The hidden supply chain costs of the AI boom

Today, I’m talking with 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 is one of my all-time favorite Decoder guests — his way of looking at the world through our supply chains is just a fascinating way of making sense of the global economy. I first met Willy in 2019, while The Verge was covering Foxconn’s promise to build an LCD fab in Wisconsin. That obviously never happened, but Willy called it right away because he could see the supply chain to support a fab simply wasn’t in place. We also had Willy on the show in 2021 to talk about what was then the pandemic-era chip shortage. Now, five years later, we’re in another manufacturing mess, as we stand in the middle of a political fight over whether globalization is coming to an end. Trumps’ tariffs keep changing, the factories that were supposed to reshore in America mostly haven’t materialized, and AI is devouring the planet’s computing resources during an unprecedented infrastructure buildout. Willy’s new book is all about the economics underlying these complex systems, which our politicians and regulators seem to insistently ignore. You’ll hear us talk about why the markets have reacted to all these disruptions the way they have, and why China remains a global manufacturing powerhouse even though every other country thinks that’s so risky. I loved this conversation — it’s in the weeds, and Willy really knows his stuff. Okay: economist Will Shih on his new book Where Does My Stuff Come From? Here we go. This interview has been lightly edited for length and clarity. Willy Shih, you’re an economist and professor of management practice at Harvard. You’re also the author of the new book, Where Does My Stuff Come From: The Powerful Economics Behind Global Supply Chains . Welcome back to Decoder . Well, thanks for having me back. I am very excited to talk to you. You and I first started talking ages ago when The Verge was covering Foxconn in Wisconsin. You are a reliable source of information on what it takes to actually build an LCD plant anywhere, not just in Wisconsin. The Foxconn in Wisconsin thing was funny because I tend to go on first principles on these things. Once I knew they weren’t going to build a glass plant across the street, it’s like there’s no way there’s going to be a factory. Now, what happened afterwards, of course, is people heard your show, and then I started getting calls from people who live in the community. They went to the zoning hearings in town, then sent me the plans and asked, “Is this going to be a panel factory?” I said, “No, I told you it’s not going to be a panel factory.” So they sent me the plans. I said, “Well, there’s not enough concrete to make this a panel factory.” For a panel factory, you need stability, so you gotta have all this structural steel, and you have to have all this concrete. Verge subscribers, don’t forget you get exclusive access to ad-free Decoder wherever you get your podcasts. Head here . Not a subscriber? You can sign up here . My favorite part of the Foxconn story — and I don’t mean to rehash it, but it’s just fun to talk to you about it again — is when you said there’s not enough concrete and steel. It’s great. We should actually talk about LCD manufacturing a little bit. There’s an entire chapter in your book about why all of it is in China and China’s investment in that. But I want to just take a big step back for a second. It seems to me that you’ve written a book about the end of globalization in one particular way. We had big global supply chains. The pandemic came and shocked the just-in-time manufacturing system to its core. And then the Trump administration, in the second round, has imposed a whole bunch of tariffs. I’ve had several guests on the show straightforwardly tell me we’re de-globalizing the economy. That’s what’s happening here. We can’t rely on it anymore. Your book, as you read it, is a little bit of a reaction to that, but you’re also pointing out how globalization is one of the smartest ways to do it based on first principles of economics. Tell me about the state of the world and the state of our supply chains right now from your point of view. Well, I think the point about first principles of economics is actually spot on. I often tell people my father was an economist, and I used to see him come home from work, and I thought, “I never want to do that. I’m going to go into science and technology.” So I went into science and technology and took all these engineering classes. And I was in product businesses only to discover, to my horror, that if you don’t get the economics right, then it doesn’t matter for science and technology. The book’s subtitle is “the powerful economics behind global supply chains.” I talk about all these principles behind global supply chains, but they’re all actually driven by economics. In fact, what you see today is market forces responding to all this stuff. So, for example, when we put tariffs on stuff coming out of China, then manufacturers say, “Okay, let me move that supply chain, and I’ll do my assembly in Vietnam, or I’m going to do my assembly in Mexico, or let me find some way to circumvent these tariffs.” What I really find is that when you look at how these supply chains are structured, like why do cashew nuts say they come from Vietnam when they were actually grown in the Ivory Coast or Ghana? Well, there was an economic reason for all of these things. It’s why frozen fish that are caught off the coast of Alaska go to Qingdao, China, for processing before they come back. Again, it’s because it’s cheaper to do it that way. When we put up these trade barriers, the first reaction tends to be, “How can I circumvent that?” We saw a lot of that, especially last year. I remember Liberation Day was April 2nd, and if you look at the quarter right before, people knew stuff was going to be happening. We have this circumvention going. That’s why in the first quarter of 2025, we had all-time-record imports from Ireland, and then the first half of 2026 showed slow imports from Ireland. That’s because we’re burning off all the stuff we imported in the first half of 2025. It all gets down to economics. I’m getting all these TV set ads because the holiday season is coming up. Great, and they’re all coming from Mexico. It’s like, “How can they all be coming from Mexico?” I know the flat panel factories that supply all these TV sets these days are all in China, and they’re all in China because the plants have been subsidized so heavily or because of industrial policies that have encouraged those