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November 19, 2019

Responding To: The Threat of U.S.-China Economic Decoupling

A Worrying Outlook: Further Decoupling

Zhongming Yuan

With the recent trade talks between the United States and China taking place and the negotiators’ seemingly positive remarks about the negotiation, it appears that we could see the light at the end of the tunnel. In the recent phase one deal, China agreed to purchase 40 to 50 million dollars of American agricultural products and open up its market for financial service companies, and Trump would suspend the 25% to 35% tariff plan in response. However, there are still many critical issues left, such as intellectual property and the Huawei issue. Also, considering the previous trade talks that all ended up fruitless and the massive tariffs still imposed upon China and the United States respectively, a sense of uncertainty prevails in the U.S.-China relationship.

It is out of the question that neither this uncertainty nor the turbulence that happened in the previous months will lead to a complete economic decoupling between the two countries. Instead, the core question should be whether the current decoupling will escalate or recede, and what actions should we take about it.

Personally, trade is just part of the U.S.-China economic relationship; even if the trade war ends, there could be further economic decoupling that results from more fundamental and systematical economic conflicts between the United States and China. While the two countries’ closely interdependent economic relations can make them try to avoid more conflicts, economic decoupling is likely to escalate in certain fields and might exert a negative influence on other areas.

First of all, decoupling can escalate in certain economic areas, especially high-technology industries, telecommunications, energy industries, currency, and military products. Since technology and telecommunications have become one of the most significant factors in national security and economic development, U.S.-China connection in this industry will undoubtedly be less connected, particularly in advanced technologies like AI and intellectual properties. Secondly, although exporting surplus products has been taken as one of the measures by China to cut overcapacity, the United States would reduce imports of China’s energy products like steel or aluminum. Thirdly, according to Chenyuan’s speech on U.S.-China currency relations, America would decouple with China in currency, and China will also be less dependent on American currency to protect its currency and economy, which will likely cause further decoupling between the two countries’ currency. Moreover, trade of military products will also be cut considering the national security aspect.

In addition, decoupling in those fields may undermine cooperation and cause decoupling in other aspects. Academic exchanges will likely be impeded, especially in technological areas. Furthermore, cultural exchanges could also be affected by both countries’ concern about each other's influence on soft power.

While the prospect does not seem very positive, avoiding further decoupling and promoting cooperation are what both countries want. Therefore, I would like to mention two methods for consideration. Firstly, both need to minimize conflicts by strengthening cooperation in most unaffected fields, building mutual understanding, and reducing the toughness in their attitudes and methods. The uncompromising attitude of the two countries on the trade issue is one of the significant reasons that hamper the two from making progress in previous trade talks. Since the trade issue is very complicated and is unlikely to strike a win-win result from the being, both countries need to make at least some compromises to make progress on the negotiation table. Secondly, as Tom Donilon mentioned at the CNAS 2019 National Security Conference earlier this year, there is no strategic dialogue that exists in the U.S.-China relationship on trade issue yet. The complexity and strong influences of the trade war make it urgent and critical that China and the U.S. develop a set of systematic strategies to communicate better.

In all, economic decoupling might escalate in certain aspects while extreme and overall decoupling is scarcely possible. To prevent further decoupling, both sides need to take measures with a more prudent attitude. With the second phase of the trade talk about to start, I sincerely hope that the United States and China can continue to make progress in their negotiations that may eventually lead to a deal.

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