Decoupling Economic Giants

– Penned by Jeevan Joseph

Much like his predecessor Donald Trump, President Biden also believes that the United States should decouple from China. Decoupling, put simply, involves separating the two economies. Proponents of this theory argue that the U.S. would not be worse off if it stopped or drastically reduced trade with China. Further, they believe that China is being unfair to the U.S. since they have a massive trade deficit with the Asian economic giant (to the tune of $350 Billion). This move is also touted as one that could bring about net gains for the United States by reducing its dependence on Chinese products and supply chain. There is bipartisan support in the U.S. congress for tech regulations in strategic technologies, where Chinese success or influence could most seriously endanger America’s national security and economic interests. Nonetheless, it would be ignorant to state that any country, let alone the United States could easily decouple from an important economic player like China. This article explores some of the spillover effects associated with the decision to decouple and the way forward.

To put things into perspective, Chinese trade with the U.S. and E.U. touched $1.3 billion last year. In this backdrop, the ongoing conflict in Ukraine has put China in a very tough spot as it has to carefully navigate between supporting Russia and keeping the West’s fury at bay. China would see diminishing foreign direct investment (FDI), lower access to global capital markets and technology-sharing with the West if it is perceived to be aggressively pro-Russia in its stance. As a counter strategy to this fallout, should it ever happen, China would focus on making its economy more resilient towards sanctions from the West. China has been steadily working towards eliminating its dependence on foreign technology and resources for the last 15 years. This policy is very likely to continue for the foreseeable future as the Chinese face the prospect of souring relationships with western trade partners.

Food is another area that is paramount to achieving self sufficiency even in the face of sanctions and trade barriers. Food has also been a historic vulnerability of China. China has been a net importer of food since its 1959 famine episode. Since then, China’s population and per capita consumption of food has increased by leaps and bounds. To combat the problem of excessive reliance on food imports, China has built stockpiles of maize, wheat and rice. Even though these Chinese stockpiles amount to 50-60% of the total global reserves of these crops, it may only last about 18 months if the west and its allies cut off agricultural exports to China.

China has also recalibrated its industrial policy and imposed more-politicized regulation and more-controlling administration systems. These are widely perceived to be responses to the escalating trade war, trade restriction lists called entity lists, export controls and political conflict over issues in Hong Kong and Xinjiang. While Geopolitical tensions appear to be sending these economic titans onto a downward spiral, other countries have adopted varied approaches to manage this crisis.

Canada for example, appears to reject the decoupling rhetoric and is making moves to amend ties with China. It is interesting to note that Canadian exports have grown 14% year on year in 2021 amounting to $22.3 billion, which is the highest spike since 2018. China, on the other hand, has agreed to resume purchase of Canadian canola seeds. Experts predicted that the decoupling process would also benefit Mexico to a large extent. Since Mexico is a low-cost production hub situated near the US, it appeared logical that importers would start filling the void left by Chinese products by sourcing the same products from Mexico. However, data suggests that Asian countries like Vietnam and Taiwan have reaped more benefit from the decoupling exercise than Mexico. They have increased their share of manufactured goods imports to the US from 12 to 17 percent since 2018, while Mexico could only register a marginal increase. Thus, this game of economic chess between Uncle Sam and the red dragon appears to create unintended winners and losers.