The United States is busy assessing its relationship with China, its biggest trade partner, in an effort to limit ties in strategic sectors.
Since Russia invaded Ukraine, the country has strengthened its ties to China as the West enacted sanctions against Russia.
After the start of the war, Russia limited its natural gas exports to Europe, causing concern that China may do the same if more geopolitical instability arises, according to Western economic officials, per The Wall Street Journal (WSJ).
“So the lesson learned from that for all of us has been: Let’s do that hard work now on the front end,” Deputy Treasury Secretary Wally Adeyemo said, according to the WSJ.
To strengthen its supply chain and reduce reliance on China while avoiding protectionist policies, the U.S. and its allies comprising the G-7 face a tricky balance.
“The big strategic choice that we have is whether in seeking to strengthen our supply-chain resilience … we do so in a way that tumbles the world back into protectionism,” Jeremy Hunt, the U.K.’s chancellor of the Exchequer, said in an interview last week, according to the WSJ.
During the semiannual meetings of the World Bank and International Monetary Fund, the G-7 agreed on new initiatives to strengthen supply chains, according to the WSJ.
A new IMF report warns against the threat of dividing the world economy into competing geopolitical factions led by the U.S. and China that would, in turn, lower global GDP, the WSJ reported.
“The question is, can we be more determined to enhance security of supplies but not push the world that far that we are into a second Cold War?” said IMF Managing Director Kristalina Georgieva at a press conference last week, according to Reuters.
“I am among those who know what are the consequences of a Cold War. It is a loss of talent and contribution to the world. I don’t want to see that repeated.”
The U.S. is the G-7 member most adamant about shifting its reliance away from China, per the WSJ.
Chinese exports to the United States totaled $577.13 billion in 2021, according to United Nations COMTRADE database.
The moves by the U.S. are part of a growing trend known as “friendshoring,” which the World Economic Forum describes as a trade practice in which supply chain networks are centered on countries considered allies.
Treasury Secretary Janet Yellen said that the fears of alienating China through friendshoring are overblown.
“The benefits of open trade, which include more efficient allocation of global resources, is maintained with friendshoring. So I think the argument that friendshoring is going to cause huge fragmentation and loss of the benefits of trade is really not valid,” Yellen said at a press conference last week, per the WSJ.
With growing geopolitical tension, both sides want to become more self-sufficient as the threat of confrontation grows.
“We should not repeat miscalculations or mistakes we made in the past with regard to Russia with other big countries,” Niels Annen, Germany’s parliamentary state secretary for economic cooperation and development, said of Europe’s reliance on Russian energy exports before the invasion, according to the WSJ.
But at the same time, Annen said, “We don’t want to enforce a policy or strategy of decoupling.”