Geopolitics and Decoupling from China

The word “decoupling” has a lineage in international politics that is both venerable and strange. During the Cold War, it was used most often to describe the risk that the security of America’s allies, especially in Europe, might become separated from that of the United States itself—for instance, if Mr. Reagan’s vaunted “Star Wars” had actually produced the equivalent of a dome protecting the United States from nuclear attack.[1]

By Gregory F. Treverton

Note: The views expressed here are those of the author and do not necessarily represent or reflect the views of SMA, Inc.

Now, the domain is economics, and the connotation of decoupling is generally positive, not negative. Decoupling typically refers to reversing globalization, in particular with regard to China, reducing reliance on supply chains in China, even “reshoring” them.

Plainly, the world of geopolitics is moving toward more intense competition between the United States and China. Just as plainly, it is a mistake to call this default future a new cold war—though it is already being labeled that—for China and the U.S. will remain much more interconnected, especially economically, than were the U.S. and the Soviet Union. And even those Cold War adversaries managed enough arms control to avoid blowing up the planet, so it shouldn’t be beyond the wit of America and China to cooperate to save the planet from pandemics in the short run and climate change in the long.

In the short run at least, the pandemic amplified both the Sino-American competition and the urge to decouple. From the beginning the pandemic was a geopolitical free for all, with open borders closing, and European Union partners denying each other critical medical supplies. The sad state of international cooperation was driven home by an estimate done by the International Monetary Fund (IMF) in July 2021: a $50 billion program of vaccination and other virus control efforts would generation $9 trillion in additional global output by 2025—a return of 180 to one.[2] Yet there were no takers, none, and billions of people in poor countries will wait until 2023 to get vaccinated.

Whether China’s COVID-19 performance confers long-lasting international benefits also remains to be seen. After setting loose the scourge on the world, it managed the nifty sleight of hand to wind up appearing as both the model and the leader in responding to it. On the negative side of the ledger, its “wolf diplomacy” clearly overplayed its hand, and its broader COVID-19 diplomacy was tarnished when some of the medical supplies it provided poor countries turned out to be shoddy. It continued to stonewall World Health Organization (WHO) efforts to dig deeper into the origins of COVID-19, especially to investigate whether it might have leaked from the Wuhan laboratory where “gain of function” experiments were being performed on viruses.

A good deal of the urge to decouple was visceral, images of dependence on China for critical medical supplies. In fact, the hyperglobalization that brought trade to twice the share of global gross domestic product (GDP) it had ever been had plateaued by the time of the 2008 recession. It recovered but only to prerecession levels. And much of the supply chain disruption, like the container “crunch” during the pandemic, was the crunch of success: unlike usual recessions, when trade falls faster than GDP, that was not the case during the pandemic. Containers were not a disease vector (as opposed, perhaps, to ports). Consumers, denied the chance to spend money on travel, entertainment, and other services, bought things—a reminder that globalized trade remains mostly in goods; the outsourcing of professional services that was such a concern a decade ago has mostly not occurred.

Still, there remains the question of what it means for decoupling if the future we are moving toward is one of tag teams in which countries fall, sometimes awkwardly, into an American-led or China-led grouping, though with some switching of sides and more hedging? Of that, the wrangling over Huawei and fifth generation (5G) cellular network technology has provided a foretaste. The Europeans, in particular, are caught between economic self-interest on the one hand, and security concerns on the other, ones loudly advertised by Washington but without offering much of an alternative to Huawei. Taiwan, and its Taiwan Semiconductor Manufacturing Company (TSMC), is a second case in point. Because it controls more than 50% of the global semiconductor market, it is economically critical to both China and the United States, which dramatically complicates its effort to remain politically neutral between them.

Companies will make their own decisions about whether in chasing pennies of cost savings in efficiency, they have put pounds at risk in security of supply lines.[3] The concern that globalization had gone too far was only sharpened by the pandemic.[4] And it remains an open question, given the importance of the Chinese economy, whether companies will seek more resilient supply lines inside China or by moving them outside China. In the end, though, companies cannot avoid being affected by the “choose sides” imperative of a more divided world, and China has taken the lead in putting more direct pressure on private companies. It punished Ant Group and other tech companies recently for putting out new products without government approval, and it has launched investigations, blocked initial public offerings (IPOs), especially on U.S. stock markets, forced restructurings, and issued fresh regulations.[5] The United States seems posed to follow suit, with proposals in the air to require government permission to merge or acquire companies, to separate companies structurally, or to move away from the consumer welfare standard that has been the venerable guide to antitrust: are consumers hurt by the merger, a proposition often hard to prove in the informational technology (IT) world when so much on the web is cheap or free?

