Made with China: Global supply chains and the limits of US decoupling

Peterson Institute for International Economics | Mary E. Lovely, Christine Y. Wan

US tariffs implemented between 2017 and 2024 failed to significantly reduce American economic dependence on Chinese goods and services. While China's direct share of bilateral US imports fell by 7 percentage points, its share of value added in US imports dropped by only 2 percentage points. This discrepancy arose because suppliers rerouted supply chains through third countries, masking the persistent flow of Chinese inputs into the American market.

According to research utilizing Asian Development Bank multiregional input-output tables for 2007–24, the primary beneficiaries of this trade diversion were Taiwan, Vietnam, and Mexico, which grew their import shares by 4.1, 3.7, and 2.3 percentage points respectively. Decoupling remains largely illusory. Consequently, critical American industries remain highly vulnerable to supply chain disruptions originating in China. The second Trump administration's current tariff policies are unlikely to curb this reliance on essential Chinese inputs.

Comment

The persistence of Chinese value added in US imports exposes the limitations of using broad tariffs as a tool of defence economics. While direct bilateral trade flows appear to diminish, the underlying reliance of the US defence industrial base on Chinese subcomponents remains largely unchanged. This indirect dependency complicates efforts by the Bureau of Industry and Security to secure critical supply chains.

The Pentagon faces heightened fiscal and operational friction when attempting to enforce strict domestic sourcing mandates for advanced systems. Efforts to expand the National Defense Stockpile or subsidise domestic alternatives will require significantly higher capital outlays than initially projected. This fiscal strain ultimately limits the procurement rate of critical munitions programmes like the Guided Multiple Launch Rocket System.

Strategic Question for Discussion

If indirect Chinese value added cannot be purged from sub-tier suppliers, how can the Pentagon realistically scale up production of the Guided Multiple Launch Rocket System without accepting persistent vulnerability to foreign chokepoints?

The available evidence points toward a dual-track approach where the Pentagon accepts a degree of supply chain risk for non-critical components while focusing strict domestic sourcing rules on high-priority guidance systems. This trajectory indicates that complete decoupling remains unfeasible, forcing procurement officials to rely on expanded buffer stocks rather than pure domestic manufacturing. My assessment is that this compromise will persist as long as alternative sub-tier suppliers in allied nations lack the capacity to meet surge demands.

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