U.S.-China Trade Close to a Record, Highlighting need for End-to-End Traceability

Trade between the United States and China is on track to break records, an indication of resilient links between the world’s top two economies amid speculation of decoupling. U.S. government data through November suggest that imports and exports in 2022 will culminate at an all-time high, or at least come very close when the final report comes out in February. Beijing just published its own full-year figures that show record trade of around US$760 billion. However, there are some caveats to this. Trade between the two countries slowed toward the end of last year, U.S. import demand cooled, and China struggled to manage its COVID-19 restrictions. The trade data aren’t adjusted for inflation, which means higher dollar figures may not translate to shipping more goods, especially considering recent inflation rates.

Large technology companies have relied historically on Chinese manufacturing and Apple’s dependence on Chinese production is a major example of this. Despite threats of supply chain disruptions, technology companies like Apple have maintained their reliance on Chinese and Taiwanese manufacturing. In Mainland China, electronics manufacturer Foxconn's assembly lines churn out Apple products on an immense scale. Foxconn's main plant in Zhengzhou employs 200,000 people and the company is ultimately responsible for around 70% of global iPhone production.

Dell is another large-scale company that has historically depended on Chinese assembly lines and semiconductor production. However, Dell announced at the start of this year that it intends to stop using semiconductors made in China by 2024 and that it is encouraging its suppliers to also reduce their dependence on Chinese components. This is a sign of a major U.S. company waking up to the risks posed by reliance on China, which could even be an indicator of a broader recognition by the U.S. private sector.

Despite this, Dell’s move is also massively insufficient, especially given the breadth of the company’s ties to and reliance on China and the underlying costs it carries. The company’s supply-side exposure to China goes well beyond just semiconductors. As of 2021, 85% of Dell’s supply chain was in China. So was 75% of its production capacity. Phasing out Chinese-made semiconductors suggests a recognition of today’s market and geopolitical threats—that Beijing leverages its role as the world’s workshop to steal technology, cement dependence, and support its own champions at the expense of international companies, markets, and security. 

There have always been massive risks associated with consumer electronics companies’ manufacturing strategies, and they have been well-known for years. For instance, depending on such a small number of suppliers for the assembly of critical electronics puts companies at risk of major disruption if something goes wrong at one of those massive plants. That concentration risk is supercharged by the fact that these plants are largely located in China and Taiwan. Relations between the United States and China are tense, and Taiwan is caught in the middle of that souring relationship.

Upstream players focusing on activities such as raw material sourcing and production should create alternative production sites. This is also known as the “China + 1” strategy. Similarly, dual players engaging in both upstream and downstream activities like distribution, marketing, and sales should look into both decoupling and strengthening their in-China enterprises for better revenue or production alternatives. However, companies with no such alternatives should move what processes they can out of China. Below-the-radar players and small or medium companies tend to have a low focus on both upstream and downstream activities. Some are at an early, experimental stage of engaging with China. Others may be taking a “follow the leader” approach and don’t want to be left out. These are the companies that should be looking to hedge their bets in China, looking to grow and remaining vigilant at the same time. Likewise, market players, especially Business-to-Consumer (B2C) companies, should implement a business-as-usual approach with adaptation strategies to cater to the Chinese consumer market. Similarly, Business-to-Business (B2B) players should pursue a “made in China, for China” approach to compete with local enterprises.