Last year, Mexico replaced China as the largest source of American merchandise imports. There is no mystery why this happened: Imports from China plunged 20.3 percent. Some of the decline in Chinese imports is attributable to Chinese firms moving production to offshore locations such as Mexico, which benefits from the USMCA agreement, as well as Vietnam and other Southeast Asia locations. There are also data anomalies, so the actual drop in Chinese imports may not be as large as the U.S. Census Bureau reported.
In any event, the trend indicates the U.S. and Chinese economies are "decoupling." U.S. exports to China also declined, down 4.0 percent in 2023. Overall, U.S.-China two-way trade fell 16.7 percent last year.
It's not just China and America, however. Global trade took a hit in 2023. In December, the U.N. Conference on Trade and Development projected global trade would drop 5 percent from the record mark of 2022.
At the same time, UNCTAD, as the organization is known, stated the outlook for 2024 is "highly uncertain and generally pessimistic" due to "persistent geopolitical tensions, high levels of debt, and widespread economic fragility." It doesn't help that there will be this year "diminished demand in developed countries" as well as "underperformance in East Asia economies."
Not long ago, globalization looked unstoppable, and in the era of fast integration, which began after the Cold War, business did not have to worry about political barriers to trade. Companies soon realized they no longer needed to manufacture close to customers and so built factories where costs were extremely low, such as China. Supply chains, as a result, became longer, and many stretched half-way around the globe. Businesses became highly efficient and thus were able to produce products at unprecedentedly low cost and with great speed. Everything could be delivered "just-in-time."
Now, that manufacturing model no longer looks viable.
"The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades," wrote Larry Fink in his March 24, 2022 letter to BlackRock shareholders. He suggested the Ukraine war killed globalization because globalization had already been weakened by the COVID-19 pandemic, which had lessened connectivity among nations, among companies, and among people.
Fink, overseeing $10 trillion of wealth as the world's largest asset manager and one of the biggest beneficiaries and proponents of global integration, is not the only one who saw an historic transition. Henry Kissinger at about the same time spoke of a "totally new era." And when Xi and Vladimir Putin met in Uzbekistan in September 2022, the Chinese leader spoke of "a world of chaos."
In the new era of chaos and war, the skies and seas are no longer reliably safe for commerce. The Red Sea attacks by Yemen's Houthi militants, for instance, have convinced many shipping companies to add weeks and thousands of miles to journeys by avoiding the Suez Canal and traveling around the Cape of Good Hope at the southern tip of Africa.
Companies are already taking the next step: manufacturing products close to customers, reversing a three-decade-old trend.
UNCTAD reported that, since Q1 2022, trade between "geopolitically close" countries, as measured by U.N. voting records, has increased over 6 percent and trade between both "geopolitically distant" and "geopolitically very distant" countries has dropped more than 4 percent. This is what U.S. Treasury Secretary Janet Yellen famously called "friend-shoring."
Governments are accelerating the trend. The U.S., starting in the Trump administration, began pulling American supply chains out of China to make them more resilient. Xi Jinping, on top of everything else, has been pushing foreign companies out of China as he tries to reserve his country's market for state enterprises. With, among other things, relentless prosecutions of foreign businesses and the issuance of vague national security rules, China's Mao-admiring leader has made China a hostile environment.
Xi's actions are also cutting his country off from the world. Last year, China's merchandise exports fell 4.6 percent in dollar terms. Imports were down 5.5 percent. If increasing trade promotes peace, as everybody believes, does declining trade pave the way to war?
Yes, said Samuel Huntington. In his landmark 1996 work, The Clash of Civilizations and the Remaking of World Order, the Harvard political scientist argued that the direction of trade—not the volume—is what is important. Economic interdependence, Huntington argued, fosters peace only when states expect that high trade levels will continue into the foreseeable future.
If trade partners see interests diverging, Huntington wrote "war is likely to result."
Of course, war does not inevitably result when countries delink economies, yet the threshold for the use of force almost inevitably drops in these circumstances.
While countries are delinking, war is in fact spreading. There is, at the moment, the war in Ukraine; insurgencies across North Africa that look like wars; and the war that started in Gaza is now destabilizing Lebanon, Syria, Iraq, and Jordan.
As wars disrupt societies, companies move factories closer to home and trade declines. As trade declines, countries have fewer reasons to keep the peace. The world is now caught in this destructive, self-reinforcing cycle.
And there is no end in sight.
Gordon G. Chang is the author of The Coming Collapse of China. Follow him on X, formerly Twitter, @GordonGChang.
The views expressed in this article are the writer's own.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
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