Can US-China decoupling work?

The US and China have thus achieved a “Phase One” trade agreement: Washington will lower some of the additional tariffs it had previously imposed on Chinese imports and has cancelled the new tariffs it was about to introduce. Beijing, for its part, has agreed to increase its purchases of US agriculture and industrial products, liberalise access to the Chinese market in some sectors, and strengthen intellectual property protection.
 
The Trump administration will have to wait for a new phase of negotiations to try to achieve its goal of bringing structural reforms in China’s economic and trade policies — which might prove to be quite elusive: President Xi Jinping is not more intent today than he was before to alter in any significant way the country’s model of state-run capitalism.

 
So what will be officially signed early January is a ceasefire, which does not mean any respite in the US-China confrontation for strategic and technological prominence. The message from the Trump administration initiatives over the last two years remains one of a policy that can be summarised in three words: “Contain and Decouple”, and which is acquiring a worrying momentum.
 

The latest developments involve the White House proposal that technology sales in the US from countries seen as “foreign adversaries” — read China — would be vetted by the secretary of commerce for security reasons. And Beijing has decided that all government offices and public institutions will have to remove all foreign IT and software equipment and replace them with Chinese domestic within the next three years.  While Washington has put various Chinese companies on its “entity list”, read trade blacklist , Beijing has set its own list of “unreliable entities” to punish companies — i.e. US companies— considered “harmful” to Chinese interests. And a defence policy bill now awaiting Mr Trump’s approval would prohibit using federal funds to purchase buses and rail cars from Chinese companies — with BYD Motors, a leading maker of electric cars and buses, the clear target of this latest initiative.

 
Add to that the Trump administration’s pressures on US companies to move their activities out of China, the increasing restrictions on Chinese investments in the US, and on US technology transfers, the reduction of US visas for Chinese students, the unrelenting pressure on US allies to ban Huawei from their 5G development projects, and you get some notion of an across the board policy of containment and decoupling.
 
If this trend continues unabated, there is an increasing risk to see the global economy breaking up into a US-centred economic, business and technology sphere and a China-centred one, with many countries as collateral victims and struggling to avoid an impossible choice between the two camps. Such an outcome would represent a radical reversal of the economic evolution over the last 40 years. It would mean the disruption of almost all supply chains and major negative consequences on technology, financial and products flows, and on an already damaged international trade system. In other words, all the drivers of growth for the global economy are today under threat.

 
The irony is that this containment and decoupling strategy is not only likely to fail but that — if ever it were to succeed — it would, in fact, harm the  US interests and global position. It is likely to fail because it underestimates the extent to which important segments of the US economy are dependent on the supply of Chinese products and services for which there is no substitute in many cases. Creating such substitutes will take time, be costly, and would require either creating dependencies on new external sources or an expansion of the American manufacturing base that is unlikely to happen. It will fail, also, because success of such a strategy would require that the European Union align itself totally to the US contain and decouple goal. However, despite all the misgivings towards the rise of China’s and Beijing policies — and the labelling of China as a “systemic rival” — the Europeans have no intention to cut themselves from China’s economic dynamism and the huge potential that its market and resources represent. Getting tougher on Beijing, yes, strengthening European competition capabilities against China, yes, but decoupling, no.

 
But even if the Trump administration’s goal of containment and decoupling were to be achieved, and even if this would slowdown the rise of China in the next few years, the US would end up being the real loser from this policy in the medium and long term. Already the US initiatives have created a number of problems for American companies; and the tightening of export and transfer of technology is leading Beijing to accelerate its drive towards self-sufficiency in critical domains such as semi-conductors, or prominence in the AI domain.  While the US has still an edge over China in the overall technology  power balance, this edge is eroding in many domains faster than many anticipated. China will keep the advantage of its 1.4 billion population and of its proximity with the Asean,  the most economically dynamic region of the world with its 800 million population, more and more closely interconnected with China. The Asean countries will hate having to choose between China and the US. But whatever their suspicion towards Beijing, these countries will have to opt for China if push comes to shove, bringing their own dynamism to the momentum that will continue to drive the Chinese economy and technology.  

 
An anti-China mood has now swept Washington. But frustration and impulses don’t make an effective strategy. We hope that some people around President Donald Trump, in the business circles and in Congress realise that; and that this happens sooner rather than later, before the damage to the global economy becomes irreparable.
 
The writer is president of Smadja & Smadja, a strategic advisory firm;   @ClaudeSmadja