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No Decoupling? Then Stop Doing It

May 11, 2023
  • He Weiwen

    Senior Fellow, Center for China and Globalization, CCG

Jake Sullivan, the U.S. National Security Adviser, stressed once again, during a speech at the Brookings Institution on April 27, that national security is the top priority in U.S.-China relations. He also defined it as lowering risk, emphasizing that the U.S. has no intention of decoupling from China.

Sullivan was echoing similar remarks given by U.S. Treasury Secretary Janet Yellen at the John Hopkins School of Advanced International Studies a week before.“As in all of our foreign relations,” Yellen said, “national security is of paramount importance in our relationship with China. … but we do not seek to decouple our economy from China’s. A full separation of our economies would be disastrous for both countries.”

This no-decoupling tone has even risen to the level of President Joe Biden, who said that the CHIPS and Science Act is not “directed to China.”

The no-decoupling announcement looks positive for China-U.S. relations. Yet it’s too early to see relief. Neither Sullivan nor Yellen has articulated any boundary between “de-risk” and “decouple.” Instead, what they define looks like national security — which is the “top priority” of “paramount importance,” — “even as our targeted actions may have economic impacts.” 

Under this logic, what Washington has been doing over the years is a form of decoupling with China, at least regarding its rhetoric on national security. 

The tone of hearings on Tik-Tok in the House of Representatives in March was overwhelmingly focused on the prohibition of Tik-Tok operations in the U.S. — for national security reasons — although there was no evidence of its threat to American national security, and even though Facebook is doing the same things.

The Trump administration, unable to provide any evidence, banned Huawei for alleged national security reasons. Hence, the narrative of national security has no standard, no definition and could be used by the White House or Congress anytime and against any product, technology or service related to China. This mindset leads to a real decoupling with China, as shown with Tik-Tok and Huawei.

The CHIPS and Science Act picks out China in particular. It stipulates that investors are prohibited from investing in China for 10 years as qualification for federal government subsidies. A 10-year ban is undoubtedly decoupling, although Biden said it was not directed at China. The Inflation Reduction Act bans federal subsidies for companies receiving key mineral imports from China. The Trans-Atlantic Trade and Technology Council has a goal of setting up global standards and rules for high-tech industries, excluding China. The Chip 4 alliance (U.S., Japan, South Korea and Taiwan) excludes the Chinese mainland, and the Indo-Pacific Economic Framework includes all RECP members but not China. They are all for decoupling under the cloak of “national security.” Could Sullivan or Yellen explain how all these things are not meant as decoupling moves? 

The latest Flash member survey by the American Chamber of Commerce in China (AmCham) provides further evidence of how American businesses in China have been affected negatively by Washington's decoupling policies. 

AmCham released its latest Business Climate Survey (2023 BCS) in March, based on member surveys in October and November 2022 and in February 2023. Just one month later, it rushed out a new edition, the AmCham China Flash Survey on China Business Climate Sentiment Updates based on a member survey from April 18 to 20. The two surveys revealed an apparent deterioration in the climate of China-U.S. relations. Some 87 percent of the members surveyed were pessimistic or slightly pessimistic about U.S.-China relations, compared with 73 percent in the 2023 BCS. Of the total, 49 percent were pessimistic, compared with 36 percent just two months earlier.

The Flash showed that 62 percent of AmCham members regard tensions in U.S.-China relations as the biggest challenge to their business in China, followed by geopolitical risks, at 40 percent. Both percentages exceed, by far, the 2023 BCS, at 32 percent. The Flash also shows that 23 percent of the members are considering or had already started shifting operations from China to other countries for risk management (60 percent, compared with 47 percent in the 2023 BCS), and to U.S.-China relations tensions (43 percent, compared with 33 percent in the 2023 BCS). On the other hand, 59 percent of members were more optimistic about China’s economic prospects, compared with 37 percent in the 2023 BCS.

