Tensions deepen as U.S. makes move away from Chinese supply chain

Political events, COVID-19, and a quest for primacy in advanced technologies have seen the United States making recent moves to shift away from China’s supply chain.

Last week, in a Securities and Exchange Commission filing, the U.S. government had told Nvidia (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD), leaders in the semiconductor chip space, to restrict exporting some of its most advanced chips to China and Hong Kong.

These restrictions are the latest attempt by the U.S. to reduce their reliance on China and dominate the advanced technology space.

Previously, the U.S. and China were mutual trade partners, forming a partnership in the 70s that helped strengthen the Chinese economy whilst delivering low prices to American consumers.

Over the past several years, however, this relationship has been falling apart.

In 2016, President Obama made a pivot toward other Asian nations, meeting with the leaders of the Association of Southeast Asian Nations (ASEAN), a group of neighbours involved with fierce territorial disputes with China.

Then, in 2018, tensions grew further when President Trump made several public complaints about the trade relationship with China and sanctioned their unfair trade practices. He then imposed extra tariffs on goods imported from China and in 2020, reduced China’s access toward various semiconductor manufacturing technologies.

China responded with many countermeasures along the way, including suspending cooperation on both the repatriation of illegal immigrants and against transnational crimes.

The feud has only worsened since President Biden took office in early 2021.

In May of this year, Mr. Biden imposed more sanctions on Chinese companies such as Chinese video surveillance company Hikvision, claiming they were permitting human rights abuses by supplying the Chinese government with cameras used in the repression of the Uyghurs.

The following month, Mr. Biden banned American citizens from investing in a number of Chinese tech and surveillance companies with alleged military ties, stating, “I find that the use of Chinese surveillance technology outside the PRC and the development or use of Chinese surveillance technology to facilitate repression or serious human rights abuse constitute unusual and extraordinary threats.”

The President has also made several complaints about human rights issues in Xinjiang.

Meanwhile, the COVID-19 pandemic has only exacerbated the separation of using Chinese supply chains.

Amid the pandemic, China’s zero COVID policy disrupted the supply chain running through China, forcing many U.S. companies to temporarily shut down operations, leading to major delays and interferences with production.

As such, many major U.S. companies have shifted operations elsewhere.

In 2020, Apple made the move to start producing AirPods in Vietnam. More iPhone production will start to be done there as well.

This year, Microsoft has shifted its Xbox game console shipping operations from China to Ho Chi Minh City, Vietnam.

And recently, Google announced plans to move manufacturing from Foxconn facilities in Southern China to Vietnam, where it will begin assembling its latest model, the Pixel 7.

Major companies are not the only ones.

Over the past year, roughly 20% of supply chain executives had brought back production to neighbouring counties in the past year, almost double the number from the previous year, according to a survey conducted by consulting firm McKinsey & Co.

In addition, the recent surge in fuel prices, have resulted in higher ocean freight and other transport costs of goods to the States.

As a result of these factors, U.S. companies have begun shifting operations back to the U.S., or nearby, where cheap labour and easy access to factory capacity outweighs the costs of shipping products across the sea.

Apple manufacturers Foxconn and Pegatron are considering building new factories in Mexico for producing iPhones, taking advantage of the lower cost of labour and the free-trade agreement between the U.S. and Mexico.

Inter Parfums, a prestige perfume and cosmetics company, has agreed to shift almost all of its contract manufacturing to the U.S.

“How good is it to have cheaper components when you cannot get them?” Jean Madar, founder, and chairman of Inter Parfums states.

More recently however, Mr. Biden’s latest measures to restrict the exportation of high-quality semiconductor chips to China reveal further steps to move away from China.

China has made it very clear that it wants to overtake the U.S. in artificial intelligence, 5G, aerospace, electric vehicles, and biotech, recently spending an all-time high of 2.44 trillion Chinese yuan (US$378mn) on research and development in a push for advanced technologies.

And semiconductor chips are integral to the development of these advanced technologies.

The move could damage Chinese firms’ ability to perform advanced work, and thrive in the technology space, as well as obstruct Nvidia and AMD’s business in China.

As such, following the announcement of the restrictions, Nvidia’s share price fell 7.7% overnight.

In a battle for world dominance, the U.S. currently has the upper hand, and by continuing to stray away from Chinese supply chains, the economic gap will widen and allow it to remain as the world’s technology superpower.

However, China’s efforts also remain strong in the quest to figure out ways to eliminates its reliance on the U.S.

This arm-wrestle for technological supremacy and economic independence is far from over.

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