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August 23, 2020

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

“Separating Myth from Reality” Response: Unpacking the Purpose and Intent of Decoupling

Bryan Carapucci

The “Separating Myth From Reality” panel shed light on a number of structural and practical obstacles for companies caught in the middle of the U.S.-China decoupling debate. While the outbreak of COVID-19 has spurred legitimate concerns on the current existence of supply chains worldwide, the fact remains that China continues to be a manufacturing powerhouse with a massive and growing domestic market. Rather than ignoring this reality and pushing for decoupling across the board, the United States needs to be tactful and deliberate in its moves and consider its allies. Otherwise, it risks putting itself at a stark disadvantage in the world economy.

Each of the panelists raised strong points on the landscape of the current global supply chain and the continued role China will play in it. Wang Tao from USB Investment Bank and Dan Wang from Gavekal Dragonomics each noted that manufacturing in China can still be advantageous and, in the event that companies do decide to make a push for diversification outside of the country, it will be a gradual process (due to the poor investing atmosphere worldwide because of COVID-19 and the current lack of widespread infrastructure in countries like Vietnam for FDI). Jimmy Goodrich from SIA offered a picture of what decoupling would mean for the semiconductor industry in particular, distinguishing between decoupling in the supply chain versus in the market writ large. He pointed to China’s push to boost its own domestic production and lower its reliance on imports through Made In China 2025, revealing decoupling that started on the Chinese side as a byproduct of both an “organic and top-down drive” from companies themselves and different levels of government, respectively.

My only real dissatisfaction with the panel was in many ways unavoidable: because it was focused on market trends and specific industry facts and projections in the event of decoupling, it only occasionally stopped to consider the ramifications of the larger geopolitical picture. If decoupling really is a politically-driven mutation of the economic-centered process of “deglobalization,” as Manok Joshi suggests, then such political considerations are part and parcel of the process and cannot be divorced from economic factors. Whether it is out of self-reliance, a campaign to “bring jobs back” after globalization and comparative advantage moved them elsewhere, or the simple souring of relations between countries (see the warning of “complete economic decoupling” with India in the Global Times, e.g.), assessing the motivations of decoupling helps gauge the severity and longevity of the moves. The United States has legitimate concerns in its dealings with China that prompted it to take action, yet its clumsy and uncoordinated approach to decoupling as the solution has the potential to do more harm than good.

Decoupling is more than just a political phenomenon with economic consequences: what begins in earnest as a move to protect domestic interests and end unfair practices can quickly backfire. Take the case of the EU, for instance. Panelist Jörg Wuttke noted that, amidst rising U.S.-China tensions and pressure to pick a side, the EU may be left with no choice but to act in its own interests. Even if the Phase One Trade Deal addressed the same concerns with the European side, it was foremost a bilateral agreement between the United States and China, at best excluding the EU and at worst placing them at a real disadvantage in trade. The Trade Deal is in many ways a symptom of U.S. grievances with China that is backed with the threat of decoupling, even if that threat may not be in the best interests of the United States. Jimmy Goodrich mentioned a study by the Boston Consulting that warns what would come of “total decoupling” of technology sales between the United States and China: China would win in both the short term as competing global producers step in to fill the spot the U.S. left, and in the long term as it achieves domestic self-reliance. The technology sector is far from the only area with potential for a lose-lose scenario for the United States if it goes down a path of total decoupling.

If handled correctly, decoupling may be able to achieve intended results without too much blowback. While it need not necessarily be multilateral, being on the same page with other countries or multilateral institutions can help amplify not only the seriousness of the intention, but its actual impact as well. Mutual concerns between the United States and others towards China certainly exist, whether it is with ASEAN over incursions in the South China Sea or with much of the EU over human rights abuses in Xinjiang or IP theft. The newly formed Inter-Parliamentary Alliance on China (or IPAC) can attest to this shared indignation. Political action and pressure can also come from the grassroots level. Even if U.S. companies ignore pressing issues like human rights abuses in another country or the government’s response to them (for manufacturing purposes, market access, or otherwise), U.S. domestic audiences and civil society informed of those issues abroad can put pressure on companies to change their operating structure or even divest.

What is clear from the panel’s conversation as well as recent trends is that decoupling is logistically difficult, costly, and slow-moving. This is especially true in the case of the United States and China, where it is still unrealistic to expect China to fulfill its commitments in the Trade Deal, and the President and USTR are on different pages about the viability of decoupling at all. Countries will need to decide for themselves to what extent decoupling will serve their own interests, as well as the justification of trade amidst human rights abuses or other recurring issues at play. If the United States is indeed adamant that its current approach to decoupling will solve its problems without backfiring, it needs to approach each issue deliberately, ideally with the support of domestic society, and not isolate itself from allies.

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