Apparently, the tensions in China-U.S. relations and the U.S. decoupling policy outweigh China’s rapidly improving economic prospects as the prime reason for pessimism and motivating big changes by U.S. businesses in the country.

The latest trade data also showed the initial effects of the decoupling process. During the first two months of 2023, the U.S. imports worldwide increased slightly by 0.5 percent y-o-y, with imports from Canada and Mexico up 8.1 percent and from EU up 18.4 percent, but down 23.6 percent from China. From 2018 to 2022, U.S. global imports of computers and electronics increased by 22.1 percent, but fell by 13.4 percent from China. China’s share shrank from 45 percent, or nearly half, to 31.5 percent, or less than one third. 

The latest no decoupling statement reflects more difficulty that it does fresh kindness by the U.S. In the first place, the policy of decoupling on chips has boomeranged badly on U.S. chip giants. 

Intel and Global Founder have experienced layoffs, and Micron lost $ 2.3 billion in Q1 of this year. A report by Boston Consultants Inc. said the ban of Huawei had cut revenues in the American semiconductor industry by 48 percent. From 2017 to 2021, the largest 11 American semiconductor companies increased their sales in the Chinese market by 52.2 percent, from $56.17 billion to $85.48 billion.

In 2021, semiconductor equipment maker Applied Materials saw sales to China increase by 174.4 percent year-on-year to $7.54 billion. Undoubtedly, it will not be leaving China. Jimmy Goodrich, vice president of the Semiconductor Association of America, has said that the American semiconductor industry will continue to cooperate with China.

The annual meeting of the China semiconductor industry, opened in Guangzhou on April 18 attracting leading chipmakers from America, Europe and Japan. Ironically, the leading sponsors were Applied Materials and other American chip companies.  

European countries have clearly rejected decoupling with China and begun to increase business cooperation.

French President Emmanuel Macron made a high-profile state visit to China highlighting stronger trade and investment relations. Ursula von der Leyen, president of the European Commission, said after her China visit that it is neither feasible, nor desirable, nor practical to decouple from China. German Chancellor Olaf Scholz has also rejected decoupling option and has invited the Chinese premier to visit Germany. The U.S. decoupling policy will be of little use if Europe continues coupling. 

The United States has been increasingly sidelined on global trade with China. 

Because of its decoupling policy, during the period from 2018 to Q1 2023, the U.S. share of China’s global trade lost 2.5 percentage points, from 13.7 percent to 11.2 percent. Meanwhile ASEAN added 3.1 percentage points, and the EU (plus UK for Q1 this year) added 0.3 percentage points, easily offsetting the share given up by the United States. 

To realize “de-risk, not decoupling,” Washington needs to change its strategic misjudgment of China. 

If Washington maintains its mindset positioning China as its foremost geopolitical threat, any move by China might well be perceived as a serious challenge to U.S. national security; thus, logically, a decoupling policy or measure might follow. In fact, China is not the prime geopolitical threat to the United States. Its central task is modernization and building Chinese into a moderately developed economy by 2035. It needs peace and economic cooperation, not confrontation or hegemony. 

China and the U.S. should set up a mechanism for institutional dialogue on national security to articulate the context and conditions that might trigger national security measures in bilateral relations. 

China and U.S. could also join in relevant multilateral arrangements on specific national security issues and start consultations within the framework of chips and high-tech export bans or restrictions. The results should include the removal or adjustment of the above-mentioned existing decoupling strategies, policies and restrictions.

In parallel, China and U.S. should resume practical business dialogue, including talks between government agencies and industry sectors, to identify practical opportunities and launch more trade and investment projects. Efforts should also be made to resume air flights to pre-COVID-19 levels at an early date, making frequent business travel and exchanges possible.

The coupling of China and the U.S. in an integral global supply chain benefits both countries and peoples, and it benefits the world. Since Washington does not want decoupling with China, what we need is constructive action.

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