Could the US and Chinese economies really 'decouple'?

By Isabella Weber is an assistant professor of economics at the University of Massachusetts
Originally published in the Guardian, September 10, 2020
 
Talk of a new cold war is everywhere. Yet the economic context of the confrontation between the US and China is fundamentally different from the days of the iron curtain. The US and the Soviet Union had created competing globalisations, dividing the world into separate economic blocs. The two sides of the present divide are tied together as one “Chimerica” – with China as the global “workshop” and the US as the tech “headquarters” of the world. The old hope that this economic interdependence would prevent political conflict has been shattered. Instead, deep economic integration has increased the stakes: the core of the world economy could fall apart.
 
 
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Today’s global economic order is still inscribed on the back of every iPhone: designed in California, assembled in China. Both parties in the race for the US presidency pledge to put an end to this arrangement. The promise, this time on both sides, is to bring manufacturing home. President Trump’s campaign proclaims that it will “end our reliance on China”. Joe Biden for his part is trying to out-hawk Trump and promises a future of “Made in America”.
 
Meanwhile, Xi Jinping proclaims “dual circulation” as China’s new economic strategy, which promises more focus on the domestic sphere rather than reliance on the rest of the world. It is true that one part of this dual approach is to signal that China’s door remains open. Xi has personally written to the CEOs of foreign firms assuring them of a favourable business environment. The Chinese government has announced plans to transform Hainan island into a gigantic free trade port and China has opened its financial and insurance markets at a pace that international fund managers had not dared to hope for. On the other hand, China is preparing for a falling-out with the US, emphasising the goal of self-reliance in critical sectors such as food and technology.
 
“Decoupling” has become the new buzzword to describe the possibility of an economic break-up between the US and China. Trump, too, has recently added it to his rhetorical arsenal. Decoupling makes it sound as if the disintegration of the world’s two largest economies could be done in one simple step – like disconnecting the coupling between two wagons of a train. This couldn’t be further from the truth.
 
In 2012, Barack Obama asked Steve Jobs whether the iPhone could be produced in the US. Jobs answered with a plain no, and the difficulties likely remain in place today. Chinese government institutions, local business partners and multinational corporations have built supply chains in China since the late 1980s. Production sites are sustained by gigantic infrastructure developments, and draw from China’s roughly 300 million migrant workers, many of whom live in dormitories at the edge of the assembly line.
 
When we talk about “decoupling” from China what we really mean is a complete reorganisation of a large chunk of the world’s production. As a result of the trade war, China’s share in global supply chains in computers and tablets – the most affected sector – shrank by about 4 percentage points. Still, China produces 45% of global exports in this sector, and 54% of all phones worldwide. For furniture, clothing and household electrical goods, the shares are 34%, 28% and 42% respectively.
 
To the extent that foreign businesses have tried to pull their production out of China, reports tell a worrisome tale for the prospects of a quick decoupling. Foxconn is relocating some of its production to Vietnam and India, yet about 70% is bound to remain in China. Even when aided by China’s unique capability in rapid infrastructure development, moving major production facilities around takes time. A previous relocation of Foxconn’s factories within China to the inland city of Zhengzhou was several years in the making. As a result of the massive costs involved, the business community is in fact largely reluctant to follow politicians’ calls to pull out of China.
 
While the world remains dependent on China’s manufacturing infrastructure, China cannot do without foreign technology. In the critical computer chips industry, China is still years behind the industry leaders and remains tied to US knowhow. Thus, recent sanctions that cut Huawei off US-made chips have been billed a “death sentence” for China’s most successful tech company. And although China’s Covid-19 stimulus package is focused on long-term, high-quality development and targeted at innovation, the country faces a major uphill battle on the technological frontier. “If the US further hit key areas of the Chinese tech industry,” a Chinese executive warns, “the impact would be devastating.”
 
The realm of finance looks ominous as well. China has long aimed to add the RMB to the ranks of the international reserve currencies. The country also continues to command the largest foreign exchange reserve of US dollars. At the same time, Chinese researchers and officials increasingly worry about an all-out “financial war”. Yu Yongding, an economist and former adviser to China’s central bank, warns that China is dependent on the US dollar system and Chinese banks could be severely harmed if shut out by sanctions. According to Yu, the US could go as far as to seize China’s overseas assets. Such financial sanctions could set off a dangerous spiral of retaliations with nothing less than the global production system at stake.
 
The end of communism might be the closest analogy we have for the prospect of rapid decoupling – it was the last time a cross-border production network was dismantled, as “red globalisation” was cancelled in one big bang. The result from this “shock therapy” in Russia was a violent experience of deindustrialisation paired with a mortality crisis beyond previous peacetime experience of industrial countries.
 
China averted Russian-style shock therapy in the 1980s by a whisker as the highest level of political leadership had been getting ready to implement this policy. The gradual reform prevailed that laid the foundations for the country’s economic rise. Hope remains that a big shock in US-China relations, too, can be avoided. Global challenges, from the pandemic to climate breakdown, continue to mount and require Sino-American collaboration. After the US election, a window of opportunity might open for a careful renegotiation of the relations at the heart of the world economy. Devising workable strategies of reconciliation is an urgent task on both sides of the divide.
 
• Isabella Weber is an assistant professor of economics at the University of Massachusetts Amherst and the author of the forthcoming book How China Escaped Shock Therapy
 

URL: https://www.theguardian.com/commentisfree/2020/sep/11/us-china-global-economy-donald-trump