US-China decoupling: Interdependence limits economic delinking
US-China decoupling: Interdependence limits economic delinking
WRITTEN BY STEPHEN NAGY AND HAHN NGUYEN
2 October 2020
Under the Trump administration, simmering US-China tensions have transitioned into a full-blown trade war and a cross-spectrum competition spanning numerous sectors. In addition to the tit-for-tat trade war, since 2018, the strategic competition has now spilt over into technology. The Trump administration seems determined to hobble China's ambition to become a technological hegemon through sanctions against Chinese tech giants like Huawei, ZTE and Hikvision.
The COVID-19 pandemic has seen Sino-American tensions enter a more unpredictable and dangerous phase. Both countries have engaged in a blame game and antagonistic rhetoric toward each other. These tensions have sparked a vigorous debate about a new Cold War and the possibility of economic and technological decoupling between the two superpowers, which are closely and intricately entangled.
Rising Sino-American tensions
Washington’s grievances against China can be traced back to its engagement policy since the normalisation of bilateral relations in 1979. The US pursued a combination of engagement and balancing strategies in the hope that China would gradually liberalise (economically and politically) and become a responsible stakeholder in the US-led liberal international order. This was part of a broader, post-Cold War effort led by the US to build a truly global international economy, which is an open, rules-based system with unrestricted flows of goods, capital, peoples and ideas. Its engagement policy was also underpinned by commercial interests as US businesses hoped to tap into China's vast supply of cheap labour and its enormous domestic market.
While globalisation and the migration of manufacturers to China have indeed had an adverse effect on the US manufacturing sector, failure to distribute wealth more equally and prepare American workers for the side-effects of globalisation has only exacerbated the problem.
Beijing's actions have, nevertheless, defied American expectations. Complaints of China's unfair practices, from barriers favouring domestic firms, forced transfer of technology to intellectual property theft, have soured bilateral relations. China's ambition to supplant the United States as the global technological hegemon is reflected in its 'Made in China 2025' program and further strengthened America's determination to thwart China’s grand strategy. Simultaneously, the economic benefits of engagement with China were closely scrutinised, in particular, its impact on the industrial hollowing-out of the US. The combined effect is a rare political consensus among Democrats and Republicans that the US needs a new and tougher strategy towards China.
For its part, China has pursued its own engagement policy — but without the transformation aspect. It has aimed to extract the benefits of engagement while shielding itself from subsequent destabilising side-effects. This policy is rooted in what Charles Boustany and Aaron Friedberg have described as 'mercantilist Leninism'. China’s leaders are convinced that the Chinese Communist Party (CCP) should hold absolute power and authority over all other actors, interests, and activities within Chinese society in order to ensure its survival. From their perspective, trade generates not only wealth and prosperity but also power, which the CCP needs to acquire to restore China to its former status as the preponderant power in Asia. Consequently, while China’s leaders desire the benefits of engagement because they engender greater power and leverage for them, they have no intention to relinquish their control over Chinese society.
This view serves as the foundation for China’s nuanced position on interdependence with the United States. For China, interdependence consists not only of a source for economic growth and technological development but it also sees risks in the form of dependency and a capability to leverage these dependencies into economic coercion. Thus, China’s leaders have long pursued a balance between reaping the benefits of interdependence and minimising their risk. This strategy can help to explain China's move to gradually open its economy to the outside world and the erecting of barriers to strengthen and consolidate what it deems as critical domestic industries.
Since coming to power in 2012, President Xi Jinping has shifted the balance towards a greater emphasis on risk-minimisation and the deployment of dependencies as a coercion tool toward other countries.
Given the CCP’s penchant for absolute control, genuine economic and political liberalisation in China is not a realistic outcome. A negotiated settlement, possibly in the form of a Phase 2 trade deal, could offer a much needed band-aid to help diffuse current tensions. Nevertheless, since many of the contentious issues (in bilateral relations) are rooted in the CCP regime's characteristics, this solution can only provide short-lived relief and would not do much to alleviate US concerns.
