In reaction to the dependency of many US companies on suppliers in China, on April 29, 2020, the Trump Administration announced the creation of an “Economic Prosperity Network” (EPN), a framework for cooperation with Australia, India, Japan, New Zealand, Korea, and Vietnam. The Administration hopes that trade with these “trusted partners” will diminish the reliance of US manufacturers on China and that the prospective partners themselves will take steps to reduce their dependence on trade with China. [1]
With the exception of India and Korea, the EPN countries are also signatories of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the successor to the Trans-Pacific Partnership (TPP) that President Trump pulled out of three days after his inauguration.[2] Had he not done so, US participation in the TPP could have provided a framework for the supply chain cooperation that the Administration now seeks in the Asian-Pacific region.[3] The formation of the EPN is not the only example of the enduring relevance of the TPP: the negotiators of the USMCA drew 57 percent of the new North American agreement from the text of the TPP.[4]
Two days after the announcement of the Administration’s support for EPN-based supply chains, US Trade Representative Robert Lighthizer wrote that the “era of reflexive offshoring is over.”[5] To support that claim, Ambassador Lighthizer cited a report that US imports of manufactured goods from 14 Asian low-cost trading partners had declined by 7.2 percent in 2019. [6]
While it is true that the Administration’s trade war has caused a drop in imports from China, to declare the end of offshoring misreads global trade data. Many companies still rely heavily on supply chains that include Chinese manufacturers. The shift made already by US companies that moved manufacturing from China to Vietnam and other low-cost countries and the reluctance of corporations to lose productivity gains from international supply chains also indicate that widespread reshoring of production to the United States will face considerable obstacles.[7] Moreover, the Chinese companies that also moved their operations to Vietnam will continue to play an integral role in the supply chains of US companies. Finally, the participation of low-cost countries in global supply chains has contributed to growth in their income per capita and to productivity gains, benefits that they will be reluctant to lose. [8]
Another example of why it will be difficult to upend entrenched supply chains came during a Chamber of Commerce panel discussion in May that discussed measures to safeguard US medical supply chains.[9] During the conference, medical supply and equipment industry leaders opposed “Buy American” policies and stressed the importance of refraining from large-scale changes in the near term, since the reshoring of production would require investments in infrastructure over a number of years as well as changes in the regulations that firms face. The creation of the EPN is itself a recognition that reshoring is only one option as US companies seek to reduce their reliance on China. Diversification of suppliers does not necessarily mean reshoring, and frequently has not.
The disruptions caused by the pandemic complicate any assessment of the future of international supply chains. [10] However, analysis of the participation by EPN countries in global value-added supply chains shows that attempts to pull those countries away from China will confront strong economic ties.[11] Our research on value-added trade shows that since 2000, the global value chains (GVC) of Australia, India, Japan, Korea, and Vietnam have fared better than US GVC trade. Combined, these five members of the EPN have maintained a share of total world GVC trade in the range of 20-22 percent. Over the same period, the United States has seen its share of world GVC trade drop by 9.6 percentage points (as our prior analysis demonstrated).
Within the group of EPN countries, Japan’s GVC trade has also dropped substantially since 2000 (from 14.2 percent of world GVC trade in 2000 to 8.4 percent in 2017). In the same period, the combined GVC trade of Korea, Australia, India, and Vietnam relative to world GVC trade grew by 4 percentage points. The data also show that much of the value-added trade that had flowed early in this century between the United States and EPN countries has moved towards China. In 2000, GVC trade between the EPN members and the US was three times greater than GVC trade between the EPN countries and China. However, by 2017, the GVC trade of the EPN countries with China accounted for 3.7 percent of world GVC trade and had grown so much that it exceeded the group’s GVC trade with the US, which accounted for 2.6 percent of world GVC trade in 2017.
Thus, from 2000-2017 the participation in global value-added supply chains of the United States and Japan has declined relative to China’s share. The countries to which the Trump Administration wants to redirect supply chains through the EPN saw much more growth in their intermediate goods trade with China than with the United States during 2000-2017. As data on value-added trade in 2018-2019 become available, we will be able to assess the evolution of value-added trade after the onset of the trade war and before the pandemic of 2020.
