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The rising fear of irrevocable U.S.-China economic decoupling and its implications

Will COVID-19 speed up U.S.-China decoupling more than the trade war?

By Emanuel Skog

It is blatantly obvious that the Sino-American relationship is going through a major challenge on an economic and political level as a direct result of the COVID-19 pandemic. Trust between the two countries has deteriorated during the pandemic and is presently at its nadir since diplomatic ties were established in 1979 [1]. However, before the outbreak of the pandemic in mid-January this year the U.S. and China had inked the so-called “Phase One” trade deal aimed at easing a two-year trade war [2]. The trade deal was hailed by U.S. President Trump as “transformative” for the U.S. economy. Chinese leaders spoke about it as a “win-win” deal that would assist in fostering improved relations between the world’s two biggest economies [3]. The deal stipulated that over the 2020-21 two-year period, China will procure at least $200 billion more in U.S. products and services than it did in 2017 and strengthen intellectual property rights [4]. In exchange, the U.S. has committed itself to halve some of the novel tariffs it has imposed on Chinese products [5]. Although, most import taxes are still in place even after the implementation of “Phase One”.

Though, one should not lose sight of the fact that the pandemic has reinvigorated already deep-rooted and old strains on the relationship after more than 40 years of “engagement” [6]. The glue which held the relationship together for most of the past 40 years has been founded on a fundamentally unbalanced equation. Both sides were willing to play down differences of an ideological nature and strategic tensions to reap the benefits from commercial collaboration [7]. However, as the Chinese economy expanded, so did its global ambitions and less willingness to accept U.S. international leadership. In the case of combatting the pandemic instead of jointly collaborating, the leaders of the two countries have engaged in blame games and misinformation campaigns trying to discredit the other side [8]. This further accentuates the ongoing, growing and widening rift between the globe’s two most indispensable nations.

The decoupling is accelerating

Political skirmishes and bickering aside, many Americans hold the opinion that the pandemic made the dangers of an over-reliance on China pertaining to supply chains abundantly clear [9]. Many U.S. companies are already shifting their supply chains, both regarding production and sourcing, to other Asian countries to avoid being hit by existing levies and potentially new ones [10]. The increasing separation between Beijing and Washington extends beyond traditional goods and services. It is most prevalent amongst advanced technologies as the U.S. is trying to protect innovations in artificial intelligence, robotics, and genomics from Chinese hands [11].

However, the pandemic has really accelerated the economic decoupling and shifted it into overdrive in the first quarter of 2020. The value of newly announced Chinese direct investment projects into the U.S. economy decreased to just $200 million in the first quarter of this year, down from an average of $2 billion per quarter in 2019 [12]. The decrease comes after Chinese direct investment in the U.S. fell to its lowest level since 2009 last year. Overall, nonetheless, U.S. investments in China have exhibited remarkable resilience. In the first quarter of 2020, its investments were $2.3 billion, which is down slightly in comparison from a quarterly average of $2.8 billion in 2019 [13].

U.S. Secretary of Commerce Wilbur Rose argued that the pandemic would lead businesses to reconsider their supply chains and it would assist in returning jobs and manufacturing to the U.S. [14]. Additionally, the growing economic divergence and ramped up geopolitical competition has forced the U.S. to reach a similar conclusion China did years ago: self-sufficiency in critical technologies is a non-negotiable component of a country’s national security infrastructure [15]. It is worth bearing in mind that China has been pursuing its own form of decoupling for more than a decade. It launched a concerted campaign to develop more advanced technologies domestically, whilst relying less on the U.S. and other Western suppliers [16].

The “Economic Prosperity Network”

The two countries are now on the cusp of entering a “new type of cold war” however, with crucial differences from the U.S.-Soviet Union showdown between 1947-1991 [17]. The advent of a full-blown new Cold War could translate into the re-emergence of the competing economic and political blocs that were the hallmarks of the previous conflict. China is by now well into the development of its own economic sphere with its ambitious Belt and Road Initiative [18]. With the primary objective of linking economies across Asia, Africa, and parts of Europe to China. This is setting off alarm bells in Washington on how to best craft a forceful and durable response to it.

In wake of the pandemic, the U.S. is pushing for the creation of a multilateral alliance of like-minded countries, organizations, and businesses as part of an initiative called the “Economic Prosperity Network” [19]. Presently, the U.S. government is working with Australia, India, Japan, New Zealand, South Korea, and Vietnam as part of the initiative. It aims to safeguard supply chains of strategic goods such as pharmaceuticals and sensitive technologies. Making sure participants adhere and operate under the same set of standards on everything from digital business, energy and infrastructure to research, trade, education, and commerce [20]. However, it remains to be seen how the “Economic Prosperity Network” will develop, whether it will turn into a permanent alliance, and what its precise focus areas will be.

It is abundantly clear that the pandemic has merely functioned as a catalyst and turbocharged the already ongoing economic decoupling. Underscoring that strategic competition was already present in the relationship beforehand and the most pertinent prism through which to analyse the current Sino-American relationship.

Source:

[1]. https://www.ft.com/content/fe59abf8-cbb8-4931-b224-56030586fb9a

[2]. https://www.wsj.com/articles/u-s-china-to-sign-deal-easing-trade-tensions-11579087018

[3]. https://www.bbc.com/news/business-51114425

[4]. https://www.politico.com/news/2020/01/15/what-is-in-us-china-trade-deal-099399

[5]. https://www.bbc.com/news/business-51114425

[6]. https://www.ft.com/content/fe59abf8-cbb8-4931-b224-56030586fb9a

[7]. https://www.ft.com/content/fe59abf8-cbb8-4931-b224-56030586fb9a

[8]. https://thediplomat.com/2020/05/the-us-china-and-the-perils-of-post-covid-decoupling/

[9]. https://thediplomat.com/2020/05/the-us-china-and-the-perils-of-post-covid-decoupling/ and https://www.cnbc.com/2020/02/12/coronavirus-effect-on-us-china-decoupling-versus-trade-war-milken.html

[10]. https://www.ft.com/content/c920bce2-360e-11ea-a6d3-9a26f8c3cba4

[11]. https://www.ft.com/content/c920bce2-360e-11ea-a6d3-9a26f8c3cba4