastructure, competitiveness, and human capital development will largely dictate which ones benefit from these trends. Mexico, Vietnam, and India will probably benefit. But the game is in its early stages and remains to be played.

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