[Global Focus] The Real Winner of the 'US-China Tech War'... China Penetrates Southeast Asia and US Allies

[One Year of the US Semiconductor Act and IRA]③
US Imports from China at Lowest Share in 20 Years
China Sets Up Overseas Factories to Disguise 'Made in OO'
US Allies and China Trade Only Strengthens
Global GDP Expected to Decline by 5% Due to Tech War
Self-Sufficiency in Semiconductors Raises Production Costs by 65%
Opportunity Cost of Fragmented International Standards Hits $1 Trillion Annually
WSJ: "US Core Scientific Advancements Will Also Be Delayed"

One year after the enactment of the U.S. Semiconductor Support Act (CSA) and the Inflation Reduction Act (IRA), symbols of U.S.-China decoupling, the trade dependence between the two countries has significantly decreased. This indicates that the strong U.S. containment policy against China is reinforcing the U.S.-China decoupling. However, a closer look reveals that China is increasing trade with U.S. allies to evade American restrictions, making genuine U.S.-China decoupling practically impossible. Given the complex intertwinement of the two economies, some experts warn that forcibly pushing decoupling could shrink the global economy by about 5%, leading to skepticism about U.S.-China decoupling.

China’s Exports to the U.S. Decline... But Trade with U.S. Allies Remains Strong

According to major foreign media on the 22nd, as U.S.-China tensions escalate, trade dependence between the two countries is decreasing. Bloomberg reported, based on recent U.S. Commerce Department data, that China lost its position as the largest U.S. import source in the first half of this year, falling to the third largest exporter. During this period, U.S. imports from China amounted to approximately $203 billion, a 25% decrease from $271.4 billion a year earlier. Mexico took over China’s previous position. U.S. imports from Mexico increased by 5.4% from $223.9 billion the previous year to $236 billion, making it the largest source of imports. Canada followed with $210.6 billion in imports, second only to Mexico.

The share of Chinese products in U.S. imports is at its lowest level in 20 years. The decline is attributed to intensified conflicts over advanced technology since last year, companies reducing their dependence on China, and changes in supply chains. China had held the position as the U.S.’s largest import source for over a decade. Analysis of U.S. Census Bureau trade data by The Wall Street Journal (WSJ) showed that China’s share of U.S. goods imports in the first half of this year was 13.3%, the lowest since 2003 (12.1%). This is an 8.3 percentage point drop from the peak of 21.6% in 2017.

On the surface, the trade pattern between the two countries appears to be severing. However, a deeper analysis reveals that trade is becoming more intricately intertwined rather than cut off. The Economist, in an article titled “How America Failed to Break Up with China” on the 8th, pointed out that while China’s direct exports to the U.S. are decreasing, trade between China and U.S. allies is increasing. Essentially, China is disguising “Made in China” products as those from allied countries to export to the U.S. For example, Apple, which has accelerated its de-China strategy in recent years, has 25 official partners in Vietnam, nine of which are Chinese mainland companies. Products manufactured by Chinese companies in Vietnam are labeled “Made in Vietnam” and then exported to the U.S.

China is leveraging its strong trade relations with Southeast Asia to exploit trade gaps between the U.S. and Southeast Asian countries. China’s direct investment in Indonesia, Malaysia, the Philippines, Thailand, and Vietnam increased from about $50 billion in 2018 to $80 billion in 2021. Statistics show that 7% of ASEAN exports are partially produced in China. In the first half of this year, China’s exports to Indonesia, Malaysia, Thailand, the Philippines, and Vietnam totaled $49 billion, an 80% increase compared to five years ago. The Economist noted, “Many countries are content with a dual strategy of receiving investment and intermediate goods from China while exporting finished products to the U.S. and the West,” adding, “The process of separating U.S. and Chinese trade and investment paradoxically may strengthen financial and commercial ties between China and U.S. allies.”

"U.S.-China Tech War Could Reduce Global GDP by 5%"

Even if U.S.-China decoupling occurs, some warn it could negatively impact the global economy. If the conflict, which has shifted from a trade war to a high-tech hegemony battle, intensifies, it could cause supply chain instability, productivity decline, inflation, and technological nationalism, severely damaging not only the U.S. but the global economy.

According to the International Monetary Fund (IMF), recent estimates based on scenarios where countries must choose between the U.S. and China show that some countries could see their gross domestic product (GDP) shrink by up to 4.7%. Southeast Asian countries are expected to suffer significant economic damage. The International Finance Center, citing the IMF and Columbia Business School, forecast that global GDP could decline by up to 5%, and productivity could drop by around 2% due to reduced trade in technology products and diminished human exchanges. Causes include slowed trade in advanced products, inefficient resource allocation, and reduced knowledge diffusion.

Supply chain instability caused by “friendshoring” (building supply chains among allied countries) could cause prices of complex advanced products to surge, pushing global inflation up by about 0.7 percentage points. The Boston Consulting Group estimated that semiconductor production costs could rise by up to 65% if self-supplied, and iPhone manufacturing costs could increase by 150% if produced in the U.S. Additionally, if technological barriers form between advanced countries led by the U.S. and emerging countries led by China and Russia, and international standards become fragmented, opportunity costs of $1 trillion annually could arise.

Within the U.S., there are concerns that severing U.S.-China research cooperation could slow progress in key scientific fields such as biotechnology, clean energy, and communications. According to market research firm Clarivate, over 40% of U.S. scientific papers are produced based on international research collaboration, with China being the most cited country. Among U.S.-led research, cooperation with China accounted for 27% in high-quality nanoscience and 33% in communications. Conversely, in China-led research, cooperation with the U.S. was only 13% and 10%, respectively. The WSJ reported, “The U.S. is turning away its greatest scientific partner during unstable times,” and noted that the scientific community fears that cutting research ties with China over security concerns could threaten U.S. progress in key fields.

Recently, the U.S. emphasis on “de-risking” rather than full decoupling from China is seen as a move to avoid the fallout that a full confrontation between the two countries could have on global geopolitics and the economy. Starting with U.S. Secretary of State Tony Blinken’s visit to China in June, followed by Treasury Secretary Janet Yellen and Climate Envoy John Kerry’s visits, high-level meetings between the two countries are being pursued to ease the extremely tense U.S.-China relationship.

The International Finance Center stated, “The U.S. has high dependence on China not only for imports of core items such as telecommunications and electronic components and rare earth materials but also in corporate revenues,” warning that China’s retaliatory measures such as restrictions on rare earths, solar technology, and corporate sanctions could amplify mutual damage. It added, “Over the past 20 years since China joined the World Trade Organization, the U.S. and China have built an interdependent economic structure,” and “The global economic damage caused by supply chain instability, productivity decline, inflation, and technological nationalism due to technological conflicts between the two countries will be much greater than that caused by trade disputes.”