US-China decoupling: How far could it go?
Published 02 September 2020 | 6 minute read
This article about US-China decoupling surveys the emerging fields of the economic conflict that - beyond trade - also include FDI, technology transfer, capital markets and access to the US dollar-denominated global payments infrastructure. A more in-depth examination of the ongoing decoupling and its impacts can be found in the accompanying essay.
US-China decoupling goals
The economic fall-out from the Covid-19 pandemic disguises the impact of the US-China decoupling and economic confrontation in economic data, making analysis difficult. As highlighted in our recent white paper "The New Cold War: de-risking a China-US conflict", what to some appeared as a trade dispute has now more evidently morphed into a broader rivalry. The economic dimension of this rivalry encompasses more than just tariffs on trade and is rapidly expanding to entail a deep decoupling of the two economies.
To answer the question “how far could the decoupling go?”, it is imperative to understand what the two sides are setting out to achieve.
- China’s aim, from an economic perspective, is as far as possible to maintain the ex-ante status quo which has served its economic interests so well.
- From the American perspective, the initial aim of the tariffs was to bring China to the negotiating table with a view to making the economic relationship more sustainable: creating deep but symmetric economic engagement with reciprocity being the guiding principle.
An equitable economic relationship on market economy lines, however, will always be incompatible with the Communist Party of China (CPC)'s control over the direction of the Chinese economy (as outlined in our article from 2018 on The real challenge for US and China relations). Therefore, anything other than a fudge would be unacceptable to either side, and the phase one trade deal was that fudge.
The Covid-19 pandemic precipitated the shift in US-China relations
Moreover, the Covid-19 pandemic and a range of further issues including the emergence of so-called “wolf warrior” diplomacy and the imposition of the National Security Law in Hong Kong have served to shift the nature of US engagement with China. The idea that Chinese expansionism requires, perhaps, a more assertive form of economic statecraft has acquired greater currency in Washington.
The policy aim, therefore, seems to have morphed from being one of trying to bring pressure to bear on China to renegotiate a deep but fair economic relationship, to one aimed at bringing about a strategic decoupling, with a view to containing China’s expansionism (see our white paper on US-China strategic decoupling in tech).
US-China decoupling impacts on trade
Bilateral trade has fallen from a peak in September 2018 of US$668 billion, on a 12-month rolling basis, to just US$519 billion now, a fall of 22%.
The bilateral deficit has fallen 27% from peak to now. Chinese outbound FDI to the US is now negligible.
US FDI into China remains in its established range of US$12 billion to US$15 billion, which is small in relation to the overall capital stock of either country and other flows between them.
US-China decoupling scope beyond trade
Beyond trade and investment, the scope of the decoupling is expanding.
Moves to raise and enforce compliance with listing standards on US capital markets could well result in Chinese-based companies delisting from US exchanges.
Conversely, China attempts to attract foreign participation in its capital markets are meeting with increased resistance from US policymakers as they fear such inflows could provide China with economic leverage and the hard currency inflows that could help facilitate geopolitical expansionism.
The logical conclusion of attempting to suppress Chinese expansionism through economic statecraft is surely a far greater decoupling and bifurcation of the global economy than that implied by current policy.
The digital Yuan
The development of the digital Yuan and greater efforts to internationalize its use (see our recent white paper about The digital Yuan and China’s potential financial revolution) should be seen as a preemptive move by China to help immunize its economy from further escalation, anticipating US moves to limit or prohibit Chinese access to the US dollar payment system.
For the US to achieve its goals, given the US itself accounts for only about one quarter of global GDP, it will become increasingly important to build alliances and the support of allies to render its geo-economic policies effective – an issue we will address in our next paper.