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Foreign Policy

Decoupling US-China Ties Is Market Distortion at Its Worst

Sep 06 , 2019
  • Zhou Xiaoming

    Former Deputy Permanent Representative of China’s Mission to the UN Office in Geneva

On August 23, U.S. President Donald Trump announced that he was again increasing tariffs on nearly all Chinese imports into the United States. Furthermore, he demanded that U.S. firms cease business in China. These are but his latest moves in unraveling U.S. economic and technological ties with China.

This “decoupling” started early last year when the Trump administration launched a tariffs campaign against China. All told, a total of $250 billion worth of Chinese goods are now subject to 25 percent tariffs, which is to be increased to 30 percent beginning October 1. Another $150 billion worth of Chinese imports are currently being taxed at 15 percent.

Washington has also enhanced the investment screening process of Chinese investments. Largely because of this, Chinese foreign direct investment into the United States last year shriveled to 10 percent of the previous year.

Washington also launched what many describe as a technology cold war against China. It has placed Huawei, China’s largest telecom group, and some other 160 leading Chinese companies and institutions on its prohibitive “entity list,” effectively banning them from doing business with U.S. suppliers. It is also vastly tightening export controls and applying visa restrictions on Chinese students and engineers in high-tech fields.

All this is being done on the nebulous grounds of national security. This time around, Mr. Trump again tried to invoke the International Economic Emergency Powers Act (IEEPA) to force U.S. businesses to leave China. In a bid to maintain its dominance over the world, the Trump administration is setting up technological and economic barriers against China, replacing the “invisible hand” of the market with the “heavy hand” of the U.S. government. By disrupting the natural flow of market forces, the U.S. measures are distorting the proper functioning of the market by allocating resources towards less efficient activities. As market forces give way to Washington’s frantic interventions, massive resource dislocations are beginning to occur. As a result, Washington is engineering what is probably the largest market distortion in human history during peace time.

The actions of the U.S. government are provoking a shift in the flow of investment. To avoid the threat of the U.S. punitive tariffs, companies are compelled to move production out of China. This forced diversion of investment often makes inefficient use of resources. In many cases it lays waste to the plants in China that would have otherwise continued to profitably operate. Moreover, companies on the move struggle to keep costs down while scrambling to rebuild their supply chains.

Washington’s moves are also contributing to overcapacity. While some manufacturers are forced by U.S. measures to uproot their plants in China altogether, others are finding it necessary to keep factories running in China for the Chinese market while setting up production facilities for U.S.-bound goods. In such situations, redundancy is often hard to avoid.
Furthermore, decoupling is resulting in loss of business contracts that could be secured under normal market conditions, causing trade diversion away from efficient producers. Consequently, while China’s trade with the rest of the world continued to expand in the first half of this year, two-way trade between China and the United States fell sharply. For the first time in history, the United States was replaced by ASEAN members as China’s largest trading partner.

A year and a half into the trade war, many Chinese companies have lost business in the United States. American companies are also victims of Washington’s agenda to weaken China. Heavy taxes on goods “made in China” are placing U.S. companies at a disadvantage with their competitors, as Tim Cook, CEO of Apple, protested to Mr. Trump in mid-August. Worse still, the U.S. measures have shut off some U.S. companies from the fastest growing market in the world, depriving them of an important source of revenue and profits – as U.S. soybean farmers, who have seen their imports to China decimated, have discovered.

This deprivation does not only negatively affect near-term profitability of U.S. companies doing business in and with China, but also damages their international competitiveness in the long run. Shrinking sales will render some U.S. firms unable or unwilling to make the kind of investments in R & D that are critical to improved productivity. Without access to the Chinese market, companies may find it difficult to recoup their investments in R&D.

Meanwhile, blocking exchanges and cooperation between U.S. scientists and engineers and their Chinese counterparts will only make scientific discoveries and innovations more difficult. China is a world leader in a number of fields and boasts a large talent pool, with its engineers outnumbering those in the United States many times over. Denying U.S. scientists and engineers the opportunity to work with their Chinese counterparts will invariably lead to redundancy of efforts and considerably reduce the chances of their success.

What is more, as the Trump administration steps up efforts to isolate China, a less open and more divided world is emerging. Presently, Washington’s measures are wreaking havoc on global supply chains and a splintered internet increasingly looks like a real possibility. More importantly, there is a growing fear that decoupling would divide the world economy into hostile blocs. Such a bifurcated world will lead to inefficiency globally and prove to be a huge drag on the world economy. Washington’s actions would be, as Jeffrey Sachs, economics professor at Columbia University put it, “economically calamitous.”

The decoupling that Washington is so intent on is market distortion at its worst and antithesis to free competition. It is bad economics that ought to be rejected by all those who care about the proper functioning of the market and the economic welfare of society.

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