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November 18, 2019

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

The Era of Complete Economic Decoupling Will Never Come

Geng Zhao

After a fresh round of high-level trade talks on October 10 to 11, 2019, China and the United States are expected to sign the “phase one” trade deal as soon as possible. This agreement may release a positive signal to an end of the trade war, which has resulted in a sharp drag on the global economy. Undoubtedly, the global financial market has been severely roiled by the fear of economic decoupling between the United States and China in the last two years, since China and the United States are the two powerhouse economies that promote the development of world trade.

The worry of economic decoupling is understandable. On the one hand, the damage of the current tariff war is enormous. Not only are losses mounting into the tens of billions of dollars for the United States and China, but also global growth according to the forecast of the International Monetary Fund has slowed down in 2019 to 3.0%, the slowest pace in a decade. On the other hand, the confrontation between China and the United States has also escalated in other areas. Concerns over technology transfer and national security are heightened, as Huawei’s actions indicate. Besides, both sides are “weaponizing” visas to restrict personnel exchanges, making it difficult for non-governmental parties to meet and communicate.

Despite the constant friction between China and the United States, as far as I am concerned, the era of complete economic decoupling will never appear. Because if China and the United States intend to decouple their economies, this scenario should be premised on two kinds of logic.

First, both sides are confirmed to regard each other as a strategic foe. Then the antagonistic identity of the two countries will generate great willingness to decouple, even though they pay a huge economic cost. However, this assumption is at odds with the reality. Vice President Mike Pence denied that the Trump administration seeks to “decouple” from China in his speech on October 24, 2019, and Beijing is willing step up purchases of U.S. agricultural products, all of which suggests that both sides are not determined to break this bilateral relationship. Given that the economic cost has already exerted pressure on the farmers’ vote basis and political contribution of Trump, and the downward tug from the trade war on the overall economy forces China to handle this bilateral relationship prudently, neither Beijing nor Washington is ready to bear a lot of trouble from the outside considering that the domestic development is still a top priority.

Second, if the technology continues to develop, the supply chain can be localized without the need for a global layout. At this time, the production globalization will no longer be economical, and these two countries will naturally decouple. Nevertheless, this assumption ignores the role of the market. While President Trump’s 2017 national security strategy labeled China a “strategic competitor”, it also targeted Made in China 2025, an aspirational set of domestic planning goals designed to further technological progress. Also U.S. scholars such as Dr. Boustany and Dr. Friedberg argued for the support of partial disengagement, especially on high-level technology. Ultimately these technical products will be dependent on access to international markets. Indeed, the international markets and trading relationships have been a great boon for the United States and China. After all, consumption is the crucial and final link in the process of social reproduction. In this respect, as long as both sides care about their financial gain for selling products, they will never go through complete economic decoupling.

Yet the economic disconnection caused by impulse and irrational factors may also exist. Although the tension eases at the moment somewhat, this broken bilateral relationship can never be a return to the past model of relations. To lend the Sino-U.S. relations to the normal track and prevent the emergence of global disorder, China and the United States need to reorient their relations to a rational point of view. Just as the letter China Is Not An Enemy calls for, the goal of cooperation and win-win can only be achieved on the condition of equality, mutual respect and appropriately addressing the core concerns of both parties. For China and the United States, patience to rebuild a rule-based order, rather than unilateral dominance by either side, remains the only viable way forward.

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