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August 23, 2020

Responding To: Is U.S.-China Decoupling Really Feasible?

From Huawei to Pandemic to the Unknown Future: Seeking a Peaceful Coexisting Way

Jiaqiao Xiang

Shortly after the ban that restricted Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad by the Bureau of Industry and Security in May, the U.S. Commerce Department announced in mid-June that it will allow American companies to work with Huawei on standard-setting for 5G networks. Some argue the reason behind the seemingly benign approval is still for the interest of the United States, fearing its own restriction will limit its own leverage in designing next-generation 5G standards. Others, however, view it as a gesture to ease its conflictual relationship with China. Such speculations were quickly dismissed as the Federal Communications Commission (FCC) announced a new policy designating Huawei and ZTE as national security threats on June 30, just 2 weeks after its seemingly affirmative message. The series of policies exemplify the friction and competition between two countries in the technology sphere, raising serious concerns over a future where the two will “decouple”. This leads to the question: what will the future of Chinese American collaboration be like? Before answering this, first take a look at what China has achieved and hope to become in the scale of its industrial upgrade.

Over the past 40 years, China has witnessed significant progress in the economy, society, and technology aspects. No longer satisfied with the mere role of “World Factory” with minimum profit, China began to make substantial efforts to upgrade its industry. In the June 11th webinar, Wang Tao elaborated on China’s increasing up-scaling role in the global supply chain for its economic structural reform and discussed foreign capitals’ dilemma over relocation.

While industrial upgrading serves as an inevitable growth path for almost every economy, the transformation comes with a price especially for foreign investors in China. The policy reform burdened foreign companies in China with increasing environmental responsibility and labor costs, which explains why even before the trade war foreign companies were planning to move their production facilities out of China (and some have already done so). However, thanks to China’s newly introduced business-friendly policies mentioned by Wang including providing masks for reopening and faster approval on certain licenses, as well as solid supply chain infrastructure, high-quality labor, and most importantly, massive market opportunities, most companies are hesitant to implement a total production relocation. In fact, most of them still choose to continue investing in China. The recent global pandemic only encourages them to stay, as companies lack both the incentive and capital to invest and relocate. As it turns out, since China was among the first in the world to reopen its economy, many companies are relying on the revival of the Chinese market to offset losses.

The fact that China has become an evolving entity with rising power is undeniable. The key questions are, in the long term, if China continues to escalate in the supply chain, will foreign companies still choose to stay and invest in China knowing they will gain less profit, and will the United States implement more sanctions to try to prevent or slow down such a process?

Answering the two questions requires an analysis of the current situation and future outlook on both the U.S. and Chinese side, as well as rapidly-changing global affairs. With the grand “Made in China 2025” plan underway and innovations by companies like Huawei, Alibaba, and Dji, the future of the Chinese economy seems promising. However, the brutal gap between reality and the ideal blueprint is still very wide. Take the semiconductor industry as an example, according to Jimmy Goodrich in the webinar, China is still in the terminal assembling position of the value chain, gaining the least value-added, while the United States firmly dominates the R&D sector, taking over majority profit. The key for the United States to maintain its advantage lies in its strong academic and industrial institutions. As long as talents from around the world still place the United States as their top destination for academic study and careers, this is not likely to change in at least the next several decades.

Indeed, the United States does sense the pressure from China. The global ranking of top universities in China has seen a steady increase, research funding for both the academic and industrial sector are increasing, and more talents are starting to consider returning to China after several years of experience abroad thanks to China’s talent attraction policy on all levels. It is normal for the United States to feel concerned, which explains its recent “containment” policy on China. Looking ahead even with great optimism, there is still a long way to go for China’s upgrading goal. The current pandemic, as a black swan incident, brings uncertainty and opportunity to the world. The world has witnessed how Chinese citizens were mobilized by the government’s call to contain the deadly virus and show collectivism in live-action. A scenario that would almost never happen in western society which places individualism as a priority. China proved its systemic advantage in such an extreme case, which earned itself some respect but also some alert. The United States, on the other hand, demonstrated the lack of leadership, especially at the federal level, causing different states to bid against each other for critical medical resources.

The pandemic and the upcoming Trump vs Biden election might have bought China some time: roughly a year or two to reorient its strategy responding to hostility from the United States. The United States, on the other hand, needs a thorough reflection on its sense of supremacy through the lens of recent incidents. Hopefully, after the pandemic, both countries can develop a new way of peacefully coexisting with each other. Then the United States must prepare to answer the fundamental questions: Is the United States prepared to accept a China with increasingly rising power? Is the United States willing to understand and respect China equally for what it is?

In both past and present sense, the competition and collaboration existed and will continue to exist between China and the United States. However, a total decoupling is extremely unlikely. If this indeed happens, the world will be divided into two systems and operate separately. Each country needs to take a side and make a tough decision on whether to do business solely with America or with China. We should be confident enough that the world can learn from the history of the Cold War and will not make the same mistake again. The world cannot afford the cost of the decoupling between China and the United States, as well as a divided two-polar system. Looking ahead, the future of U.S.-China relations is still filled with uncertainty and hardship, and it requires great wisdom and effort for both countries to move their relations forward.

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