North America's Shifting Supply Chains: USMCA, COVID-19, and the U.S.-China Trade War

ABSTRACT

"8 The most important of the factors discussed in the article is the U.S.-China Trade War (discussed in Part III of this article) which, despite the conclusion of the "Phase One" Agreement on January 15, 2020, permits the United States to continue to impose tariffs from 7.5 percent to 25 percent on some $360 billion worth of tariffs on Chinese imports.9 Many observers, including this writer, believe that these penalty tariffs, imposed originally to pressure China to improve its protection of intellectual 4. property,10 will be in force for the foreseeable future and will exacerbate the already significant pressures on U.S. businesses to restructure their supply chains away from China toward the United States and its two USMCA partners. Given the unpredictability of both the Trump Administration and the Chinese leadership, it is more than a remote possibility that the tariff levels on U.S. imports on the remaining approximately $150 billion worth of Chinese products could be increased without much warning, as this was threatened by the Administration in the Fall of 2019 when the "Phase One" Agreement was under negotiation.11 Thus, in many respects, North America is expected to become the most attractive option for sourcing many parts and components and for supply chain management more broadly, even if the logistics and other complexities of more extensive decoupling from Chinese sources requires an extended period (three to five years) for many manufacturers of complex products. The dislocations will not be limited to U.S. importers because American firms, like chip producers Qualcomm and Intel, as well as Boeing (who count China as one of their most significant markets),13 are likely to lose partial access to that market either because of export controls or as retaliation for U.S. tariffs on Chinese exports to the United States. Initial concerns arose some years ago, well before the coronavirus became a worldwide catastrophe and before the United States and other governments placed blame on China for concealing the seriousness of the outbreak in China in a manner that has made it difficult for other countries, including the United States, to react promptly and effectively to the threats to the health of their own citizens and their economies.14 The pandemic has further reinforced the determination of President Trump and his key advisers (and many on both sides of the aisle in Congress) to greatly reduce or eliminate the supply chain links between U.S. manufacturers and China.15 This monumental change would be accomplished through "reshoring" production either to the United States proper (as the Administration would seemingly prefer) or, more likely in the case of labor-intensive products, "nearshoring" production to Mexico.16 For some products, final assembly and production of parts and components would be split between the United States and Mexico or Canada.