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Foreign Policy

Simulating Decoupling: It’s Not Pretty

Mar 27 , 2020
  • Ma Xiaoye

    Board Member and Founding Director, Academy for World Watch

Lurching from one spat to another, China and the United States are sliding downhill — so much so that both sides are tiptoeing carefully around any discussion of economic decoupling.

The essence of trade negotiations is to find ways for both sides to benefit from market access and investment in each other’s markets. All that’s been built to date will go down the drain if decoupling comes to pass.

China’s experience and lessons drawn from fighting the coronavirus epidemic and the treatment techniques developed through tests and trials, are invaluable and should be shared and disseminated. In critical times, relief supplies should be shared with countries in need, and the sensible use of supplies should take precedence over other policy goals and not to be impeded. As things stand now, cooperation between countries is gaining traction.

It serves the interests of all to collaborate and foster synergies in the effort to corral the evolving epidemic. We can ill-afford to  put other priorities over public health.

I would like to draw an analogy. China and the U.S. could tap into the wisdom of porcupines, who cuddle together for warmth in winter without attempting to pluck each other’s spikes. Neither will be pierced by the other. It’s a form of non-confrontational coexistence. 

Four decades ago, when China and the U.S. began to engage with each other, one area was technology cooperation for the benefit of society.  The classic supply and demand relationship underpins the countries’ technology cooperation.

From a dissemination point of view, foreign companies make successful investments in China and disseminate technologies to gain greater market access; in return, low cost and an abundant labor supply in China has fueled the growth of the U.S. economy.

But the interest distribution pattern of U.S. investment in China has disrupted cooperation. Economic and social factors, have come to the fore in politically charged discussions. Each government has shown flexibility and has engaged actively in negotiations on key topics to accommodate the other.

Both sides must reach common ground on issues of core concern and must accept some trade-offs. Also, a timeline for solving problems should be worked out, and both sides should show ingenuity in tackling the issues at hand, given their depth and breadth.

As shown recently, both sides have different timelines in mind regarding enforcement of the trade agreement. Sanctions and other pressures may increase. Economic and technological decoupling was put on the table along with harsh and blunt tariffs.  Decoupling remains a treacherous rock lurking beneath the seas of China -U.S. relations. 

In this turbulent time, the outbreak of the new coronavirus epidemic showed the world what would happen in a de-globalization process. On one front — trade in services — the outbreak has led to travel restrictions, which hinder service providers and users in contract implementation. Technology contracts and high-end consulting related to technology and the service trade are hampered or even suspended. When the time comes to restart these contracts, it can only happen if there are concrete new opportunities, and face-to-face communication between managers and workers.

Travel restrictions are a tremendous drag on traded in services. Regarding trade in goods, around 25 countries have halted imports from places affected by the coronavirus. On high-tech products in bonded areas, U.S. companies had already embarked on a course of supply chain readjustment at the outset of the trade war. Based on the number-crunching of the accountants, they explored various retaliatory scenarios.

Supply chain adjustments usually take years. The prolonged China-U.S. trade friction has prompted some high-tech companies to adjust. UBS published a report last year on this subject, finding that some companies were still of two minds, as the cost-benefit analysis was intimidating and they continued to pin their hopes on a turnaround in trade talks.

But with more U.S. politicians chanting for economic and technological decoupling — and with the arrival of the coronavirus epidemic rocking the boat even more — multinationals deeply integrated into global supply chains are reaching the point of despair. The coronavirus outbreak has brought a precipitous disruption of supply chains, which serves as a sort of simulation or rehearsal for a broader economic decoupling. It’s not pretty.

Travel restrictions have also hamstrung the flow of technology, an area in which the U.S. has an edge. It could be said that prevention and control measures have by accident given the world a preview of the economic and social havoc decoupling would wreak.

In light of this development, it is time for those who have been misled by decoupling theory to rethink the merits of the argument. When we are faced with a common threat, economic and trade interests should be put on the back burner.   

The U.S. government has already exempted tariffs on medical relief products and called for prevention and control cooperation between responsible major powers. Meanwhile, technological cooperation has been embroiled in the U.S.-China spat. The decoupling argument has jeopardized the military product control and dual-use product end-user review practices that require China’s cooperation.

It is a poisonous kind of competition to hijack human interests and put economic and trade interests above health, development and the resolution of a common threat — not to mention potential technological progress in various fields.

One hopes the right lessons will be drawn from the ongoing decoupling simulation and that leaders can manage to see the light in the tunnel ahead — which is cooperation. We expect politicians from both countries to show responsibility, capability and vision in navigating the darkness, to promote economic integration, harness synergy and mitigate confrontation.

A viable path forward for the mutual benefit of two peoples can be charted. The reward for doing so will be a better and more peaceful world.

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