Image credit: Julius Silver/Pixabay
While there are legitimate (even necessary) reasons for decoupling, as Alan Dupont points out, “to preserve the integrity of an open, robust trading system and liberal international order”. Nevertheless, as Dupont asserts a complete decoupling is impossible due to the level of integration between two economies and their wider importance to the global economy. It might hobble global economic recovery from the pandemic and even trigger a new recession. Despite calls and initiatives from governments, businesses appear to have no plans to leave China. Surveys conducted by American and European Union Chambers of Commerce show that more than 80 per cent of businesses do not have relocation plans. Despite rising labour costs and geopolitical tensions, China still holds several critical advantages — high-skilled labour, a giant market, adequate infrastructure, and complex supply chains for business. As John Lee argues, China's giant market provides opportunities for both lower-priced manufacturers from developing countries and value-added products from advanced economies. These advantages make it extremely difficult to find an alternative.
A limited decoupling
Consequently, a form of selective decoupling or partial disengagement is a more likely resolution. Selective decoupling should aim to slow the outward flows of technology and information to China, to regulate the inward flow of Chinese goods, capital and people to the US, to strengthen US advantages in innovation and research, and to initiate a united front and robust collaboration with other like-minded partners. Furthermore, selective decoupling is already underway as some firms are currently relocating their production lines to countries such as Vietnam, Mexico, and India due to a combination of China's rising labour costs, a trade war and declining revenue growth.
Nevertheless, pursuing this strategy will require the US to overcome several domestic and international challenges. First, to mobilise public support for a likely prolonged competition with China (the US needs to ensure that benefits from growth and prosperity are more equitably distributed). While globalisation and the migration of manufacturers to China have indeed had an adverse effect on the US manufacturing sector, failure to distribute wealth more equally and prepare American workers for the side-effects of globalisation has only exacerbated the problem.
Second, defending American interests against China's use of economic statecraft while preserving the openness of American society and its political system will be a daunting task. The US would need to comb through a vast and complex set of interactions spanning different sectors to identify those that represent a threat and mitigate accompanying risks while leaving harmless activities intact. In doing so, the US would need to resist the temptation of blanket bans as they damage American national interests and play into the hands of CCP propaganda.
Third, the US cannot compete effectively against China without the support of its allies and partners and their increased presence in international institutions. Thus, regardless of who may be the next US president, the administration should adopt a multilateral approach by reaching out to those countries who share similar concerns about China's conduct. The US cannot influence decision-making within international institutions (in its favour) if it is absent from the process. Ratifying the United Nations Convention on the Law of the Sea (UNCLOS), participating in high-standard regional trade agreements and offering credible initiatives for infrastructure in the Indo-Pacific would all be meaningful steps toward signalling the US is serious about regional engagement.
Finally, Sino-American selective decoupling is not limited to economic relations, but a comprehensive strategy to scrutinise and properly regulate the flow of goods, capital, people and ideas between the two countries. Other than expected defensive measures to protect national security, the US would compete more effectively by demonstrating a willingness to sort out its domestic issues and seek support from allies and partners.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biographies
Dr. Stephen Nagy is a Senior Associate Professor at the International Christian University in Tokyo; a distinguished fellow with Canada's Asia Pacific Foundation; a fellow at the Canadian Global Affairs Institute (CGAI); and a visiting fellow with the Japan Institute for International Affairs (JIIA).
Hanh Nguyen received her M.A. in International Relations at International Christian University, Tokyo. Her research interest includes Vietnam's foreign policy and US-China relations. She is a fellow under the Japanese Grant Aid for Human Resource Development Scholarship (JDS). She has written for the Pacific Forum, 9DashLine, Geopolitical Monitor and the East Asia Security Centre. Image Credit: US Embassy and Consulates China.