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Foreign Policy

In Suppressing China, Difficulties Abound

Feb 01, 2023
  • Ma Xue

    Associate Fellow, Institute of American Studies, China Institutes of Contemporary International Relations

Since the mid-2010s the United States has been paying attention to strategic reliance on China in some critical areas and has considered China to be the foremost threat to its national security. Meanwhile, technological nationalism has risen dramatically. The American government has come to see science and technology as instruments for global competition and containing China’s development.

The two trends have combined, giving rise to the notion of “decoupling” from China. This took shape during the second term of Barack Obama’s presidency and was updated and put into practice during the Donald Trump administration. Now, President Joe Biden has taken U.S. “supply chain resilience” as a national security issue. The administration has turned from all-around decoupling to a more targeted kind of divestiture and achieved consensus with allies on a supply chain reset. The idea is to rebuild supply chains under comprehensive U.S. dominance. The routes the U.S. is taking to reduce reliance on Chinese supply chains include restricting China, strengthening itself and aligning with allies and partners.

First, to defeat and contain threats from China, the U.S. restrains China from acquiring technologies and intellectual property related to its strategic industries via legislation and corresponding mechanisms. It has employed such trade countermeasures as increasing tariffs against Chinese companies it alleges are engaged in “unfair trade,” drives up costs for Chinese manufacturing and contains the upgrading of Chinese industries. It has gradually promoted legislation at the national level and attempted to reduce its dependence on Chinese exports — especially forsaking projects that weaken its own strategic industrial autonomy. 

Second, the U.S. enhances its own competitiveness and leadership and provides maximum protection for politically sensitive industries that it sees as critical to national security. The U.S. has adopted a national economic strategy to guarantee secure and sufficient material supplies for strategic industries and has crafted a national infrastructure strategy. It provides financial support for research and development to sustain and restore technological leadership in strategic industries. It encourages closer coordination and collaboration between supply and demand sides at home through direct subsidies, tax reductions and exemptions, import and export quotas and setting standards that favor American companies.

Third, the U.S. is promoting a “friendly-nations-oriented” and “trustworthy” supply network. The Biden administration places considerable weight on “peer support,” besides building “trustworthy supply chains” and coordinating technological norms and standards with allies and partners. It is seeking to build joint storage and procurement of critical materials with “like-minded partners,” as well as strategic reserves of raw materials suitable for long-term storage. It is also trying to formulate new agreements on free trade and investment with allies and partners, expand cooperative relationships to such Indo-Pacific partners as India, Indonesia and Vietnam, establish connections with multilateral mechanisms having similar interests to diversify supply chains and weaken China’s status as a global industrial center.

The U.S. strategic purpose of reducing reliance on Chinese supply chains is obvious as its tactical nature grows increasingly explicit. Its policy design indicates a step-by-step approach. In terms of strategic purpose, reducing dependence on Chinese supply chains is meant to promote the creation of U.S.-dominated supply chains.

The U.S. actually wants to rebuild both the supply and demand ends of supply chains. On one hand, the U.S. wants to adjust supply chains that are “strategically reliant on China” and increase the number of sellers on each link in supply chains, thereby undermining the market force of China as a dominant seller.

In supply chain adjustments involving such products, the U.S. has mainly resorted to “friend-shoring” (limiting trade and direct investments to the scope of political allies and partners) and “near-shoring” (outsourcing businesses to neighboring countries or regions that are close in terms of geography, time zone and language), to compete with existing Chinese products.

On the other hand, the U.S. attempt to adjust the supply chains of so-called strategic industries is mainly aimed at preventing China from catching up via innovation. The U.S. wants to retain the economic dividends of significant technologies, as well as its military and national security advantages.

Judging from the nature of its tactics, the U.S. supply chain adjustments are targeted at a middle ground between all-around exclusion of China and all-around engagement with China. Since Biden took office, he has intentionally downplayed “decoupling” and turned to emphasize “supply chain resilience.” U.S. Trade Representative Catherine Tai has stated clearly that China and the U.S. need to “recouple” and “coexist for the long-term.” This embodies a “middle way” choice that draws upon the views of the fiercely opposed “restriction” and “cooperation” factions in the U.S.

Therefore, in fields where technological levels are low and products are widely available and more cost-oriented in the international market, the U.S. doesn’t seek to cut off connections with China. Rather, it will turn to “trusted suppliers” in fields featuring higher technological levels and vulnerability to such factors as cybersecurity risks.

From the perspective of policy design, the U.S. has resorted to gradual adjustments. In terms of target adjustment, the U.S. has turned from industry reshoring to near-shoring and from preserving the absolute safety of supply chains to seeking relative safety. The U.S. is accelerating the accommodation of transferred low-end manufacturing by promoting the establishment of supply chain alliances aimed at replacing “made in China” in global supply chains.

