What If China And The U.S. Part Ways? Post 1: Thinking About A New Global Supply Chain

The global supply chain has undergone significant transformations in recent years, with China and the United States playing crucial roles as the major global economic powerhouses. On June 30, just as Secretary Antony Blinken was engaged in high-level trade discussions–and immediately prior to Treasury Secretary Janet Yellen holding her own meetings which are ongoing as I write–the U.S. State Department quietly issued a new Travel Threat Advisory urging Americans to reconsider travel to mainland China, Hong Kong, and Macau. With fast-rising tensions between the two superpowers, we thought we’d ask ourselves an important question: what would happen if these two giants were to part ways? 

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Such a scenario would have far-reaching implications for the global economy and the intricate web of international trade. In this article, I’m going to delve into the potential consequences of a separation between China and the U.S., shedding some light on the new global supply chain that would emerge as a result.

The Current Landscape

Before we explore the potential ramifications of a split between China and the U.S., it's important to understand the current landscape of the global supply chain. China has long been the manufacturing hub of the world, boasting a massive labor force, low production costs, and a vast network of suppliers. On the other hand, the U.S. has excelled in technological innovation, research and development, services, and high-end manufacturing.

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The symbiotic relationship between China and the U.S. has allowed for the efficient flow of goods and services across borders. Chinese manufacturers have supplied the world with a wide range of products, while American companies have dominated in sectors such as technology, aerospace, and pharmaceuticals. This interdependence has led to intricate supply chains spanning continents and has propelled both countries' economies to new heights.

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The 2nd and 3rd Tier Problem

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Even if your suppliers aren’t located in China - chances are one of their suppliers is.  Especially in the food and beverage industry.  This hides risk in the supply chain, and can lead to the most unpredictable types of disruptions as YOUR supplier may not even be aware of issues in their supply chain. 

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The interconnectedness and ‘sprawl’ of the global supply chain has introduced risk that will be difficult to unravel over the coming years - but even if a split doesn’t;t happy, trade lines will be redrawn in the coming years and decoupling from China is a major initiative for many companies

The Impact of a Split

If China and the U.S. were to part ways, the global supply chain would undergo a seismic shift. Supply chains that were once optimized for efficiency would now require restructuring and diversification. For instance, a reliance on single sourcing would likely go away, trading partners and manufacturing geographies would change, and cost structures would be completely upended.  Let's examine in more detail some key areas that would be affected:

Manufacturing and Production

China's dominance in manufacturing would inevitably be challenged. While it possesses a well-established infrastructure and an extensive network of suppliers, the departure of American companies would significantly impact its production capabilities. As a result, China would need to focus on expanding its domestic market, expanding their reach in Africa, locking down its regional relationships, strengthening trade ties with other countries, and diversifying its manufacturing sector to maintain economic stability.

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On the other hand, the U.S. would face challenges in filling the black hole size void left by China. The reliance on offshore manufacturing and the need for cost-effective (or dare I say, cheap) production would prompt American companies to seek alternative destinations such as Southeast Asia, India, or Latin America. This shift would not only affect manufacturing but also lead to changes in employment patterns and regional economic dynamics. 

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This could lead to more countries being lifted out of poverty, but the development time of each country is different and difficult to predict. 

Technological Innovation

The separation between China and the U.S. would undoubtedly impact technological innovation. Currently, both countries compete fiercely in areas like artificial intelligence, telecommunications, and semiconductors. A division would disrupt the flow of knowledge, collaboration, and talent exchange, slowing down the pace of technological advancements on a global scale.

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China would strive to strengthen its domestic research and development capabilities, potentially leading to increased investment in education, infrastructure, and innovation hubs. Simultaneously, the U.S. would intensify its efforts to protect intellectual property (a longtime challenge we’ve been on the losing end of), nurture local talent, and foster a conducive environment for innovation and entrepreneurship.

Trade and Tariffs

One of the immediate consequences of a separation would be the imposition of trade barriers and tariffs between China and the U.S. The current trade war between the two countries serves as a precursor to the potential economic ramifications. These barriers would disrupt existing supply chains, increase costs for businesses and consumers, and create uncertainty in the global marketplace.

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As a result, companies would be compelled to reevaluate their sourcing strategies and seek alternative suppliers or partners. This diversification of supply chains would lead to increased competition among countries, as they vie to attract foreign investments and capitalize on new trade opportunities.  Countries such as Vietnam and India that have invested heavily in infrastructure are poised to be front and center on the global economic playing field.

The Emergence of a New Global Supply Chain

While the separation between China and the U.S. would undoubtedly present challenges, it would also create opportunities for other countries to step up and reshape the global supply chain. As businesses seek alternative manufacturing destinations, countries like Vietnam, Mexico, and India could experience a surge in foreign investments and become new manufacturing powerhouses.

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Moreover, the development of global, but a highly geographically fragmented  supply chains could gain momentum. Countries within the same geographic region could forge closer ties, fostering intra-regional trade and reducing reliance on non-friendly partners. This shift towards regionalization could lead to the creation of more self-sufficient economies, reduced transportation costs, and increased resilience against global shocks.

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Trade lines could also be redrawn not based on region, but based on the needs of each individual country.  New trade alliances will need to be formed that may be based on political ideology, capitalist v. socialist, and past trading history.  The likes of the trading lanes being redrawn is something that we have yet to see in human history.  Untangling the interconnected web to de-risk supply chains will take years of hard work

Conclusion

The hypothetical scenario of China and the U.S. parting ways presents a complex and multi-faceted picture of the global supply chain. While it is challenging to predict the exact outcomes of such a separation, it is evident that the global economy would undergo significant changes. Manufacturing patterns would shift, technological innovation would be affected, trade dynamics would be disrupted, and new players would emerge.

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In this dynamic environment, businesses and governments must adapt and seize the opportunities presented by the evolving global supply chain. By diversifying sourcing strategies, fostering innovation, and embracing regional collaboration, countries can position themselves to thrive in the face of change.

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About SourceHub

Founded and headquartered in Chicago, IL, SourceHub develops powerful AI-enabled software that delivers complete E2E visibility for your inbound supply chain. By seamlessly connecting data from a growing number of sources, and making it easy to share with your supply chain partners, you have the ability to stop disruption before it occurs, and give your team hours back in their day. SourceHub is providing visibility solutions to a growing roster of global brands and can be found at https://sourcehub.ai