plants to be there. If you watch the trade lanes, you’ll see this stuff. What happens is there’ve been all these new shipping routes from China to Mexico over the last two years. Direct ocean container service from China to Mexico. It’s like, “Huh, I wonder what that’s about.” I’ll tell you what it’s about. It’s about moving parts and components from China to Mexico so that I can assemble them in Mexico and then bring them in under the USMCA agreement. So what you’re actually seeing is that these supply chains are organized the way they are partly because some places have the capabilities, but more often than not, a lot of these are just responding to economic forces. If I’m going to add on tariffs or I’m going to make it more expensive to ship something between two points, the market will find a way around that. That’s something I want to come back to several times in this conversation. “It’s cheaper” was a real driving force of globalization. Americans like cheap things. They like cheap flat-panel TVs. The fact that I can go to Costco right now and get a 50-inch TV for $300 is a miracle of the modern supply chain and of modern manufacturing. It is a miracle, right? And it’s cheaper, and it’s because there’s a place that, for better or for worse, can make it cheaper. By the way, American consumers benefit from that. One of the reasons that we pursued free trade and globalization so heavily in the United States is that we thought that creating economic ties between all these various countries would reduce the potential for an armed conflict. There are a lot of ways to think about that, but in general, if you tie the economies together, the price of having a war shoots up, and then you won’t have free or cheap TVs, and maybe the public won’t like that. That is under pressure now, right? We’re sitting here in the middle of an AI conversation, where China is routinely invoked as the great threat that will rise up if they get to AGI before us. We are putting up tariffs, particularly on China. In the United States, the policy administration is to bring manufacturing back to the United States through the use of tariffs. Your point of view is that simple economics will provide enough contortions to avoid that blunt outcome. When we seal the borders for some products everywhere, then the price is going to go up. So, for example, putting tariffs on steel. Initially, when we just put tariffs on imported steel and aluminum, then what happened was, “Well, gee, I happen to be making construction equipment. More than half of the cost of that construction equipment is medium carbon steel, so therefore it makes it easier for me to import construction equipment from somewhere else.” We then say, “Okay. Now we’re going to tariff stuff based on your steel content.” Eventually, when you close off all those things, which means you’re basically tariffing everything, then stuff gets more expensive domestically. You could look back on the period from 2000 until really 2012 to 2014; we had relatively low inflation. Part of it is because we were getting cheaper stuff from China. I think there are a couple of things that drove a breakdown of this model, if you will. One is that people didn’t really recognize that the connection between moving work out of the US to China meant you’re leaving people behind who don’t have any more work. That cost was spread over people who, by the way, also shop at Walmart and benefit from the cheap goods. But we as a country didn’t think about it like, how are we going to retrain all those people who weren’t making furniture in North Carolina or who were making castings and forgings in Kentucky or wherever? That was one part of the problem. The other part of the problem is that we have this gigantic trade deficit. Now, a lot of that is fueled by government spending and borrowing and so on. But typically, in some respects, you would’ve expected the exchange rate or some other adjustment mechanism to compensate for that. I remember the last time exchange rates moved was in the 1980s. That was also the last time the US ever had a trade surplus, when the dollar got a lot cheaper relative to the Japanese yen, especially at that time. That had an adjustment on trade flows as well. So now you have China running this ginormous trade surplus. Basically, what they’re doing is exporting their economic problems in China to the US, and they’re exporting that at the expense of jobs elsewhere. The Europeans have suddenly woken up to that. Now go to a place like Germany, where half the economy revolves around the auto industry, and they now have figured it out, and it’s like, “Wait a minute, this is an existential crisis for us.” But on those two things, the controls you would’ve expected to rebalance things didn’t pan out. That’s why we have so much discussion about this right now and a view of this as a problem. It feels like my entire teen experience was a conversation about NAFTA, and we should open free trade in North America. Later on, I got to college, and all the economic discussion was about the EU and creating the single market in the EU: “We’re going to set up these big open markets, and there’s going to be free trade inside of those markets, and that will lead to a kind of economic prosperity.” Fast forward to 2026, and the desire to tear a lot of that down has gone way up, right? Particularly as you look at the USMCA and Chinese goods coming to Mexico to come to the United States, nakedly circumventing the entire policy goal of imposing tariffs. The goal is to build the iPhone in the United States. The goal is to build manufacturing in the United States. I know that you have never really thought that’s an achievable goal, but that is the goal. That is what the administration promised. We’ve created these trade groups, trade associations, that allow that goal to be circumvented. Do you think the walls are going to keep going up, or do you think they’re going to come back down? I think we’re going to see more pressure to moderate our behavior a little bit because, let’s face it, there are a lot of goods that we, as a country, need access to inexpensive labor. So I’m actually very pro-USMCA as a successor to NAFTA because I actually think there are things that we need inexpensive labor for. Mexico is a good place to source things like that. There are things that we need from Canada. So if we were to look at North America as a trading bloc, then what you would see is the benefits of specialization, which is the whole rationale for trade in the first place. We’re better at doing this, you’re better at