By now it’s impossible for strategic thinkers in China and the United States to ignore an unpleasant reality: The decoupling of their deeply integrated economies has begun and will most likely accelerate as their overall relationship becomes increasingly adversarial.
Even if Beijing and Washington reach an interim trade deal in mid-December, a comprehensive agreement that can end the bruising trade war will remain elusive and appears out of reach in 2020, an election year in the U.S. Although the American business community would love to see the normalization of commercial relations, opposition from the U.S. national security establishment and China hawks in the executive and legislative branches of the government will make it extremely difficult, if not impossible, for such a deal to be struck.
The strategic logic for decoupling is compelling in both capitals. For security hawks in the U.S., decoupling with China — first in trade and then in technology and finance — would reduce China’s economic growth potential significantly, and thus contain its power. From the perspective of their Chinese counterparts, excessive dependence on the U.S. market and technology also presents unacceptable risks to sovereignty and national security.
As a result of similar geopolitical calculations on both sides, the trend toward U.S.-China decoupling is almost certain to continue unless the underlying relationship undergoes a 180-degree turn — an inconceivable event given the two nations’ deep strategic distrust, escalating security competition and irreconcilable ideological differences.
The challenge for the U.S. in decoupling is that the strategy is unlikely to achieve the objective of substantially reducing Chinese growth potential unless Washington gets substantial support and cooperation from its allies.
To be sure, full U.S.-China economic decoupling alone can inflict real damage on the Chinese economy and reduce its growth potential. The U.S. would also pay a steep price, even though such costs would be relatively lower than those of China. But since China also maintains deep and extensive commercial ties with American allies — in particular the European Union and Japan — Washington’s decoupling strategy, if implemented without the support of those allies, will be only partially effective.
A few numbers show the challenge facing the U.S.:
While the U.S. remains China’s single largest export market for merchandise goods, the combined EU and Japanese markets are nearly as large. In 2018, the U.S. imported $540 billion worth of goods from China. By comparison, the EU and Japan imported $434 billion and $75 billion in goods from China, respectively. In terms of foreign direct investment in China, the EU alone is a bigger investor than the U.S. In 2018, the total value of U.S. FDI in China was $107 billion, compared with the EU’s roughly $194 billion (2017 data).
While it is obvious that U.S.-China decoupling could seriously hurt China, unilateral U.S. decoupling would not likely cripple the Chinese economy. The real challenge for the U.S. in the coming years is for Washington to persuade its allies to decouple from China as well. This could be a tough sell.
To be sure, America’s allies share Washington’s concerns about China’s trading practices, growing military power, assertive foreign policy and human rights violations. Indeed, they see China as a competitor, even a threat. But unlike Washington, they do not consider China to be an existential threat to their status, security or economic well-being and are unlikely to follow Washington’s lead in decoupling because of the high economic and geopolitical costs that would entail.
As far as China’s growing power is concerned, the security stakes are substantially different for the U.S. and the EU. As the guarantor of Asia’s peace and security and the world’s preeminent power, the U.S. feels the threat of Chinese power far more acutely than does the EU, which is blissfully located half a world away and, as a union of postmodern states, harbors no aspirations for global geopolitical prominence.
As a result, the dominant geopolitical logic driving Washington’s decoupling strategy is either absent or much weaker in Brussels. Even for Japan, China represents a different sort of challenge. While Tokyo definitely faces a theoretical threat from China, with which it has had long-standing territorial disputes, as China’s immediate neighbor Japan also has an enduring interest in a largely stable and friendly China. A full-fledged U.S.-China cold war, started by economic decoupling, would not only embroil Japan but also create mounting regional tensions and instability, a scenario few Japanese leaders want to experience.
Besides their asymmetrical security interests, America’s allies also see China as an indispensable partner on the issue they care about most — climate change. Thoroughly alienated by the Trump administration’s decision to withdraw from the Paris climate accord, U.S. allies — the EU in particular — now count on China’s continued cooperation in this area. Decoupling with China would make such cooperation impossible.
Last, economic calculations differ between the U.S. and its allies. The economic stakes for the U.S. — such as access to China’s huge and expanding consumer market — are real but bearable. Because of its strong domestic economy, which is more insulated from the rest of the world than are the economies of the EU and Japan, the U.S. can afford to adjust to the shocks of decoupling. For the EU and Japan, the loss of the Chinese market would be proportionally far worse because the Chinese economy represents a major source of global growth, and its consumer market is expanding faster than the mature consumer market in the U.S.
So talk alone is unlikely to help Washington get its allies on board with a decoupling strategy. Not only will it need to start treating its allies as real friends but also must put substantial economic incentives on the table to compensate them for the costs of decoupling. Most important, Washington will have to regain its moral authority and reclaim the leadership on climate change. Obviously, none of this is possible under the Trump administration.
The only scenario in which American allies will decouple from China would be one made in Beijing. We can imagine a series of Chinese policy blunders that cumulatively convince America’s allies that China is an existential threat on the same order as the former Soviet Union. Such blunders could include a security crackdown in Hong Kong, military aggression against Taiwan and in the South China Sea, escalating repression in Xinjiang or failure to implement meaningful economic reforms to make the Chinese market more open to European and Japanese companies.
Needless to say, such a scenario would be disastrous for all concerned. So let’s hope Chinese leaders will not allow it to happen.