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Do All Trade Roads Lead to China? The Geopolitics of Global Supply Chains Today

Agora Strategy Executive Briefing on Geopolitics of Global Supply Chains
Agora Strategy Executive Briefing on Geopolitics of Global Supply Chains

Executive Summary

  • China remains a linchpin in global trade, but this central position is challenged by the country’s persisting economic problems and international firms shifting their operations away from the mainland.

  • Beijing’s newfound willingness to cooperate with the United States and Europe provides a breathing pause for businesses worried about escalating geopolitical tensions, although the underlying contradictions will remain.

  • Faced with risk and uncertainty, most firms have chosen to maintain operations in the country for now while exploring diversification options, others have started divesting, while an unfazed few have sought to even further localize their business.

Implications for International Business

  • As economic and political frictions could easily flare up again, firms should prepare for further curbs on trade with China, not least as the EU pursues its “de-risking” agenda and acts against what it views as unfair Chinese subsidies.

  • Yet, poor diversification strategies could leave companies even more exposed. Meticulous planning is required to fully exclude Chinese suppliers or operators from supply chains, as complex trade patterns often obscure input from China.

  • Alternatives to diversification include investing in recycling and redesigning operations to reduce waste, just as technological innovations can allow firms to substitute Chinese-sourced inputs for less scarce products and raw materials.

State of Play

Decoupling is difficult

President Xi Jinping’s draconian pandemic lockdowns have left a mark on the Chinese economy. A year after the abrupt reopening in late 2022, households and businesses still spend less out of caution, putting a brake on a previously dynamic economy. This has added to structural challenges related to slowing population growth, weak private consumption, and growing debt. The Communist Party has also tightened its grip on the private sector, as evidenced by the sudden vanishing of high-profile Chinese technology entrepreneurs. In combination with U.S. export controls and restrictions on investment, investors have taken flight. For the first time on record, foreign direct investment in China went negative in the third quarter of 2023.


These disruptions have not dislodged China from its position as a world-leading trader. China is still the main source of imports for most of its neighbors in Asia, including among members of the Indo-Pacific Economic Framework (IPEF), a US-led trade initiative. The government is investing heavily to prop up the manufacturing sector, which contracted for the second month in a row in November. With low demand, however, overcapacity and subsequent cheap exports of goods like EVs, batteries, heat pumps, and electrolyzers could follow.


Europe’s plans to reduce its reliance on Chinese semiconductors, raw materials, and green technology will reshape trade patterns over the long term, as would EU measures to limit the import of cheap subsidized EVs from China. Yet the EU’s dependence on China is not lessening, at least not at any significant pace. China remains the EU's principal provider of rare earths and other crucial raw materials. The US also struggles to end its reliance on Chinese imports. After tariffs were imposed on a range of products in 2018, US imports of Chinese goods decreased, and American firms began to buy more from other Asian countries like Cambodia, Thailand, and Vietnam. The latter in particular has emerged as an important hub for manufacturers, with President Joe Biden signing a “comprehensive strategic partnership” in September, and Xi Jinping paying a visit to the country in December. However, some Chinese firms appear to have moved their assembly to these countries to circumvent US tariffs, essentially leaving American dependence on primary suppliers intact.

Key Issues The geopolitics of trading with China

Beijing is still firmly bent on displacing the United States as the world’s dominant geopolitical power. For now, however, Chinese leaders seem eager to limit the West’s economic decoupling as much as they can while expanding cooperation with groups like the BRICS. Joe Biden and Xi Jinping’s four-hour encounter in November provided a welcome pause in the otherwise escalating geopolitical rivalry marked by new trade restrictions. Beijing was also surprisingly forthcoming ahead of the EU-China summit in early December by allowing 15-day visa-free travel for citizens of France, Germany, Italy, the Netherlands, and Spain as a clear marker that it is again ‘open for business’. Moreover. the Chinese commerce ministry recently pressed local authorities to halt bias against foreign companies, including by ensuring new EV subsidies are accessible not just to domestic brands. However, underlying tensions remain, as the EU wants Beijing to limit support for Russia and curb its cheap exports.


China also continues to expand trade networks in its neighborhood as well as in the Middle East, Africa, and South America. One of its main conduits, the Belt and Road Initiative (BRI), has been used to develop supply chains leading back to China. This month, Italy informed Beijing that it would leave the BRI, but the initiative seems to be doing well in other places. 21 Latin American states have signed on to the BRI, while China has free trade agreements with Peru, Ecuador, Chile, and Costa Rica. The Regional Comprehensive Economic Partnership Agreement (RCEP), a trade agreement between 15 Asia-Pacific nations that entered into force in 2022, has also helped solidify China’s trading partnerships. The United States, meanwhile, tends to rely on its well-developed military alliance network to compete with China in the region, rather than signing substantive trade deals. Its unwillingness to offer market access or cut tariffs makes it harder to tie partners closer. Late this year, for instance, negotiations within the IPEF, involving countries like Vietnam, Thailand, and Malaysia, failed to yield anticipated results.

There’s more than one way to “de-risk”

Firms with clear national affiliations risk becoming collateral damage in the present geopolitical spats. Recent examples include Chinese restrictions and raids against U.S. companies Micron, Deloitte, and Bain & Company in what smacks of retaliation against American sanctions and export controls. Beijing also barred some bankers and executives from leaving the country and put pressure on due-diligence firms like Mintz Group for carrying out what authorities say are unauthorized investigations.


Executives therefore have to make hard decisions. Gradual and light diversification should be the best option for businesses who have faith in the Chinese economy and think their operations are unlikely to get caught up in geopolitical frictions. It allows them to capture growth and show shareholders they are taking action to address the mounting risks. The downside is that diversification can be costly, often takes time, and, even if it succeeds with the daunting task of isolating supply chains from Chinese operators, businesses’ foothold in the mainland leaves them significantly exposed. Those who do not think remaining is worth the risk have started to divest. This is the choice of companies with easy access to alternative supply chains or whose sectors are likely politicized. Also companies outside high-risk sectors have followed this strategy, as toymaker Hasbro, for instance, has shifted production away from China. Others, still, have put their weight down on the Chinese side, such as McDonald's and Volkswagen announcing major investments in China over the past year. Some have even gone further with “China for China” strategies aiming to localize operations and protect parts of their business from external disruptions. Merck, for example, has announced plans to enlarge its supply chains in China to lessen dependence on raw materials sourced from outside the country. Such moves should appeal to those who struggle to see a bright future for their company unless China is in the equation.

Diversification is not the only strategy available to businesses who want to reduce their dependence on China. Investing in recycling schemes or redesigning operations to reduce waste can help alleviate reliance over time. Technological innovations also allow firms to replace inputs from China with less scarce products and raw materials. For instance, a recent breakthrough by Swedish battery maker Northvolt is expected to enable the production of sodium-ion batteries without critical minerals such as lithium, which are tied to China's dominance of the supply chain. Northvolt is, in fact, building a gigafactory in Heide, where battery production is set to begin in late 2025.


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