The hidden supply chain costs of the AI boom

Nov 5, 2026 · Summarized Nov 5, 2026

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Key takeaways

Tariffs usually cause manufacturers to reroute components, move assembly, or redesign products before they cause production to return to the United States.
U.S. manufacturing is most viable where automation creates high labor productivity or where American firms possess rare technological capabilities, such as jet-engine superalloy casting.
The iPhone remains global because it combines advanced chips and specialized equipment from several countries with enormous amounts of manual assembly labor.
China’s manufacturing strength reflects demanding customers such as Apple and Tesla, aggressive regional competition, long-term planning, and unusually rapid capital investment in automation.
Frequent tariff changes make companies postpone factories that require stable demand and policy for a decade or more, particularly semiconductor fabs.
Shih favors a strategic trading bloc of like-minded countries over either dependence on China or a go-it-alone U.S. strategy.
Supply chains have absorbed many disruptions through market adaptation, but shortages such as AI-driven memory demand can still push prices sharply higher when demand exceeds capacity.

Summary

Why Foxconn’s Wisconsin plant was never going to be an LCD factory

Neal Patel revisits Willy Shih’s 2019 prediction that Foxconn would not build the promised LCD plant in Wisconsin. Shih says he reached that conclusion from first principles: the plans lacked the enormous amount of concrete and structural steel required to keep an LCD factory stable, and Foxconn was not building a glass plant across the street to supply it. After the episode, residents sent Shih zoning documents asking whether each proposed building was a panel factory; he repeatedly told them there was not enough concrete. The example introduces his broader argument that supply chains must be understood through physical and economic requirements, not political announcements.

Tariffs redirect supply chains instead of simply bringing factories home

Shih argues that tariffs trigger market responses designed to avoid them. Manufacturers move assembly to Vietnam or Mexico, and goods may take indirect routes: cashews grown in Ivory Coast or Ghana are processed in Vietnam, while Alaskan fish can go to Qingdao for cheaper processing before returning to the United States. He points to new direct China-to-Mexico shipping routes as evidence that Chinese components are being assembled in Mexico and imported under USMCA. He also cites record first-quarter 2025 imports from Ireland as front-running before “Liberation Day,” followed by slower imports as companies worked through accumulated inventory.

Cheap goods brought benefits but left workers and trade imbalances behind

The $300 50-inch television at Costco illustrates the benefits of globalization and Chinese manufacturing, while free trade was also intended to make war more expensive by tying economies together. Shih says policymakers failed to address the workers left behind when furniture production moved from North Carolina or castings and forgings moved from places such as Kentucky; those costs were spread across consumers who also benefited from Walmart’s low prices. He adds that the United States’ trade deficit was not adequately corrected by exchange rates after the 1980s. China now runs a large surplus and, in his view, exports its economic problems and excess production to other countries.

Shih favors a North American and allied trading bloc over economic isolation

Shih supports USMCA as a successor to NAFTA because the United States needs access to lower-cost labor and can specialize with Mexico and Canada. He says trade works when countries accept reciprocal specialization, but China’s model is different: it wants the world dependent on Chinese goods without buying proportionately from the rest of the world. Rather than going it alone, he proposes deeper trade across North America, Europe, Japan, Southeast Asia, Australia, New Zealand, parts of Central and South America, and Africa. Such a bloc could provide critical minerals, lower-cost labor, and technology specialties while reducing dependence on China.

American manufacturing can return only where productivity or technology justifies its cost

Shih rejects the idea that tariffs alone can recreate the manufacturing economy of the 1970s and 1980s. The United States is a high-cost country, so returning factories need unusually high labor productivity through automation and sophisticated processes, or products where American technology leads the world. He cites high-temperature superalloys for jet engines: only three companies can cast them, two in the United States and one in the United Kingdom. Jet-engine production largely never left the West, and Chinese companies still buy such products. Shih’s conclusion is that the United States should protect and extend capabilities it does uniquely well rather than pursue every low-cost manufacturing job.