In temporal adjustment, the U.S. has given up on the idea of a quick fight and quick win. Rather, it seeks to ensure long-term benefits to the U.S. under a pluralist framework by means of adapting to supply and demand via long-term planing, and is constantly evaluating changing costs, availability and stability. 

As for route adjustments, the U.S. is turning from restricting China to placing more weight on strengthening itself. It is trying to achieve the long-term goal of absolute supply chain safety via technological investment and incentives, as well as by consolidating talent reserves and infrastructure. Meanwhile, to save time in achieving supply chain advantages, the U.S. is making parallel efforts to restrict Chinese development routes and buy time for the U.S. to catch up. American policies still face various difficulties that confine the scope, extent and sustainability of implementation.

Difficulty No. 1 is that it’s difficult for the U.S. to balance flexibility and efficiency while reducing reliance on Chinese supply chains. In step with the potential slowing of U.S. growth, as the American economy becomes smaller and less vigorous, it will be increasingly hard to drive any rebuilding of supply chains by depending on domestic demand alone. When demand shrinks and products become more sophisticated, supply side become highly uncertain, and it may become unlikely that government support and commitment to manufacturing will promote commercially viable innovation. 

With a lackluster world economy, private companies will focus more on short-term solutions that could raise efficiency and productivity, and make utmost endeavors to reduce costly flexibility and redundancy.  This is why the outcome of U.S. policies on supply chain adjustment have fallen short of expectations. Additionally, China has become the ultimate consumer market for various products. Therefore, if foreign companies move their supply chains away from China, and commodities are exported to China again, costs will rise dramatically. For many foreign companies, transferring supply chains from China to other countries is neither safe nor economical. It would come at a huge cost.

Difficulty No. 2, is that U.S. technological suppression of China faces both an information dilemma and control issues. New technologies have reached a crossroads globally, and the future is hard to predict. It is not easy to identify the scope of specific frontier realms that are worthy of government control. The U.S. government has tried to predict future hot spots of innovation and to draw manageable boundaries around a field of fuzzy technologies; yet, in retrospect, many “critical” projects that had been identified weren’t so critical after all, and some technologies that were excluded from the checklist ended up making a tremendous economic impact.

In the meantime, America’s gradual adjustments make it possible for resources to continue coalescing toward China via third countries, or even in the manner of transfers. This allows China to adjust or self-repair the any disrupted supply chains and means that unilateral U.S. control is usually invalid. It is difficult to cut off channels for technological transfers to China, as that, in turn, will result in self-imposed competitive disadvantages and conflicts with international partners. 

Difficulty No. 3, is that it’s hard to avoid deviation while implementing policies meant to strengthen America’s own competitiveness at home. On one hand, relevant U.S. policies have been based partly on such factors as broken supply chains for biopharmaceutical products and raw materials, new-energy vehicle batteries, critical minerals and semiconductors; yet government inputs went awry with businesses either choosing to withdraw because of scarcity or reducing dependence on scarce materials and semi-finished products. On the other hand, American interest groups always engage in fierce lobbying over the distribution and flow of public resources. This leads the government to change its decision-making criteria so that projects that favor of parliamentarian politics will take precedence over those conducive to maximum consumer welfare. The ultimate benefit to society thus allows little room for optimism.

Difficulty No. 4, involves the effects of those U.S. policies that hinge on allies and partners. Those parties need to share the risks and costs of China-U.S. competition and will seriously consider and cope with their own roles being marginalized on the global stage.

For the time being, most U.S. allies and partners are preserving an intra-alliance power balance and avoiding the defects and risks of a singular strategy by diversifying their resource deployment and policy combinations. In fact, most U.S. allies and partners are far from ready to reduce economic interdependence with China. In addition, in light of the fact that U.S. foreign economic policymaking faces an increasingly volatile political environment, it will be difficult for the U.S. to make credible commitments on its policies to allies.

Although U.S. policies are subject to the above-mentioned constraints, we should take note of the fact that they have shown a tendency to become long-term and irreversible. A dramatic slowdown in global trade and a reduction of global supply chain participation have become a trend. The economic alliance the U.S. is forging to rebuild U.S.-centered global supply chains may change the geopolitical landscape.

U.S. policies have obviously attempted to exert external pressure on China, but it would be wrong to ignore China’s own flexibility and competitiveness. On one hand, the huge advantages of China’s market resources and the solid foundation of the industrial agglomeration of its manufacturing sector make it a must to consider geographical proximity in building supply chains. This puts China at the center of the Asian economy, and it is hard to undermine. On the other hand, as China promotes rapid commercialization of innovations by means of its mammoth consumer market, advantages formulated in the high-tech realm may effectively spill into other fields, thus resulting in greater benefits that feed high-tech industries and allow China to catch up via differentiated competition and by defying generational gaps.

Therefore, U.S. efforts to reduce reliance on Chinese supply chains may restrict China’s economic options in the short term, but in the long term they will not prevent the strategic rise of the Chinese economy.

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