Cole McFaul | August 25, 2020
Responding To: Is U.S.-China Decoupling Really Feasible?
Into the Unknown: the Present and Future of U.S.-China Decoupling
The decoupling of the U.S and Chinese economies has been one of the center issues in U.S.-China relations since 2018, and the future direction of the two economies has become an increasingly crucial topic in light of COVID-19, where the pandemic has impacted not only the global economy but also political dynamics. In the discussion hosted by the Georgetown U.S.-China Initiative, U.S.-China Decoupling: Separating Myth from Reality, panelists from different industries provided us with macro and anecdata, and insights from individual industries as well as the economies as a whole. Contrary to what many would assume or what the Trump administration hopes, the trade war has not led to significant decoupling in major Chinese export industries such as manufacturing, and neither has foreign direct investment decreased significantly.
However, this is by no means a positive sign. The fact that decoupling has been happening at a speed way below expected reveals how difficult it is for the two economies to be completely separated. Multiple factors restrict multinational corporations as well as the movement of capital. To begin with, as Ms. Wang Tao pointed out in her presentation, China has grown from the world’s manufacturing plant into an important player in the global supply chain. The question facing global corporations now is not simply just about moving a whole manufacturing plant to a different country or continent, but how does the intermediate production China provides better fit into the global supply chain that companies rely on. As Ms. Wang’s CFO survey suggests, COVID-19 has made companies recognize the importance of having a complete concentrated supply chain more than ever, and the intention to move out of China has declined since the pandemic as companies recognize that moving multiple parts of their supply chain out of China is simply not plausible.
Second, data presented by Mr. Dan Wang from Rhodium demonstrates some surprising facts about Foreign Direct Investment. Since 2018 when the trade war began, U.S. FDI to China has remained largely unchanged as Chinese FDI to America has declined quite significantly. Although the large investments have stayed relatively unhindered by the trade war, the confidence of Chinese investors were after all trumped by the nebulous prospect of U.S.-China economic relations. FDI is not only constrained by policies, but also the capacity of investment subjects. In the potential investment countries adjacent to China, few have the capacity of equivalent productivity, skilled labor, infrastructure, or exchange rate stability that China can offer. Therefore, regulations and policies have been relatively ineffective in completely shifting the direction of FDI.
Third, the global pandemic has its own implications on U.S.-China economic decoupling. Even if companies are inclined to move out of China, the progress is going to be more stagnant than the Trump administration expects. In addition to the awareness of a concentrated supply chain, many companies will simply lack the resources to move their pre-existing facilities and human resources to a completely different country. Even if the United States further pushes for more aggressive policies, the response from businesses may still be impacted more by practical, non-policy related decisions. Another concern brought by the pandemic is that many countries will start to regard industries related to public health, such as the medical and pharmaceutical industries, as industries relevant to national security. During the past few months, many countries were involved in conflicts simply over the export and quality of medical supplies. Since experts predict that the lingering impact of the pandemic will last for the foreseeable future, the elevated status of the pharmaceutical and medical industries might lead to a different series of economic migration between the United States and China.
Last but not least, the role that Europe plays is crucial in U.S.-China economic tensions. It seems like the world has been expecting Europe to take a side. However, as Mr. Jörg Wuttke suggests, Europe doesn’t have to. On one hand, the price of giving up a market that took Europe almost a century to slowly regain is too high for the European economy and companies. On the other hand, the exacerbating tensions between the United States and Europe on the matter of trade is giving Europe increasingly less incentive to behave in cohesion with America’s policy goals. If the economic ties between Europe and China stay strong, the impact America wishes to have on the Chinese economy would not necessarily be as devastating as expected.
While many signs show the interdependence of the two economies, the resistance to decoupling is still alarming under the current political context. If the Trump administration wants to demonstrate its effectiveness in restricting China, then the impact of the trade war must manifest itself in a significant way that it can contribute to votes in November. This leads us to all the concerns about future uncertainties: would further economic sanctions become a tool to win votes in the upcoming election? Would economic decoupling continue to be a proxy for other political tensions, such as the frictions over the Hong Kong National Security Law? Most importantly, how would all the elements play out in a world still under the lingering impact of COVID-19, where China and Europe have been steadily recovering as America witnesses unprecedented numbers of new cases each day? These are all the unknowns the world has to proceed with in the upcoming future.
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