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November 18, 2019

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

The Rules of the Game May Change, but the Players Won’t

Bryan Carapucci

While the United States and China may be gravitating towards economic decoupling by certain metrics, such as President Trump’s encouragement for U.S. manufacturers to leave China and China’s own “Made in China 2025” initiative, in reality the likelihood that the two countries’ economies will bifurcate completely is slim to none. As the world’s two largest economies and consumer markets (in terms of individual nations), the United States and China are inextricably linked and have both benefited immensely from strong economic ties. Regardless of short-term disturbances, this relationship will persist because it is ultimately what is most beneficial for the American and Chinese people.

The current state of economic relations between the two countries paints a vivid picture of the potential devastation that fractured ties would entail. U.S. consumers and Chinese exporters have been hit the hardest by tariffs in the trade war, though the rippling effect of these policies can be felt across the board. Rather than facilitate a smooth or clear path to resolution of issues, tariffs have placed the two countries in limbo, and the looming threat of another increase in tariffs on December 15, 2019 further complicates things. Suspension of the proposed U.S. tariff increase this past October indicates that both sides are willing to work together to repair relations and avoid the inevitable increased economic slowdown that would ensue, though, despite this, substantive change has yet to be made. This ordeal has proven that the two economies cannot withstand severance. While certain sectors in one country might gradually push towards decreasing reliance on the other country, the sheer scale and interwoven nature of the U.S.-China economic relationship means that, at least in the foreseeable future, decoupling remains a near impossibility and would not serve either side’s interests without posing a risk to the economies of both countries.

This is not to say that real grievances do not exist or that the U.S.-China relationship will naturally recover due to mutual economic reliance alone. Much of the discontent on the side of the United States surrounding fair market competition, intellectual property theft, etc. cannot be swept under the carpet or ignored. There are serious discrepancies and disagreements, some of which appear to be irreconcilable. That said, the benefits of continued trade far outweigh the alternative of decoupling. Considering the potential economic rewards that both sides can reap, these differences will necessarily find some resolve, even if it means shifting the very nature of the relationship. In other words, while the rules of the game may change to address pressing concerns, the players themselves will not, as both the United States and China remain massive economies with continued incentive to trade. Even if, for instance, U.S. manufacturing suddenly made a mass exodus out of China, the result would not be an unstoppable trend towards decoupling since other aspects of economics relations would remain strong or at the very least intact.

The threat of economic havoc that decoupling would bring to the United States and Chinese economies means that there is little to no reason for either country’s government to pursue this avenue. The two great powers will have to sort through identifying problems that stand in the way of economic prosperity in the two countries and creating a platform in which both countries can prosper, which will not happen overnight. How these issues can be resolved is not clear, though one thing is certain: decoupling would not serve in either side’s interests and would not only devastate their two economies, but strain the entire global economy as well.

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