doing that; you specialize in that, we’ll specialize in this. We trade; everybody is better off. If you can do that with a community of countries that understand the need for that type of balance, then everybody is better off. I think the problem with China is they’re very happy to have this imbalance, where they want the world to be dependent on them, but they don’t want to buy stuff from the rest of the world. When you have that, then trade doesn’t really work. So I think that’s the problem. I’m hoping we’re going to realize that we’re better off among a group of like-minded countries where we can trade within that bloc. So for example, if the US were to view North American partners and European partners in Japan — and countries in Southeast Asia, Australia, New Zealand, parts of Central and South America, and even Africa — and say, “Okay, let’s trade across this bloc,” then we’d have access to most of what we need, whether it’s critical minerals, low-cost labor, or a lot of technology specialties. We could do much better with that, much better than a go-it-alone strategy in my view. The first part of your book — which I highly recommend the audience read; it’s a fun read — is just setting up the first principles of why we trade at all in the very concept of labor arbitrage. It seems like we’re having a national policy conversation that is 500 steps removed from these basic ideas of why we would trade. It is entirely centered around: can you bring manufacturing back to America because we let all the manufacturing jobs go to Mexico and China, particularly in high tech? And we’re behind. There might be some extraordinarily bad event, like a war, where it’s exposed how little manufacturing capability we have in the United States. That has nothing to do with the basics of specialization in various countries around the world. It’s another problem, and the blunt instrument is, “Boy, it’s bad that all of our drones are made in China. We’re going to prevent drones from being sold here. Of course, our industry will set up drone manufacturing in the United States.” I don’t see that connection. Do you see that working? No. I think that’s a transactional view where you look at one piece at a time as opposed to looking at the bigger picture. I think we have to start with a core principle that the US is a high-cost country. Therefore, if you want manufacturing jobs coming to the US, then you’ve got to have high labor productivity. In fact, if you look at the types of jobs that are coming back to the US, they tend to use a lot of automation, a lot of sophisticated manufacturing processes, and stuff that is high-skill that can justify the high labor cost. Either that, or they are things where we have a technological lead that nobody else knows how to do in the world. I was looking at the high-temperature superalloys that are used in the hot section of jet engines. There are only three companies in the world that know how to cast those, and two of them are in the US, and one of them is in the UK. There are things like that the rest of the world has to buy from us. So if you have high labor productivity or highly differentiated products, those we can make in the US; we can make them successfully. By the way, most of them never left the country. The US, France, and the UK are major suppliers of jet engines to the entire world market. Even the Chinese buy those from the West. So if we have these things that we do better than anybody else, we should invest in those and make sure that we’re always in the lead, and then everybody else will buy from us, and then you’ll have some balance where you can’t be held up. There’s a lot of this thinking like, “I wish I could turn the clock back to the 1980s or the 1970s, when manufacturing was the path to the middle class in the US.” But manufacturing has changed worldwide, and for those jobs that you want to have manufacturing in the US, you’ve got to have high labor productivity or the high differentiation that’ll go with it. I want to stay on the iPhone for one more second. Apple just inked a new deal where they’re going to source a bunch of titanium from a Pennsylvania-based company called Perryman for the iPhone 18 Pro and the new iPhone Duo. They’re going to source that titanium here. They’re then going to ship it to China. They’re going to assemble the phone in China, and they’re going to ship the phones back to us. They do that with Corning and glass as well. I’ve always looked at that. Tim Cook’s job, in particular, is that he’s a statesman. He has to negotiate with Donald Trump and Xi Jinping about iPhone production and tariffs in these supply chains, and the iPhone holds the global economy together. If the price of the iPhone gets too high because of tariffs, maybe there’s an electoral impact in the United States. How do you see products like that? Are they as load-bearing as it feels to me, or are they just examples of the larger system? I think the iPhone is a terrific example of how difficult this problem is. Because right now you have components that have high technological complexity. The iPhone uses the most advanced chips produced by Taiwan Semiconductor Manufacturing Company. By the way, most of those chips are still going to be made in Taiwan. TSMC has a fab in Arizona, but its capacity is piddly compared to what it has in Taiwan. Those chips come from one place and require the most sophisticated processing tools that come from ASML in the Netherlands, but also companies like Lam Research and Applied Materials in the US. So it’s that global thing. But the key thing is iPhones also require assembly labor. They require manual assembly because we’re not at the point yet where you can assemble the whole thing with a robot. There’s actually a chapter in my book where I talk about what Henry Ford and the lifestyles of the Chinese Communist Party have to do with assembling iPhones. It turns out it’s a lot. The lifestyles of the Chinese Communist Party have to do with how they mobilize workers in what’s called the Danwei model , which was established after the Communist Revolution. It’s where you have a production site, a walled city with housing for workers, a means of production, warehouses, ways to feed them, and stuff like that. If you ever go to a phone factory in China, the real question is: how do I mobilize 100,000 to 200,000 workers to do this manual assembly on a scale that an Apple needs? They’re trying to do it in India. They’re having some success with India, but that was really hard. Once again, it’s: how do I mobilize manual labor at that level of scale?…