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November 19, 2019

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

Decoupling’s Dirty Secret: Demystifying the Divorce That’s Already Begun

John Rindone

Commercial ties between the United States and China have grown immensely in depth and breadth since the two countries normalized diplomatic relations in 1979. However, as the Chinese and American economies increasingly appear more competitive – and less complementary – what was once the ballast of the relationship has become a principal source of tension. Correspondingly, “decoupling” has emerged as the paradigm du jour within certain circles in both Washington and Beijing – a term which describes how the ongoing reduction in economic integration between the United States and China may, intentionally or not, create two competing sets of standards, systems, and patterns of engagement across the global economy.

Thus, the question: considering the current state of U.S.-China economic relations, will the Chinese and American economies decouple? To answer, consider two trends in the pair’s economic relationship.

First, the connection between China’s economy and its central government has evolved. After the 2008 financial crisis, the Chinese government successfully leveraged massive fiscal stimulus to blunt the impact of recession. In the ensuing years, and especially under the administration of President Xi Jinping, China then attempted to tackle the excesses of this stimulus program by relaxing industrial overcapacity, promoting systemic deleveraging, increasing environmental protection, and centralizing government administration for anti-corruption purposes. In short, through both stimulus and subsequent reform, the Chinese central government strengthened its role in steering China’s post-crisis economy – even as private firms grew and thrived in tandem.

The government’s increasing role in the economy set the stage for Sino-American decoupling. Notably, China’s Thirteenth Five-Year Plan (2016-2020) cemented dirigisme as the central lever for value-chain upgrading and transformation – China’s next stage of economic development. Initiatives such as “Made in China 2025” aim to develop domestic capacity for China to attain international preeminence in high-value sectors such as semiconductors and pharmaceuticals through government subsidies, technological indigenization, and consolidation of state-owned enterprises.

Accordingly, many American businesses now view China’s persistence in discriminatory commercial practices and alleged intellectual-property violations as the potential instrument of their own demise. Changes in Chinese economic policy and value-chain positioning have galvanized American support for the U.S.-China “trade war,” casting doubts on the benefits of Sino-American economic integration.

Second, changes in the American economy have altered the national consensus on China. Whereas, in the 1990s, companies like Boeing and Ford prodigiously lobbied for granting China MFN trading status and WTO membership, corporate America and its political allies appear ambivalent about the ongoing U.S.-China trade war. While frustration among stakeholders has played a part, an additional, structural force seems to be at play: apathy.

Simply put, many advanced sectors of America’s 21st-century economy lack direct interest in China – because China’s government has blocked or kicked them out altogether. Netflix, Google, and Facebook (including WhatsApp) are essentially banned in China, while Groupon, Uber, and Amazon have terminated most of their Chinese operations in the face of market-access difficulties. In other words, a decoupled Sino-American economic relationship is already the norm for these companies. Accordingly, while leaders of established firms like Tim Cook and Steve Schwarzman publicly advocate for easing trade tensions, the newish Mark Zuckerberg and Jeff Bezos do not. This has left considerable space for the construal of Sino-American economic disagreements as security threats above all – a process known as securitization. Therefore, it is no coincidence that America has aggressively pursued decoupling in emerging technological sectors, such as 5G – spaces where support for Washington’s traditionally liberal commercial instincts has failed to counterbalance political hawkishness, supplementing the demands of legacy protectionists.

The question, then, should not be whether economic decoupling will start, but rather where it is likely to stop. Decoupling already characterizes significant elements of the Sino-American economic relationship. Compared to the twelve-month period ending in November 2018, America’s annual imports from China have dropped this year from $395 billion to $342 billion. Similarly, year-to-date U.S. merchandise exports to China have decreased from $93.3 billion in 2018 to $78.7 billion in 2019. Finally, Chinese direct investment in the U.S. fell 84% between 2017 and 2018, from $29.4 billion to $4.8 billion.

While these data reflect the impact of both tariffs and America’s new screening procedures for foreign investment, the broader trade war has simply accelerated decoupling. As demonstrated above, a common, structural contributor to both abovementioned drivers of the trade war – Chinese economic nationalism and selected American apathy – has been the “guiding” (or, distortive) influence of the Chinese government in the nation’s markets. Hence, the present upshot: observers should not ignore that the Chinese government and still significant American commercial interests both ostensibly desire to halt decoupling, considering its economic costs. Nonetheless, that cannot be done without a concerted effort by the Chinese government to affect changes which, going beyond a resumption of the pre-Trump status quo, comprehensively promote a free and fair environment for the economic relationship.

With all this in mind, China’s ongoing liberalization of its financial services industry will function as a crucial case study. Already, there are encouraging signs: since 2018, for example, foreigners have ploughed $75 billion into Chinese-listed shares, despite withdrawals of $8 billion out of other big emerging markets. For this reason, America’s financial services sector persists as a bulwark of China bullishness. Therefore, should China genuinely continue as planned with the liberalization of market-access restrictions in asset management, insurance, and investment banking, it might earn Beijing the business goodwill it needs in New York for a political re-calibration in Washington.

Ultimately, although structural factors have already made Sino-American economic cooperation and openness more constrained in recent years, decoupling will proceed as far as China allows it to.

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