Decoupling from China

Published December 11th, 2023 by JMSCapitalGroup

Noah Smith reviews research suggesting that the US has begun a long-term process of decoupling from China. Import patterns have shifted significantly in recent years:

Smith acknowledges that the large drop in Chinese imports is probably overstated, as China is likely rerouting goods to the US via other countries, but cites additional research estimating that the share of US imports from China has dropped 2-3 points, which is still a significant decrease in just a few years.

He argues that a complete fissure in US-China trade is unlikely, given how interconnected global trade is; instead, he believes we’d first see foreign direct investment into China decline, as a precursor for companies shifting their supply chains elsewhere over time. And, in fact, foreign direct investment into China has declined sharply, even turning into a net negative for the most recent quarter:

Moreover, even beyond trade disputes and geopolitical and economic concerns, Smith argues that economic forces are likely to result in increased diversification of supply chains. He points out that just as China has decoupled significantly from Japan, Taiwan, and South Korea, as it produces more of its inputs, we may see the same process unfold elsewhere. India, Vietnam, Mexico, and other countries may move up the value chain, shifting from merely assembling high-value components bought from China to producing these components in-house. Decoupling would not cleave the US and Chinese economies like an Iron Curtain; Smith expects the process to be gradual, messy, incomplete, and ongoing.


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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.

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