US-China decoupling: inward turn could undo gains made in ‘de-risking’ efforts

For all the talk of the benefits reshoring and ‘de-risking’ can bring domestic workers, they also introduce new risks to people’s way of life
Neither the US nor China can afford to ignore these new risks, including limited job creation, expensive subsidies and greater material costs

Janet Pau

Published: 4:09pm, 17 Oct 2023

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Localisation policies are gaining appeal in both the United States and China, driven by global uncertainties and persistent bilateral tensions. These policies emphasise local production and consumption, self-reliance and reduced dependence on global supply chains, all in the name of “de-risking”, which has become the watchword of our time.

While these policies are touted as beneficial for the economy and local workers, they also introduce new risks that can leave their people worse off.

The Covid-19 pandemic and Russia’s invasion of Ukraine have exposed the risks of relying on imports that can be disrupted by unforeseen events. The likely ripple effects of Israel’s escalating war in Gaza on energy and technology trade will serve as a stark reminder of the vulnerabilities that can arise with little warning.

Apart from the goal of self-reliance, the US and China also seek to protect sensitive technologies to safeguard national security, support domestic industries, enhance innovation and create jobs.

Localisation can also support climate goals by cutting the carbon emissions generated from long-distance goods transport.

Moreover, slogans such as “Made in America” and “Made in China” appeal to the public and can score political points.

The US has implemented localisation-oriented policies before, such as the Buy American Act in 1933, which mandated a preference for domestic products in government procurement. The Inflation Reduction Act of last year more widely aims to boost industrial growth, create jobs and promote environmental sustainability. It targets new American industries such as electric vehicles by requiring more than 50 per cent domestic content to qualify for tax credits.

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China has also adopted policies with local content requirements and become increasingly invested in heavily subsidised and state-led technological innovation. Its dual circulation strategy aims to enhance domestic production capabilities, promote hi-tech industries and achieve self-sufficiency in strategic sectors.

China has poured resources into producing electric vehicles and semiconductors as a hedge against increasing US export and investment controls.

However, while localisation policies are promoted as a means to mitigate risks and enhance local welfare, they introduce new risks and trade-offs. For instance, developing an electric vehicle industry domestically could create jobs for engineers and skilled auto workers, but the overall number of such jobs could be limited because of increased automation.

Additionally, the establishment of vertically integrated supply chains could create low-skilled positions that could otherwise be outsourced to countries with lower labour costs. These jobs might not be appealing to overqualified workers, resulting in a failure to address issues such as the youth unemployment and underemployment, with which China is currently grappling.

Fostering local production often requires significant subsidies to support domestic industries. A notable example is the construction of chip plants in the US, which is providing subsidies to help equalise US costs of production with those in countries with lower labour and operational expenses.

Taiwan Semiconductor Manufacturing Company’s new plant in Phoenix, Arizona, is starting to take shape as it prepares to start mass production in 2024. Photo: Matt Haldane

These subsidies need to be funded, potentially through new taxes. The irony is such new taxes could inadvertently deter long-term investments and undermine the very purpose of encouraging local production.

Subsidies also make domestic industries less globally competitive. This can reduce exports, eventually leading to job losses and slower growth.

Local content requirements for high-end industries will also be tough to meet as specialised materials, components and machinery must still be sourced from abroad. Both the US and China will find it difficult to achieve competitiveness across the technology supply chains.

In fact, policies to master the supply chain even in areas of comparative disadvantage will yield few benefits for local populations. Despite ambitions to build stronger supply chains for the future, both the US and China face the loss of manufacturing activities to lower-cost economies such as Mexico or Indonesia, and the erosion of living standards for displaced manufacturing workers.

What are China’s industrial subsidies and why are they so controversial?

Policies such as the US Trade Adjustment Assistance programme have led to the re-employment of workers who lose their jobs or have hours reduced as a result of increased imports. However, it has not led to long-term stability or wage parity, while manufacturing competitiveness further eroded.

Addressing worker displacement will become even more vital when both skilled and unskilled workers risk being downwardly mobile. Generative artificial intelligence is anticipated to decrease the demand for skilled workers in emerging sectors such as entertainment, creative industries and software, even with localised production efforts.

Government subsidies for automation could inadvertently discourage human labour. This raises the question of whether it is necessary to deliberately decelerate technological advancements to prioritise human involvement.

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Finding balance is hard. The US and China need diversified economies that combine local production with global and regional trade. This lets them leverage their strengths in industries that can generate higher value while benefiting from international collaboration. Encouraging local entrepreneurship, creativity and technological advancements will help these sectors prosper.

Such industries are aligned with local strengths and capabilities, reflecting local culture and identity while creating loyal domestic and international customer bases. These sectors can also find success by collaborating with international partners to facilitate knowledge transfer and support cutting-edge developments which countries cannot develop alone.

The US and China are at a crossroads. They can turn inward for short-term and costly gains, or they can balance local production and international openness.

Across-the-board localisation policies risk selling false hope to people, leading to disappointment and populism. Striking a better balance can help local populations benefit while thriving in an interconnected world.

Janet Pau is executive director of the Asia Business Council

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