While the US and China decouple, the EU and China deepen trade dependencies

Pandemic-era shortages and rising geopolitical tensions have fueled calls in recent years for the United States and the European Union to “decouple,” or at least greatly reduce their dependence on imports, from China. All three of the world's largest trading regions are pursuing policies to diversify the sources of their imports, both as a hedge against natural supply disruptions and to reduce vulnerability to economic coercion.

The United States has decreased its dependence on China for all types of imported manufactured goods since 2018, according to recently released 2023 customs data. The European Union[1] and China, however, have maintained or increased their reliance on each other for almost all types of imported goods, creating the potential for future clashes between EU and US national security policies.

The United States has the least diversified import sourcing of the three big trading regions, meaning a greater share of its total imports come from fewer sources, according to a commonly accepted measure, figure 1 shows. This Herfindahl-Hirschman index (HHI) is calculated as the sum of squared market shares. The higher the HHI, the greater the concentration of import sources; a lower HHI indicates more variety. The US index for total imports is the highest of the three regions for every year examined. For more detail on our approach, see the methodology appendix below.

Only four trading partners each supply the United States with more than 10 percent of its total imports—the European Union, Canada, Mexico, and China—but diversification of its sourcing has increased since 2018.

China’s import sourcing is the most diverse of the three big regions; its concentration index is substantially lower than those of the other two, figure 1 shows. Only the European Union provides more than 10 percent of the total value of China’s imports. The European Union also relies on a diverse set of suppliers; just two sources—the United States and China—provide 10 percent or more of the European Union’s import value in 2023.

Focusing on changes over time, figure 1 also shows that both China and the United States reduced their sourcing concentration between 2018 and 2023, a reversal after the growth between 2013 and 2018. In contrast, Europe’s concentration rose across the full 10-year period.

Tracking import supply diversification of the three big economic regions

Given the unequal distribution of natural resources across countries, we may expect that the sourcing of total imports is more concentrated than manufactured goods. For example, only a subset of countries export oil and gas or corn and soybeans. While overdependence in both energy and food is a major concern for some countries, “derisking” of supply chains in the context of trade with China focuses on manufactured goods. As noted by Richard Baldwin, China provides 29 percent of the world’s value added in manufacturing and 35 percent of gross manufacturing production.[2] China is a dominant supplier of many goods deemed essential to other economies.[3] Consequently, overdependence on China for manufactured goods is of concern to the United States and the European Union.

The concentration indexes for the three regions’ manufactured goods imports, figure 2 shows, are higher for each region when compared to those for total imports in figure 1. Moreover, differences across regions in the concentration levels are smaller than they are for total imports. Indeed, despite the narrative that China has been “decoupling” for years, the data show that the concentration of its manufactured goods import sourcing is not exceptional compared with other large economies. The HHI for China’s manufactured imports is similar to that of the United States, and only 13 percent lower than that of the European Union.

Over time, for all three regions, the trends for manufactured goods resemble those for total imports, with the United States and China diversifying their sourcing between 2018 and 2023, and the European Union increasing the concentration of its manufactured goods sourcing over the same period. In particular, the share of EU imported goods originating in China has grown, and the mainland remains by far the region’s largest import source.

China relies on the United States for less than 10 percent of its manufactured goods, while it now purchases more from the European Union than it did five years ago. Only three other sources, all in East Asia, provide more than 10 percent of Chinese manufactured imports, with both Japan and Korea claiming a progressively lower share of China’s bundle since 2013.

China’s share of US manufactured imports dropped sharply after the United States applied tariffs on about two-thirds of its imports from China in 2018 and 2019, figure 2 shows. Given that sourcing arrangements reflect costly investments that unwind only with time, this suggests that China’s share of US imports may continue to decline.

Over the last 10 years, only two other sources, Mexico and the European Union, have each provided at least 10 percent of US manufactured goods imports. Both sources have seen their market share climb as China’s has diminished, with the European Union becoming America’s top source and Mexico closing in on China in 2023.

Europe, however, is growing more dependent on China as a supplier of manufactured goods, as seen by China’s rising contribution to the European Union’s concentration index in figure 2. More broadly, the European Union had more diverse sources of manufactured imports than the United States in 2013 and 2018, but now that is reversed as figure 2 shows. The post-Brexit United Kingdom is no longer a significant supplier. Meanwhile, the US contribution to EU import concentration remained largely unchanged between 2013 and 2023.

Exploring trade dependencies by manufacturing categories

To examine where trade dependencies have grown, we sort all manufactured goods into four categories according to the characteristics of the manufacturing process, using the United Nations Conference on Trade and Development (UNCTAD)’s degrees of manufacturing classification system. Our HHI calculations for each of the four distinct manufactured goods categories appear in figure 3. Readers may download our HHI calculations and explore details of interest.

