Ignore the Buzz about U.S.-China Decoupling. US Dependence on China is Growing in the Areas That Count

[beijingwalker]

Ignore the Buzz about U.S.-China Decoupling. US Dependence on China is Growing in the Areas That Count​

Oct 19, 2023, 2:27 pm EDT

Uncertainty in the Middle East, and the attendant jump in oil prices, is a reminder to investors that geopolitical stress points are frequently commodity-intensive and often have knock-on effects on the supply and demand of strategic natural resources. This same dynamic applies to shifting U.S.-China trade relations.

The U.S. share of imports from China has been declining, a fact that has been driven much attention. Since hitting a peak of 21.6% in 2017, China’s share of total U.S. goods imports fell to 16.5% in 2022 and was just 13.5% over the first eight months of this year, the lowest level since 2004.

These figures are at the core of the U.S-China “decoupling” narrative. The prevailing consensus is that the world’s two largest economies are going their separate ways as Beijing seeks greater economic self-sufficiency and Washington works overtime to cajole U.S. firms to diversify their global supply chains. The proof of “decoupling” is in the trade numbers. Or is it?

The much-cited import figures deserve a more nuanced view.

Yes, punishing tariffs imposed by the Trump administration, even tighter restrictions on trade and investment from the Biden White House, rising wages in China, and the corporate rethink of global supply chain have all conspired to reduce the U.S. share of quintessential “made in China” imports over the past few years.

Based on figures from the U.S. Census Bureau, U.S. electrical machinery imports from China—as a percent of total U.S. imports—dropped by nearly 14 percentage points between 2016 and 2023; the decline in toys and apparel was considerable (8 and 12 percentage points, respectively), while the fall-off in furniture (21 percentage points) and footwear (20 percentage points) was more dramatic. These products are among the largest categories of U.S. imports from China, and hence their declines have had an outsized impact on bilateral trade flows and an outsized influence on the decoupling debate.

But here’s the rub: while the U.S. has been successful in finding alternatives to Chinese imports of motherboards, toys, sofas, and sandals, America’s dependence on China for strategic and critical minerals not only remains high, but in some cases, has actually increased. China’s role as the “factory to the world” is being recast as more firms diversify and derisk their global supply chains. But remember, China, in large part, is also the “refinery to the world.”

When it comes to refining iron ore into steel or pulverizing cobalt into fine purity particles for batteries, most roads lead through China. The nation’s processing infrastructure—think smelters, refiners, cracking activities, chemicals, and related capabilities—is second to none on a global scale. That is a potentially dangerous set-up for a country like the U.S., which according to the U.S. Geological Survey, is 100% reliant on graphite and manganese imports, 76% per cobalt, and 56% net import reliant on nickel imports.

The U.S. is also significantly dependent on other countries for antimony, rare earth minerals, barite, bismuth, gallium, germanium, tantalum, yttrium, and many other minerals. The list goes on. Indeed, according to the U.S. Geological Survey’s “Mineral Commodity Summaries 2023” report, the U.S. is now more than 50% net import reliant on 51 minerals, up from 47 from the prior report. And of these 51 minerals, China, as it happens, is the No. 1 supplier to the U.S. of 12 minerals deemed “critical.” America’s dependence on China for some of these commodities has actually risen over the past few years.

In other words, when it comes to critical minerals to power America’s green transition, and to support the U.S. semiconductor and defense sectors, the trend is for more, not less dependence on China. Between 2016 and 2022, U.S. import dependence on China for graphite as a percentage of total imports rose from 37% to 75%; magnesium increased from 38% to 51%; rare earth minerals jumped from 41% to 62%; and Yttrium rose from 50% to 74%.

Decoupling is easier for garments than graphite. The inconvenient truth is that the U.S. remains wedded—coupled, even—to the refining champion of the world. Another truth: By imposing export controls on gallium and germanium earlier this year—two minerals used in the production of semiconductors and missiles—China served notice that it’s not afraid to flex its muscle when it comes to refining strategic minerals for the rest of the world.

The U.S. and its allies are serious about diversifying their mineral and metals supply chains, but efforts to diversify and derisk mineral supplies won’t be as quick and cheap as flipping factories for sweatpants and hoodies. It will take years and a great deal of capital and the political will to overcome environmental concerns.

What this all means is that there is a great deal at stake as the decoupling debate swirls and gathers traction as the 2024 election approaches. Investors should be careful not to misinterpret the headline figures that suggest that the U.S. and China are painlessly on the path of disengagement. Nor should they embrace the false narrative that as the U.S. reduces its import dependence on China, the upshot is more U.S. leverage over Beijing in setting bilateral trade and investment policies. Nothing could be further from the truth.

Not only does China remain a key source of imports for the U.S., it also remains a key export market for U.S. goods. Through the first eight months of this year, America’s third-largest export market, after Canada and Mexico, was none other than China. The silver lining to all of this is that the world’s two largest economies are still in the business of doing business with each other.

In the end, the world we live in is far more complex and dynamic than the decoupling headlines suggest.

Ignore the Buzz about U.S.-China Decoupling. Dependence Is Growing in the Areas That Count.

A narrative that the U.S. and China are going their separate ways misses crucial data points, write Joseph Quinlan and Ariana Chiu.

www.barrons.com

 

[beijingwalker]

The U.S. Is Becoming More Dependent on China’s Economy in the Ways That Matter Most

 

[Menthol]

It will be more as China climbs the technological ladder.

Low tech products can easily be replaced as everyone can do it, despite not being cheaper.

But high tech products have a monopoly advantage and can hardly be replaced.