Commercial war between the United States and China: could these powers break off their commercial relations?

With the commercial war between the United States and China, a fragmentation of the world market and a greater commercial importance of regional blocs seem to be on the horizon.

The atmosphere has worsened, especially after the pandemic and in the face of a crisis in the supply of high-tech microchips, the United States announced a special plan to encourage the domestic industry of these components, through heavy subsidies and a ban on exports to China.

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China, in turn, responded by banning the export of gallium and germanium – two minerals essential for the production of semiconductors – and their derivatives. These raw materials are key components in the manufacture of smartphones, automobiles and game consoles, among others.

The continued escalation in the U.S.-China trade war has popularized the idea that it is easy and possible to decouple the two economies, but this is more difficult than is commonly believed.

Despite the escalating trade war between the U.S. and China, both economies have a high degree of dependence

Despite sanctions and counter-sanctions as part of the trade war between the world powers, trade between the U.S. and China reached a record high in 2022, rising to USD $690.6 billion, with no signs of that changing.

This is largely due to the fact that China controls not only the export of many manufactured goods, but also the entire production chain up to the final product. This is the case, for example, with lithium batteries. China covers everything from the extraction to the recycling of the batteries.

In the case of textiles, this includes not only fabrics but also trimmings, dyes, zippers and other parts. It even imports a large part of the world’s wool and cotton, including that originating in the United States, which represents 35% of world production.

It is the control of an entire productive ecosystem and economies of scale that makes China irreplaceable, not only in manufacturing and assembly but also in marketing.

Moreover, its domestic market is the largest in the world and its middle class is the fastest growing in purchasing power globally. For all these reasons, it is an effective source of demand.

For a foreign company to replace this Chinese production with one in its own country, it would have to relocate the entire chain. It would also have to source all its inputs from China or, failing that, from countries such as India or Bangladesh, and would possibly be forced to give up at least partially supplying the gigantic Asian market.

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This is not just in textiles and batteries, but in hundreds of areas of manufacturing, including automobile production, where China has displaced Japan as the leading producer.

Limits of offshoring as a weapon in the trade war

Currently, there is a certain tendency to offshore companies located in China and relocate them to other countries. This offshoring is done – and will probably continue to be done – with the aim of lowering costs, whether of labor, transportation or raw materials.

However, offshoring is not yet strong enough and possibly only the sharpening of geopolitical contradictions will accelerate this front of the commercial war between the United States and China.

U.S. manufacturing deficit

In recent years, the United States has neglected manufacturing production, with most manufacturing equipment coming from imports.

According to the U.S. Department of Commerce this country had a trade deficit of about $1 trillion in 2021, but about $300 billion of that deficit comes from imports of capital goods, i.e., machines that produce goods.

Semiconductor production subsidies may stimulate new fab construction, but they also account for machinery imports. In 2022, the import of capital goods exceeded the production of them in the United States for the first time, according to Asia Times.

Despite U.S. sanctions, many important companies remain in China, as they have advantageous costs, proximity and access to Asian markets, which are the fastest growing in the world.

This explains the repeated visits of senior U.S. officials to Beijing, such as Secretary of State Anthony Blinken, who noted on his June trip that “strong and healthy economic engagement benefits both the United States and China”.

Blinken described as “disastrous” the possibility of “delinking and halting all trade and investment” with the Asian giant, although he reiterated that he would not provide technology to China that could be used against the United States.

Trade decoupling between China and the United States is not so easy and will not be so quick in a globalized world where profit drives big business.

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