Initiative for U.S.-China Dialogue on Global Issues

In the dim light of bringing the trade war to an end anytime soon, the concept of “economic decoupling” becomes more frequently mentioned. The United States might have realized that its economy is large enough that decoupling could be a feasible option to completely resolve trade issues with China. The idea of cutting off economic ties between two of the world’s largest economies sounds extremely unrealistic. Nonetheless, the two countries have never been closer to economic decoupling since the establishment of a trade relationship.

Currently, there are already noticed trends of decoupling in technology and manufacturing. The controversies around Huawei and ZTE are often interpreted as a sign of technological decoupling despite the legal justifications behind the investigations on the two Chinese tech giants’ activities in North America. Meanwhile, U.S. companies are moving their supply chains away from China. The raised tariffs and tense economic relationship set up a hostile environment, which discourages economic ties and exchanges between the two countries.

The fundamental problems behind the current trade war make decoupling dangerously possible. What the United States seems to want from China is a more open and transparent economic structure which gives U.S. corporations more space to compete and profit. One of the major reasons for the tariffs under the Trump administration is to force China into changing their "unfair and discriminatory practices". Nevertheless, by definition, what are considered as “unfair and discriminatory” lies in the Chinese economic structure where nationally owned corporations are guaranteed advantages in market and the government closely monitors the direction of crucial industries. It is impossible for China to give up its commanding position in the economy, which means the tariff approach would never bring a possible solution. The problem the Trump administration is trying to resolve is inherently structural, and the current solution the United States seeks will almost certainly lead to a disappointing failure. Combined with the increasing support, it is very likely that decoupling would become the next step after the strenuous yet unproductive struggle with the trade war.

The political factors also contribute to the possibility of decoupling. Trump administration promised to decrease the trade deficit and its major aim is China. It is closely associated with his promises in domestic policies as well, namely, to create more jobs and support American companies against foreign dominance. Unfortunately, the gap in trade deficit only seemed to have widened and reached its new heights in 2018. The struggle to deliver policy goals could exacerbate the adoption of a more radical approach that perceptually could gain more political capital and support. On the other hand, China also needs to maintain its internal perception of the international prestige of government and the image of a strong, robust economy. The continuation of hostility in the trade war may also take the relationship one step closer to decoupling.

What do the United States and China need to do in order to avoid possible decoupling? First of all, the two countries need to recognize that decoupling cannot happen. It would be in neither countries’ best interest if the United States and China move away from existing economic connections. The impact on the existing multinational corporations would be an imaginable shock to both countries’ economies. It would also be detrimental to the future of Sino-U.S. relations, as the hostility would almost certainly be at its height while the loss of economic ties would take away an important force that bonds the two countries into conversations. Furthermore, the decoupling between the two countries would spur the trend of untying economic connections especially based on ideological differences. This potential impact would be disproportionately borne by developing countries, creating further global economic inequality. No matter from a national interest or a responsible global actor standpoint, neither side should take the step towards decoupling.

Second, both need to set their goals correctly in the trade talks. The United States needs to understand that trade is by no means the place where it can get China to change its economic structure and governmental involvement in its economy, and to keep pushing China towards such a direction would only lead to worse outcomes. On the other hand, China needs to take a less defensive stance. There has to be more trust and transparency during the talks to instill good faith instead of doubts and suspicions. Both countries need to recognize that they have to compromise some of their demands in order to reach an actual deal.