The efforts by US companies to diversify their Asian supply chains will find support in those countries that want to expand their export markets. Despite the weight of China in Asian-Pacific trade flows, some US manufacturers will gradually strengthen their supply chains with EPN countries, a goal that they might have achieved earlier had the United States not withdrawn from the TPP.
Guy Erb is a former US trade policy official and investment banker, with experience in financial and trade advisory services and international organizations.
Scott Sommers is a Consultant with Berkeley Research Group and an incoming Ph.D. student in Economics at the University of Minnesota.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC, or its other employees and affiliates.
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© Washington International Trade Association
[ 1] Reuters World News, “Trump Administration pushing to rip global supply chains from China: officials,” https://www.reuters.com/article/us-health-coronavirus-USA-china/trump-administration-pushing-to-rip-global-supply-chains-from-china-officials-idUSKBN22G0BZ. Accessed May 5, 2020.
[2] Baker, Peter. “Trump Abandons Trans-Pacific Partnership, Obama’s Signature Trade Deal.” The New York Times, The New York Times, 23 Jan. 2017, www.nytimes.com/2017/01/23/us/politics/tpp-trump-trade-nafta.html.
[3] S. Katz, “The Enduring Promise of the Trans-Pacific Partnership,” The American Interest, https://www.the-american-interest.com/2020/05/01/the-enduring-promise-of-the-trans-pacific-partnership/. Accessed May 12, 2020.
[4] W. Alschner and R. Panford-Walsh, “How much of the Transpacific Partnership is in the USMCA,” Ottawa Faculty of Law Working Paper No. 2019-28, June 26, 2019, p. 3.
[5] R. E. Lighthizer, “The Era of Offshoring U.S. Jobs Is Over,” The New York Times, May 1, 2020, https://www.nytimes.com/2020/05/11/opinion/coronavirus-jobs-offshoring.html. Accessed May 12, 2020.
[6] Kearney Reshoring Index, https://atkearney.com/operations-performance-transformation/us-reshoring-index/full-report, Accessed May 13, 2020. The 14 countries cited are China, Vietnam, the Philippines, Malaysia, Indonesia, Pakistan, Sri Lanka, Taiwan, Thailand, Bangladesh, India, Singapore, Hong Kong, and Cambodia.
[7] W. Shoulberg, “Vietnam Is Becoming the Big Winner in the China Trade Wars,” Forbes, October 19, 2019. “Trump’s trade war convinced Lovesac to move its manufacturing out of China and into Vietnam,” Business Insider, February 2020. https://www.businessinsider.com/trade-war-lovesac-china-inside-vietnam-factory-2020-2#when-we-visited-the-factory-workers-were-swiftly-cutting-wood-stuffing-pillows-and-weaving-different-elements-of-lovesac-products-together-14. Accessed May 19, 2020. “Chinese companies moving to Vietnam keep quiet on trade war to avoid the wrath of authorities and staff,” South China Morning Post, May 16, 2019. https://www.scmp.com/economy/china-economy/article/3010530/chinese-companies-moving-vietnam-keep-quiet-trade-war-avoid. Accessed May 19, 2020.
[8] A. Ignatenko, F. Raei, B. Mircheva, “Global Value Chains: What are the Benefits and Why do Countries Participate,” IMF Working Paper, January 2019, pp. 3 and 13.
[9] D. Palmer, “Medical Industry Leaders: Don’t Rush to Change Supply Chains,” POLITICO Morning Trade, 20 May 2020, www.politico.com/newsletters/morning-trade/2020/05/20/brazil-begins-bid-to-join-wto-government-procurement-agreement-787761. Accessed May 20, 2020.
[10] S&P Global—Panjiva, “We’re not there yet—18 coronavirus lessons from supply chains and financial data,” https://panjiva.com/research/were-not-there-yet-18-coronavirus-lessons-from-supply-chain-and-financial-data/33038. Accessed May 15, 2020.
[11] We base our analysis of global value chains (GVCs) on data from the University of International Business and Economics, GVC indicators sourced from the World Input-Output Database, OECD-ICIO database, Eora database, and Asian Development Bank multi-region input-output (MRIO) database. The Asian Development Bank database offers coverage of 62 nations across 35 industries but does not report out New Zealand individually. See G. Erb and S. Sommers, Global Supply Chains and the Pandemic, WITA, April 27, 2020, https://www.wita.org/blogs/global-supply-chains-pandemic/.