The iPhone depends on a global chain that robots cannot yet replace

Shih calls the iPhone a demonstration of why reshoring is difficult. Its advanced chips come largely from Taiwan Semiconductor Manufacturing in Taiwan, whose Arizona capacity is still small by comparison; the chips require tools from ASML in the Netherlands and Lam Research and Applied Materials in the United States. The phone also needs extensive manual assembly, which has not been fully automated. Chinese factories can mobilize 100,000 or 200,000 workers through production campuses with housing, warehouses, and food provision, a system Shih connects to the Communist-era danwei model. India is making progress, but reproducing that labor scale has been difficult.

China learned manufacturing through demanding customers and regional competition

Shih pushes back on describing China’s manufacturing capabilities simply as stolen American intellectual property. Apple suppliers receive a “golden ticket”: besides revenue, Apple forces them to meet demanding specifications, improve quality, and hit lower cost targets. Tesla’s Shanghai factory similarly raised the capabilities of local suppliers and helped strengthen China’s electric-vehicle industry. Beijing sets broad objectives, but provinces and cities compete fiercely to achieve them, often investing aggressively in automation. Shih describes a Shanghai factory replacing equipment only two or three years old with newer machines because its owner believed more capital spending was necessary to survive.

Short-term tariff swings are freezing long-term factory investment

Shih contrasts China’s five-year plans and technocratic implementation with the United States’ unstable tariff policy. He says China has learned from earlier disasters such as the Great Leap Forward and has executed many priorities identified in its 1986 “863 plan,” including information technology, biotechnology, communications, robotics, and parts of semiconductors. By contrast, the 2025–26 tariff map looks like a “shotgun hit the wall.” Companies cannot decide whether to build in Mexico or the United States when policy changes every few weeks, especially for semiconductor fabs that need 10- or 20-year investment horizons. Uncertainty therefore encourages companies to delay rather than build.

Protection can distort markets, but supply chains remain remarkably adaptive

The hosts discuss Chinese electric vehicles, the “chicken tax” on imported light trucks, and whether tariffs protect industries or merely raise prices. Shih says the chicken tax helped make SUVs and pickups Detroit’s profit center, but consumers paid more; foreign automakers eventually built trucks in the United States and Mexico. He cites Toyota’s Kentucky plant, which produces sedans with mostly regional parts and American workers, and says long-term supplier relationships can make domestic production work better than transactional buying. Despite tariffs, COVID-19, the Suez blockage, and conflict affecting oil, markets have adapted through circumvention, front-running, tariff engineering, and relocation. Memory chips are different because AI demand has overwhelmed capacity, threatening higher prices for phones and game consoles.

Show notes

My guest today is Willy Shih, an economist, a professor of management practice at Harvard Business School, and the author of the upcoming book, Where Does My Stuff Come From? The Powerful Economics Behind Global Supply Chains.

Willy’s new book is all about the economics underlying global trade, which our politicians and regulators seem to insistently ignore. So we got into Trump’s tariffs, why the markets have reacted to supply chain disruptions the way they have, and why China remains a global manufacturing powerhouse even though every other country thinks that’s so risky.

Read the full interview transcript on The Verge.

Links:

Where Does My Stuff Come From? | Willy Shih

RAM price hikes: the latest on the global memory shortage | The Verge

Tariffs didn’t bring manufacturing jobs back to the US | Decoder

Trump tariffs mean chaos for consumers | Harvard Crimson

Why the global chip shortage is making it so hard to buy a PS5 | Decoder (2021)

Inside Foxconn’s empty buildings, empty factories, and empty promises | The Verge (2020)

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Credits:

Decoder is a production of The Verge and part of the Vox Media Podcast Network.

Decoder is produced by Greg Ott, Kate Cox, and Nick Statt. This episode was edited by Eileen Felix. Our editorial director is Kevin McShane.

The Decoder music is by Breakmaster Cylinder.
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