Reality Check: Deglobalization

It’s been a rough few years for globalization. First came the global pandemic that slammed international borders closed. Workforce disruptions led to broken supply chains and angst among business leaders over their dependence on partners overseas. Then came much more geopolitical turmoil, which has fed the narrative that U.S. companies are choosing to deglobalize by bringing manufacturing and critical supply relationships closer to home. But is that really happening?

A recent working paper by Laura Alfaro (Harvard Business School) and Davin Chor (Dartmouth’s Tuck School of Business) published by the National Bureau of Economic Research shines some light on that question. Alfaro and Chor don’t see deglobalization occurring so much as what they call a “looming great reallocation” away from China: Imports from China as a share of all U.S. imports fell from a peak of 21.6% in 2017 to 16.5% in 2022. (However, they note that in absolute terms, U.S. imports from China expanded from roughly $505.1 billion in 2017 to $531.3 billion in 2022.)

Economists point to a rise in imports from Vietnam and Mexico of electronics, auto parts, and semiconductors as being partially responsible for Chinese goods making up a smaller share of U.S. imports. But China is not alone in losing U.S. market share: While China’s share fell by the most percentage points, U.S. imports from Japan and high-income European countries such as Germany, France, the U.K., and Italy have all continued to decline as well.

What’s behind these shifts? The authors uncovered some clues in their analysis of earnings call transcripts from 2005 to 2023: Use of the terms “friendshoring,” “nearshoring,” or “reshoring” spiked twice — first as U.S.-China trade tensions rose under the Trump administration, and again as the Biden administration introduced discretionary tariffs and embraced industrial policy.

But companies that seek to reduce dependence on China by shifting sourcing to Vietnam or Mexico might find that Chinese companies remain active in their global value chains. That’s because Chinese companies stepped up their foreign direct investment in both Vietnam and Mexico in response to the U.S. imposing tariffs on direct imports from China. “The upshot of this is that even though the U.S. may be reallocating its sourcing and imports toward Vietnam and Mexico, it may de facto remain connected with and dependent on China” indirectly, Alfaro and Chor write.

Bottom line: International trade flows remain robust, but some U.S. imports are being reallocated from China to other countries.