US-China Decoupling: Yes, No AND Maybe So

In a few weeks I will be testifying before the U.S.-China Economic and Security Review Commission, and this is causing me to become a bit obsessed with US-China terminology. It is also making me increasingly tired of talking about “decoupling” and “cold wars” when there seems to be no clear definition for either.

1. On the Meaning of Decoupling

I’ve been asking a ton of people whether they think the US and China are in a cold war. The answers I get are almost invariably yes or no, and then an explanation for the yes or the no. When I ask them when this cold war began, I get answers ranging from the mid-1800s to those who contend that we are not yet in a cold war.

When I ask what they mean by a cold war, I almost invariably get a blank stare. In 2019, I proclaimed the start of a US-China cold war, but I’m always happy to modify that statement based on how cold war is defined. The Oxford Dictionary defines cold war as arelationship between two countries who are not friendly but are not actually fighting each other, usually used about the situation between the US and the Soviet Union after the Second World War.” Not sure this definition helps much.

The same is true of decoupling, which in many ways is tougher to define than cold war. Are the United States and China decoupling? They certainly are if you focus on the “ing” part of the word and thus focus on the fact that the U.S. and China are in the process (however fast or slow) of moving away from each other. They almost certainly are if you focus on decoupling as aspirational, because both the United States and China for the most part would like to be rid of the other. But if you define decoupling to mean separated (which is how many seem to define it) that obviously has not happened because the two countries still do boatloads (pun intended) of business with each other.

A friend of mine (who lived in China for about 20 years and then “decoupled” from it about six years ago) sent me an article this morning, titled, The U.S. and China want to “decouple” their economies. Is it possible? I immediately answered the title’s question in my head with “it depends on how you define decouple.”

2. Decoupling Talk

The first paragraph of this article notes how “tensions are rising between the United States and China, and there is talk of ‘decoupling’ the two countries’ economies.” It then asks whether decoupling is a good idea and quotes Christine Lagarde, as saying that it “would lead to less economic growth, less prosperity in the world, more poverty across the world. So I think that this is something that should be by all means avoided.” Though it never makes this clear, this first paragraph seems to be talking about a full decoupling, which is more akin to “decoupled.”

3. Decoupling Has Started

But it then says that “decoupling may already be underway” as “the U.S. and China have meaningfully reduced the share of their imports coming from each other”. This is why I say that the United States and China (and for that matter, the EU and China as well) are decoupling and have been doing so for years.

4. But is Decoupling Even Possible?

The article devotes a section to “What do the commentators say” and that section begins by saying it’s “not clear if decoupling is even achievable.” As proof of that, it correctly notes that many countries “view China as central to their economic future,” and “the U.S. effort to decouple often leaves countries in regions such as south-east Asia more economically dependent upon China, not less.” This is all true, but none of this necessarily directly relates to the issue of US and China decoupling.

The article then notes how “even companies that have moved their production to other countries still purchase components from China” and that means that “real decoupling is likely to turn out to be much harder than it looks.” This is the first time I’ve seen or heard the phrase “real decoupling”, and I think it means the same “full decoupling,” but note that I am not aware of any clear definition for full decoupling. Does full decoupling mean that there will be no trade whatsoever between China and the United States? If that’s the definition, we will never achieve that even if there is a full-scale war between the two countries. Does it mean that US-China trade will be reduced by 50 percent or more? 25 percent or more? I am just tossing out these numbers to see if anything sticks, because I’ve yet to see anyone try to define decoupling (full or otherwise) with numbers.

The article again mentions other countries by noting that “even the closest U.S. ally is never going to cut itself off from China politically or economically,” and this makes me ponder whether this is even relevant to a discussion of US-China decoupling. What are your views on this?

It then notes how a “full decoupling probably isn’t in store for the United States and China, unless the two countries go to war. But a “selective decoupling” is “inevitable” and how the U.S. wants to curb investments and sharing of technology in areas such as “quantum computing, bioengineering, advanced semiconductors” that can be used for military purposes.

5. Last Words on Decoupling

It would seem we all ought to be able to agree that US-China decoupling is happening and will continue to happen well into the future. We all ought to be able to agree that there will be no full decoupling, short of a war, if full decoupling means the end of all trade.

I find myself often asking the following additional questions related to decoupling:

  1. What will get decoupled? Those things most tied to national security are at greatest risk. The odds of either country ending all trade in socks or rubber duckies is quite low.
  2. Who will bring about decoupling? This is a critical question and one that is usually ignored. There will be government-led decoupling, which will be impelled by sanctions, tariffs, regulations, etc. And there will be company-led decoupling, which is what happens when a company decides to cease buying its socks from China for whatever reason. There will be China-led decoupling and there will be US-led decoupling.
  3. Will decoupling go slowly and then all but stop or will it speed up? I love the phrase about how things happen “gradually and then all at once,” and I think that is what we will see here. I think that there will be tipping points. If half of the companies that get their socks from China stop getting their socks from China, the remaining half are more likely to leave China as well, even though their pricing might improve. This is just my guess.
  4. What about other countries? I have for years been saying that the EU is tracking the United States in terms of decoupling from China and despite Macron having briefly been won by tea with Xi, I still believe this.

What are you seeing out there?

4-21-2023 UPDATE: NATO confirmed today that all existing members of NATO have agreed to Ukraine “eventually” joining NATO. This is relevant to China because it is another “data point” on how the world is cleaving in two with the United States and the EU on one side, and China and Russia on the other. The big question is where the other countries will line up.



Read More

China Business