First, in the category of labor-intensive and resource-intensive goods—which includes clothing and footwear—the United States has greatly diversified its import sources, panel A of figure 3 shows. In particular, the share of these goods imported from China fell sharply over the last five years. Although America’s import concentration exceeded that of the European Union and China in prior years, in 2023 the HHI for the United States fell below both. Not surprisingly, Vietnam’s (labeled VNM) share has grown rapidly.[4]

The European Union still relies heavily on China for labor-intensive and resource-intensive goods. Perhaps surprisingly, China increasingly relies on Europe for imports of labor-intensive and resource-intensive goods, driven partly by growth in imports of consumer goods such as travel goods, handbags, footwear, and clothing. China’s import concentration now exceeds that of the United States for these products and is almost equal to Europe’s.

Second, in the category of low-skill and technology-intensive goods—which includes iron, steel, and less complex transport equipment—US import concentration has declined since 2018, as panel B of figure 3 shows. China’s share of such imports has fallen. The United States now relies almost as much on Europe as on China, with Mexico in third place.

China’s supplier concentration in this category exceeds that of both the United States and the European Union, with Indonesia (IDN) becoming China’s most important source of these goods.

Europe’s import concentration in this area remains largely unchanged from 2018, with China still the region’s largest supplier.

Third, in the category of medium-skill and technology-intensive goods—which includes certain road vehicles and specialized industrial machinery—panel C of figure 3 shows a growing mutual dependence between the European Union and China.

China’s import concentration for these products exceeds those of the other two regions, and its reliance on the European Union, its number one supplier, has increased. Meanwhile, Europe’s import concentration intensified as China’s share grew sharply between 2018 and 2023, a result of China’s surging electrical machinery exports, including batteries and components critical for electric vehicles.

American sourcing of medium-skill goods has diversified slightly, with China’s share falling sharply and Mexico’s share rising.

The final class of goods is high-skill and technology-intensive goods. This includes items exported primarily by advanced economies, such as aircraft, but also cellular phones and laptops exported by middle-income countries through multinational value chains. American sourcing concentration for these goods fell between 2018 and 2023, driven by a sharp drop in China’s market share and a gain in the European Union's share, panel D of figure 3 shows.

China’s import concentration for these goods also fell, although only slightly, as Europe’s concentration rose. For all three importing regions, there is a noticeable increase in the share of imports that come from smaller partners between 2018 and 2023.

Can the United States and the European Union get in sync?

Despite efforts by the Biden administration to convince the European Union to wean itself off Chinese imports, the opposite is happening. Europe has grown more dependent on China in recent years as the United States has become less so. This increasing divergence in US and European economic interests may make it harder for them to agree in the future on national security and technology policies involving Chinese imports. Washington and Brussels encountered such difficulties previously over the US push to block sales of Huawei products and Chinese 5G systems in Europe on national security grounds. Similar clashes could lie ahead if recent import concentration trends continue.

Appendix on methodology

To measure import concentration, we calculate the Herfindahl-Hirschman index (HHI) for the world’s three largest trading regions—China, the United States, and the European Union. The HHI is calculated as the sum of squared market shares. Our calculations mainly rely on trade data from each region’s statistical agency, a method that allows us to calculate up-to-date indexes for 2023, as well as for 2013 and 2018. We use these indexes to track progress in diversification of each region’s import sourcing. To gain further insight into how regions are diversifying, we employ disaggregated customs data to sort manufactured goods into unique and exclusive groupings. For this purpose, we use the United Nations Conference on Trade and Development (UNCTAD)'s classification of manufactured goods by the degree of manufacturing. This classification scheme reflects the factor intensity of production, allowing us to consider the evolution of trade dependencies over time.

Notes

1. For consistency in our analysis, references to the European Union (EU) in this document pertain exclusively to the EU27, excluding the United Kingdom throughout the analysis period.

2. See Richard Baldwin, "China is the world’s sole manufacturing superpower: A line sketch of the rise," VoxEU, Centre for Economic Policy Research, January 17, 2024.

3. Dahlman and Lovely (2023) calculate Herfindahl-Hirschman indexes for the set of countries participating in the Indo-Pacific Economic Framework, finding that all members except Japan, Fiji, and the United States experienced increased concentration of import sourcing between 2010 and 2021. See Abigail Dahlman and Mary E. Lovely, "US-led effort to diversify Indo-Pacific supply chains away from China runs counter to trends," RealTime Economics, Peterson Institute for International Economics, September 6, 2023.

4. Because we are using gross trade flows to measure dependence, we do not address dependencies created by indirect flows of value added. This is an important caveat when interpreting movements in gross trade flows as decoupling. However, the movement of manufacturing activities away from China to locations such as Vietnam is a necessary step in diversification of global value chains.