In 2018, Steve Bannon, then chief strategist of US President Donald Trump, argued that the United States must “decouple” from China. Since then, the term has become staple in discussions of China-U.S. Relations, to the point that some, like former Australian Prime Minister Kevin Rudd, have warned that it could become a self-fulfilling prophecy. How important is this risk today?
A certain decoupling is undeniably underway. In recent years, the two countries have been locked in a tariff war. Additionally, the United States has implemented sanctions against Chinese tech giants ZTE and Huawei, allowed Chinese companies to be delisted from U.S. stock exchanges unless they meet U.S. auditing standards, and has added a number of Chinese companies to their “entity list”, thus subjecting them to further trade restrictions.
This trend extends beyond commerce and technology. For example, the number of Chinese students enrolled in American universities has fallen. And the United States has announced its intention to diplomatically boycott the Beijing 2022 Winter Olympics, prompting condemnation from China.
Yet, China or the United States is unlikely to be as keen on decoupling as these developments suggest. China has taken a passive approach, reacting to US actions, while being careful not to engage in fighting. And while Americans largely support a hard line on China, far fewer support breaking economic ties.
Decoupling is certainly not in the best interests of the American business community. As the United States Chamber of Commerce recently reported, “American companies would lose hundreds of billions of dollars if they cut back on investments in China or if countries raised tariffs.”
This may partly explain why even Trump’s Vice President Mike Pence in 2019 responded with a ‘categorical no’ when asked if the administration wanted to decouple from China. More recently, US Trade Representative Katherine Tai asserted that, far from decoupling, which “is not a realistic outcome”, the US is continuing with “recoupling”; US officials are only identifying their goals in this process.
Whatever these objectives, some recoupling is already underway. As the U.S.-China Business Council reports, after the two countries signed the Phase 1 trade agreement in 2020, both sides halted tariff escalations. In addition, China has instituted a “robust system of tariff exclusions”, with the United States instituting certain exclusions as well.
This has contributed to a recovery in bilateral trade. In 2020, US merchandise exports to China increased by around 18%, more than offsetting the more than 11% drop due to tariffs in 2019. As a result, China has maintained its position as the third largest market for US merchandise exports. .
China has also maintained, if not deepened, its ties with the rest of the global economy. As Nicholas R. Lardy of the Peterson Institute for International Economics observes, “despite economic and financial strains and a plethora of foreign restrictions on the transfer of technology to China,” the country continues to attract “record amounts” of ‘foreign direct investment. In fact, in 2020, China’s inward FDI increased by more than 10%, to reach $ 212 billion, bringing its share of global FDI to a record high of a quarter, nearly double its share in 2019.
Chinese leaders seem happy to continue on this path. In September, China’s central bank and financial regulators pledged to optimize market access requirements for foreign banks and insurance companies, improve rules on cross-border transactions between parent companies and subsidiaries, and to widen the channels allowing foreign capital to participate in the national financial market.
China is also pursuing complementary domestic reforms, aimed, for example, at achieving competitive neutrality. And he uses market mechanisms (like exchange rate flexibility) to balance his trading account.
In addition, China is striving to strengthen its adherence to international rules and standards, such as the protection of intellectual property, a major concern of foreign companies operating in China. As the US-China Business Council notes, China has made “constant efforts” to improve the protection and enforcement of intellectual property rights, and its intellectual property laws and regulations “increasingly reflect the international standards ”.
Chinese leaders are also striving to strengthen regional and multilateral cooperation. The country’s calls to revitalize the World Trade Organization, its participation in the Comprehensive Regional Economic Partnership and its candidacy for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership illustrate this effort.
Overall, it seems clear that China is committed to maintaining global value chains. Yes, it is adjusting its economic structure in order to reduce its dependence on foreign demand and is investing heavily in research and development, with the aim of improving its capacity for local innovation.
But, contrary to what some Western observers think, China has pursued its own form of decoupling for more than a decade, since it launched a campaign to develop more advanced technologies at home. This is in response to Western efforts to deny Chinese companies access to advanced technologies, efforts that in many cases have taken the Chinese by surprise. If measures taken by China in this process prove to be problematic, they can be negotiated within the framework of the WTO.
This may not be exactly what the United States envisioned when it supported China’s accession to the WTO 20 years ago. But, in its own way, China is keeping the promise of this step, and it will most likely continue to do so, as long as the United States allows. Nonetheless, Rudd’s warning should not be taken lightly. If we keep talking about decoupling, we might understand. It is a result that we would all live to regret.
The author is a former president of the China Society of World Economy and director of the Institute of World Economy and Policy of the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.
Opinions do not necessarily represent those of China Daily.