Can hi-tech supply chains binding China and America be untangled?

Gwyneth Paltrow introduced the world to the concept of “conscious uncoupling” in 2014 during her divorce from Chris Martin. Much mockery ensued. But in 2024 it is not an actress and a rock star who want to gently step back from an interdependent relationship. America and China now face that challenge, as relations become increasingly chilly.

The most common term for it is “decoupling”, though the American government prefers “de-risking”, and applies it narrowly, to a few areas of advanced manufacturing. But whatever you call it, the difficulties in making a separation work are clear.

In some respects, decoupling is under way. The Rhodium Group, a research firm, says that the annual level of greenfield investment by Chinese companies in America dropped to below $1bn from 2019 to 2022—less than investment by Norway and Spain. In 2023, Mexico surged past China to retake its historical position as America’s largest trading partner.

America wants to bring production of some semiconductor manufacturing back home, and is subsidising firms to invest. It also wants to move supply chains to friendlier Asian countries, but that sometimes clashes with business reality.

Take solar-panel production. America imposed steep tariffs on Chinese solar-panel makers, and buyers switched to producers in South-East Asia. But the content of solar panels destined for America is still often Chinese. In August, the Department of Commerce said five large Chinese firms were skirting tariffs by manufacturing in South-East Asia.

The reorientation of massive, low-margin contract manufacturers also illustrates the challenges of decoupling. Foxconn, a Taiwanese giant with factories in China which lists Apple, Dell and hp among its clients, aims to expand in India. But it pulled plans for a $20bn chipmaking venture in Gujarat in July, after running into difficulties.

Foxconn is investing heavily in Vietnam, but continues to grow in China. In 2023, the company acquired land for further production in Henan province and began production at two other sites. Wistron, another Taiwanese manufacturer with factories in China, ended its own presence in India after a decade and a half, selling its operations to Tata, an Indian conglomerate. Wistron did not confirm the reason for its move, but Indian media reports suggested that even with the country’s lower labour costs, it struggled to turn a profit.

Many Western firms are relying on such manufacturers to do their decoupling for them. Those firms’ ability to rearrange their supply chains will make the difference between successful de-risking and messy half-separation.

South-East Asian countries like Vietnam will benefit. With no intention of limiting trade and investment flows to and from China, they are of growing interest to both China and America. The two sides in the trade war may both end up losing, while the non-combatants win big. ■

Mike Bird, Asia business and finance editor, The Economist