The Daily Planet #102: The China Shock, Part 3

The economic relationship between the US and China has undergone a fundamental transformation, driven by geopolitics, security concerns, and the need for supply chain resilience. While globalization and comparative advantage remain important, companies can no longer rely solely on cost efficiency and just-in-time production.

Instead, businesses are adopting a strategy of strategic interdependence, focusing on resilience and diversification to navigate the complexities of the current global landscape. This shift is evident as US firms become more selective in their investments in China, with China's share of US imports declining significantly from 22% in 2017 to 13.4% in 2024.

Meanwhile, other markets like Vietnam and Mexico have grown in importance, and companies are building multi-node supply networks that often include Chinese partners in new locations to mitigate risks. Foreign direct investment into China has plummeted by over 90% in recent years, reflecting heightened geopolitical scrutiny and concerns about regulatory uncertainty.

On the other side of the Pacific, China's domestic economy continues to advance technologically, foreign capital inflows remain subdued. On the outbound side, Chinese investment in the US has also sharply declined, redirecting capital toward Southeast Asia, the Middle East, and Latin America.

Moral of the story: in this era of strategic interdependence, firms must embrace complexity, develop granular intelligence, and adapt to evolving local conditions to succeed in a more fragmented and cautious global economy.

Strategic interdependence is rewiring the global economy

It is no longer sufficient for the US-China trade relationship to be driven solely by cost and efficiency