Surely, globalization is, structurally, a long way from the days of “Chimerica,” the coinage of Niall Ferguson.[6] China is the usual and convenient villain, but the six million manufacturing jobs the United States lost between 2000 and 2010, resulted from a combination of production moving to China and other low-wage countries, automation continuing apace, and companies scaling back production in the 2008 recession. Still, the predictions of mainstream economists in the 1990s were too sanguine about globalization, in particular about the extent to which “hyperglobalization” of trade would drive increasing inequality. Until the 1980s trade liberalization mostly lowered barriers erected before World War II.[7] Indeed, trade as a share of global product was only slightly larger than it had been in 1913.

What economists did not predict—and perhaps could not have given the data they had—was the coming trade boom, especially in manufactured exports from developing countries, which are now five times the share of global product they were in the mid-1980s. In that sense, China’s boom was “made in America” to the extent it was the primary destination of all those inexpensive consumer goods. In 1991, manufactured goods from low-income countries accounted for just 9% of U.S. imports, a number that rose to 15% by 2000 and 28% by 2007, with China accounting for almost nine-tenths of this growth.[8] American goods imports from China jumped by a staggering 1,156% from 1991 to 2007.[9] While manufacturing had been declining as a share of total employment in the United States, in absolute numbers it was relatively stable—until 2000, when it fell off the cliff. As the trade deficit surged, manufacturing in the United States declined, and the surge accounts for more than half the 20% decline in manufacturing employment between 1997 and 2005. Small wonder that globalization became a dirty word in the Rust Belt.

In that sense, the “win-win” sense of the early days of China’s boom is long past, and the economic dimension of Sino-American relations is seen as competitive by both. It was noteworthy that the one international venture the Biden administration did not quickly reenter was the Trans-Pacific Partnership (TPP), from which Trump had withdrawn the United States in January 2017. Nor did the administration move quickly to lift the tariffs Trump had imposed on China. A range of Chinese measures—from the 2015 Made in China strategy to the 2020 export control law—bespeak a similar impulse toward competition and self-reliance. These political choices may be undergirded by technological change to the extent that the advances in the Fourth Industrial Revolution, like 3D printing or the Internet of Things, both permits more decentralization, hence limit the need for long, global supplies, and, through automation, hurts low-skilled labor, thus sharpening the sense that globalization is a zero-sum game.

Are there factors that might mitigate this turn from globalization to global competition? This white paper nicely outlines a number of steps companies can take to adapt to and protect themselves from a world of decoupling. Whatever the state of their political relations, the United States and China will remain enormously important to each other economically, and, ultimately, it is in the interest of neither to see the world fall into a mishmash of competing standards and rules. Not all the supply chains raise the same issues of decoupling: despite all the attention to India, supply chains in pharma mostly link rich countries, with intermediate products valuable enough to be moved by air, not container—one of the reasons that producing vaccines quickly was the singular success of the pandemic. And in the end the two countries might decide that geopolitics should not rule over cooperation to save the human race from pandemics and climate change.

Gregory F. Treverton stepped down as Chair of the US National Intelligence Council in 2017. He is now Professor of the Practice at Dornsife College, University of Southern California, Chair of the Global TechnoPolitics Forum, and an SMA Executive Advisor.

[1] To be sure, there was always considerable theology to these discussions. A sharp-eyed reader, for instance, might notice that instead of shared U.S. and European nuclear vulnerability, if the United States homeland were less vulnerable to nuclear attack, it could be argued that should have made it more, not less, credible that Washington would carry out NATO strategy by threatening a nuclear response to a conventional Red Army attack on western Europe.

[2] As cited in Adam Tooze, “Our Era of Incompetence,” New York Times, September 5, 2021, Week in Review, p. 4.

[3] “Has Covid-19 Killed Globalisation?,” The Economist, May 14, 2020, available at http://www.economist.com/leaders/2020/05/14/has-covid-19-killed-globalisation.

[4] Vanessa Gunnella and Lucia Quaglietti, “The Economic Implications of Rising Protectionism: A Euro Area and Global Perspective,” European Central Bank, April 24, 2019, available at https://www.ecb.europa.eu/pub/economic-bulletin/articles/2019/html/ecb.ebart201903_01~e589a502e5.en.html.

[5] Asheesh Agarwal, Willl the U.S. Emulate China’s Tech Take-Down, The Hill, September 11, 2021, available at https://thehill.com/opinion/technology/571821-will-the-us-emulate-chinas-tech-takedown.

[6] Niall Ferguson and Moritz Schularick, “‘Chimerica’ and the Global Asset Market Boom,” International Finance 10, no. 3 (2007): 215–39, https://doi.org/10.1111/j.1468-2362.2007.00210.x.

[7] See Paul Krugman in Luís Catão and Maurice Obstfeld (eds.), Meeting Globalization’s Challenges: Policies to Make Trade Work for All, Princeton University Press, 2019. A summary version is available at https://www.bloomberg.com/opinion/articles/2019-10-10/inequality-globalization-and-the-missteps-of-1990s-economics.

[8] David H. Autor, David Dorn, and Gordon H. Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review 2013, 103(6): 2121–2168, available at http://dx.doi.org/10.1257/aer.103.6.2121, pp. 2121-2.

[9] Ibid. p. 2158.