Rebalancing Trade with China Requires a More Diverse Electronics Supply Chain
By Chris Miller, Associate Professor of International History at The Fletcher School
Introduction
As the incoming Trump administration devises its strategy to rebalance trade with China, electronics—the computers, phones, and servers that define the digital world—will be at the center. China is the largest manufacturer and assembler of electronics, while the United States is the world’s biggest designer and buyer of them. A quarter of the goods that China exports to the United States are electronics. China produces a large share— perhaps dangerously so—of the world’s electronics, exporting 63 percent of the world’s smartphones and 72 percent of computers.1
Despite multiple rounds of tariffs and export controls, in recent years, China’s position has in many ways strengthened. The West has criticized Beijing’s industrial policies like Made in China 2025, but these tactics have helped China gain market share in many segments.
Export controls on advanced chips have slowed China’s progress in that sphere, but China is gaining market share and technological aptitude in nearly every other segment of the electronics supply chain. Simpler semiconductors, substrate materials, display screens, printed circuit boards (PCBs), and assembly capabilities have attracted far less attention from policymakers. Yet electronic devices from smartphones to servers require many other components beyond advanced chips to function.
China is applying the same playbook it has deployed in semiconductors—including vast, market-distorting subsidies for government-linked firms—to shift the balance of influence in these sectors too. The US and other Western countries risk becoming overdependent on China-based manufacturing for some types of electronic components.
Chinese firms, meanwhile, are developing advanced capabilities. Because subsidized Chinese companies can offer below-market prices, their world market share will grow. Unless the West takes policy action to counteract Chinese subsidies, Chinese firms will play a bigger role in the electronics supply chain—including in more advanced, higher-value segments. This poses two challenges for the United States: the risk that China dominates specific segments and uses them as leverage against the West and the risk that—amid a military crisis—the US could lack the components its defense industrial base needs if supply from China and the rest of Asia is disrupted.
It isn’t hard to imagine that China would weaponize supply-chain segments where it is dominant. It’s already doing so. In 2010, China cut rare earth exports to Japan over a territorial dispute.2 More recently, China has imposed restrictions on exporting materials like gallium and germanium, which are needed in chipmaking.3 China has also threatened the supply of materials to Japan’s car industry if Tokyo aligns with US policies.4
Supply-chain dependencies can be weaponized if the product in question is (1) predominantly produced in one country, (2) difficult to produce elsewhere quickly, and (3) costly to do without. Electronics manufacturing relies on long and complex supply chains, often involving hundreds of firms and thousands of manufacturing steps. For example, an AI server can have 35,000 components produced in multiple countries.5 Not all these components are difficult to produce, but having to swap out even a simple component for an alternative can impose delays and require redesigns.
Internationalized supply chains can be stabilizing if all countries equally rely on each other. However, China’s surge of state subsidies threatens to shift the balance of influence in electronics supply chains, creating dangerous Western dependencies on Chinese producers. While Western firms retain technological advantages in designing and producing the most advanced processor chips, Beijing is pouring billions of dollars into producing the simpler foundational semiconductors pervasive across electronics. Not only is China likely to be close to self-sufficient in foundational semiconductor production by the end of the decade, but its ability to price below market will threaten Western firms’ profitability. China is executing the same playbook for displays (that is, screens for devices phones and PCs), in which, thanks to state support, it has gone from a minor player a decade ago to the dominant producer today. It is already the dominant producer, by far, of the PCBs on which chips are assembled into electronic products.
This dynamic only intensifies the second risk, which is that the US defense industrial base lacks a reliable supply of electronic components in case of a military crisis. Certain components—not only high-end chips but also cutting-edge displays and PCBs—can be sourced only from Asia. In peacetime, this isn’t a problem, especially when some of the cutting-edge suppliers are allies or partners like Japan, South Korea, and Taiwan. Yet in a war, moving goods across the Pacific would become much harder. Given the growing risk of conflict in Asia, relying exclusively on Asia-based suppliers for critical defense industrial electronic components is an unacceptable risk.
To address Chinese state subsidies and avoid excessive dependency, policymakers need a more holistic view of the electronics supply chain, beyond the advanced chips that have attracted much attention. Policymakers also need new tools. Continuing to encourage electronics assembly—not only in Southeast Asia but also in India and Latin America—would help.
The incoming Trump administration is likely to escalate tariffs on China. It should examine not only tariffs on final goods from China but also imposing tariffs on China-made electronic components imported in systems from third countries. Rules of origin governing electronics could be amended to encourage component production as well as basic assembly to shift away from China toward third countries like India, Mexico, and Vietnam. Such a move would prevent firms from shifting final assembly to a third country but continuing to rely on components like chips, displays, and PCBs from China. Additionally, the US should consider requiring critical industries, including the defense industrial base, to demonstrate that they have adequate component supply from non–East Asia sources, guaranteeing resilience of core industries in case of a military crisis.
(This post is republished from American Enterprise Institute.)