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Economic Decoupling Creates Grave Strategic Dangers for China and America

Oct 27, 2020


Click to read the October issue of China-US Focus Digest

Rising anger toward the People’s Republic of China (PRC) is fueling calls in the United States for “decoupling” the world’s two leading economies. But decoupling is a strategy that not only would impose severe economic costs on both countries, it also would weaken a crucial buffer that dampens bilateral strategic disputes. The probable outcome would be a substantial increase in tensions at best, and a calamitous military clash at worst. 

There is little doubt that U.S.-PRC relations have deteriorated during Donald Trump’s presidency. The deterioration began early on with pointed U.S. accusations that China engages in a variety of “unfair” trade practices. Washington has pursued a more nationalistic economic course that some observers describe as a full-fledged trade war with Beijing. One manifestation of that attitude is an effort to reduce U.S. dependence on China as the source of certain important goods, such as electronic components and pharmaceuticals.

The drive to diversify supply chains received a dramatic boost when mutual recriminations erupted between Beijing and Washington in early 2020 over the handling of the Covid-19 pandemic. An early March 2020 article published in Xinhua, the official Chinese news agency, mightily upset U.S. officials, the American public, and the American news media.  A PRC foreign ministry official hinted that his country might impose export controls to withhold antibiotics and other life-saving drugs from American consumers. Such controls, he stated, would plunge America “into the mighty sea of coronavirus.” 

The apparent threat in the Xinhua article focused public and press attention in the United States about how the country was dependent (by some estimates, in excess of 80 percent) on pharmaceutical ingredients from China. That heightened realization spurred a growing media and congressional campaign to reduce such dependence. The danger of supply chain disruptions, not to mention Beijing’s possible use of its dominance in pharmaceutical sources to gain political or strategic leverage on the United States with respect to other issues, strengthened calls for greater American independence. That objective was most evident in articles by conservative and economic nationalist analysts, but the sense of alarm was not confined to that portion of the ideological spectrum. Vaunted mainstream-establishment publications began to call attention to the vulnerability as a cause for concern. 

Such worries have strengthened the campaign for an overall decoupling of the U.S. and PRC economies. But there are serious downsides to adopting that approach. Developing entirely new supply chains in multiple industries would be both expensive and disruptive. Those problems would exist even if the U.S. was willing to tolerate dependence on non-PRC sources in East Asia and other regions. The difficulties would be even greater if the goal was U.S. self-sufficiency with respect to the production of a host of products deemed strategically crucial. 

However, the potential costs and drawbacks are not confined to the economic arena. Several historians have pointed out that a key feature of the original Cold War was the lack of significant economic ties between the United States and the Soviet Union. U.S. exports to the USSR in the 1980s, for example, fluctuated between $1.6 billion and $3.5 billion. Even adjusted for inflation, that was a trivial sum compared to the value of current U.S. exports to China--$106.6 billion in 2019. And imports from the Soviet Union were even more meager than U.S. exports to that country — a mere $558.2 million in 1986, a typical year.

In one sense, that situation made it easier for leaders in both countries to wage the Cold War struggle, since there were minimal economic costs in doing so. On the other hand, the absence of meaningful commercial links meant that there was little to buffer the strategic animosity between the two superpowers.

The relationship between the United States and the PRC is fundamentally different and more complex. Bilateral economic ties are both deep and wide-ranging. The annual trade in goods in 2019 amounted to $559 billion. The PRC also is one of America’s biggest financial creditors, holding some $1.07 trillion in U.S. Treasuries. Even a mundane cold war would be costly to both countries; full-scale animosity would be extremely damaging. The massive China-U.S. economic relationship especially, acts as a major impediment to any kind of military confrontation--even a limited one.

Decoupling would severely weaken that restraint, and such a development would be extremely ominous. Indeed, a U.S.-China cold war could be even more dangerous than was the original version between the United States and the Soviet Union. The spheres of influence between the U.S.-led West and the Soviet empire were fairly clear after the initial post-World War II years. The Iron Curtain through Central Europe emphasized that point, with only capitalist-controlled West Berlin constituting a dangerous flashpoint in that part of the world. The DMZ separating North and South Korea was another flashpoint, but the USSR kept its distance from that one. The other arenas of contention were located in the Third World, where the geostrategic stakes were modest, and both sides were careful to limit their commitments and risks. 

Beijing and Washington confront a far less clearly delineated strategic environment today. There are several high-priority arenas for potential military clashes between the United States and China. The PRC’s expansive territorial claims and growing military presence in the South China Sea, combined with the increasingly extensive “freedom of navigation” patrols by the U.S. Navy, have produced an extremely volatile and dangerous situation in that body of water. Likewise, the competing territorial claims of China, and U.S.-allied Japan to the Senkaku/Diaoyu island chain in the East China Sea is becoming another source of confrontation — with Washington ostentatiously declaring its support for Tokyo’s position. The host of unresolved issues on the Korean Peninsula could cause tensions between PRC-ally North Korea and the United States to spiral out of control, as they threatened to do during the initial year of the Trump administration. 

Most dangerous of all is the deterioration of relations between Mainland China and Taiwan. Beijing’s behavior in recent years indicates a growing impatience with the refusal of Taiwan’s current leadership even to discuss political reunification. Indeed, Taipei is flirting with pushing the envelope regarding independence, and Washington has transformed its own relationship with the island into one just shy of a full-fledged military alliance. With respect to that issue, Beijing and Washington appear dangerously close to being on a collision course. 

Such a volatile strategic environment makes maintaining robust bilateral economic ties imperative. Those links now constitute the main factor inhibiting possible armed conflict between the United States and the PRC. A U.S. strategy aimed at decoupling with China is not only a dubious idea from an economic standpoint, it is a potentially lethal move from the standpoint of war and peace.

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