Illustration by Patric Sandri

Over the last five years, global supply chains have come under unprecedented stress from the pandemic, natural disasters, geopolitical events, and general anti-globalization sentiments. Nowhere is this more evident than in the trade relationship between the United States and China. As political tensions rise between the two countries, US government policies have caused a move away from direct trade with China, shifting sourcing to lower-wage nations and friendly neighbors and shoring up American manufacturing capabilities. It’s a phenomenon HBS professor Laura Alfaro calls the “great reallocation”—but surprisingly it doesn’t mean the United States is less dependent on China.

In the working paper, “Global Supply Chains: The Looming ‘Great Reallocation,’ ” Alfaro and her coauthor, Tuck School associate professor Davin Chor, analyzed 40 years of global supply chain trends, with a focus on the events of 2017 to 2022. They found that trade has rebounded from the pandemic shock, but that aggregate measures—such as American goods imports—mask big changes in the origins of those goods.

HBS professor Laura Alfaro
(Photo by Susan Young)

HBS professor Laura Alfaro
(Photo by Susan Young)

The research showed that tariffs placed on Chinese imports by the Trump administration in 2018, which were intensified during the Biden administration—as well as national security concerns—have significantly chilled direct imports from China. Chinese imports dropped from 21.6 percent of goods by the United States in 2017 to 16.5 percent in 2022. Meanwhile, Vietnam and Mexico, among other countries, have seen an increase in their share of American imports.

Alfaro compares China’s situation to that of Japan 60 years ago. In the 1960s and 1970s, the United States imposed tariffs on Japanese goods. In response, Japanese firms moved affiliates to the United States. “The scope and speed at which Japanese firms came to the US was dramatic,” Alfaro observes. “But the US [government] is not going to let China do that.”

Instead, China has intensified trade with and foreign direct investment (FDI) in four of the top five trading partners of the United States. For instance, direct investment by Chinese firms in the Mexican manufacturing sector grew from $31.6 million in 2017 to $151.5 million in 2022—mostly in the computer and auto parts industries.

“China is indirectly maintaining the relationship via imports to other countries and FDI to other countries,” Alfaro explains. “It is likely that any import the US buys from another country has a similar share of Chinese ownership as it used to five years ago.”

While the intent of these policies was to move away from China, they have backfired by shifting China’s participation in the global supply chain feeding American consumers. Moreover, the move is not cost efficient, as production costs in nations such as Mexico and Vietnam are higher than in China, which results in higher prices for finished goods.

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