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Vietnamese manufacturers are among the best-positioned to capitalise on US efforts to shift supply chains ‘away from strategic rivals’. Photo: Bloomberg

US-China tensions open door for these 7 trade partners to capitalise on Washington’s ‘friendshoring’

  • New analysis says US’ shift away from China to strengthen supply chains with allies won’t be easy, as China looks to remain critical in the ‘most globalised’ sectors
  • Economist says companies have already become used to US-China frictions, and there’s no ‘fast and easy solution’ to leaving China behind
China trade

As the United States ramps up efforts to shift supply chains “away from strategic rivals” while deepening relations with allies, a new analysis identifies which among them are the top “friendshoring” candidates.

Mexico, South Korea, Japan, Vietnam, Indonesia, Brazil and Malaysia are best-positioned in Washington’s push to “shake off the dependence on China”, according to the findings released by Allianz Trade on Thursday.

With a focus on globalisation and friendshoring, the analysis looked at potential suitors for the US-initiated strategy of reshaping the global supply chain through allies – based on their trade complementarity and absence of tensions with the US and EU; as well as their competitiveness with China in terms of the global value chain and traditional trade.

There’s not a fast and easy solution to friendshore away from China. It’ll take forever to reshore the lion’s share
Ludovic Subran, Allianz

The report said China’s share of the US’ import market fell last year to 10 per cent, from 15 per cent in 2018, when tariff hikes of up to 25 per cent were introduced between the countries. And China went from being the US’ second-largest source of imports in 2018 to its fourth-largest in 2021.

Asian competitors such as Vietnam, Taiwan, South Korea, India, Thailand and Malaysia “partly benefited” from the heightened US-China tensions during the period, Allianz found.

But China is also a critical supplier for the “most globalised” sectors, such as computers and telecommunications; electronics; household equipment; metals; automobile and transport equipment; chemicals; and machinery equipment, the report added, with China’s share of the global output in those areas ranging from 6 per cent to 27 per cent.

“There’s not a fast and easy solution to friendshore away from China,” said Ludovic Subran, chief economist at Allianz. “It’ll take forever to reshore the lion’s share of China in global trade.”

On the supply side, China is the largest contributor in the world, with the output it produces for global value chains amounting to nearly US$3.4 trillion a year, figures in the new report showed.

The world’s value-chain imports from China account for 0.5 per cent of global output, and the share goes as high as 3.9 per cent for Vietnam, 3 per cent for Singapore and 2.3 per cent for Taiwan and Hong Kong. It stands at 0.6 per cent for Germany and 0.3 per cent for the US.

“There will be more frictions in a fragmented world, even though the world is more connected than ever in global trade and goods,” Subran added. “And there will be two levels of working – political rhetoric and pragmatism.”

The report added that US and EU’s critical dependencies on China are mostly found in the aforementioned globalised sectors. And Subran warned of the dangers of removing countries from the global value chain, as it would result in soaring costs for manufacturers.

Europe eyes new chip supply chains as Taiwan tensions risk ‘choking’ supply

“Companies are used to the US-China frictions, and they will move around the situation to absorb the costs,” Subran said.

Looking at dependencies from China’s perspective, the US is a critical supplier of only 22 types of goods, mostly in the agri-food sector, representing just 0.2 per cent of China’s total imports, the report added.

The EU’s role is “more substantial”, as it is a critical supplier of 188 types of goods to China, mostly in the agri-food, textiles, and machinery and equipment sectors. These sectors account for nearly 20 per cent of China’s imports from the EU, but only 2 per cent of China’s total imports.

“We can’t deglobalise China [when there is] such critical supply dependence,” Subran said, calling the situation “systemic and complicated”. “It’s a lose-lose game.”