Is Trump’s Threat To Decouple US Economy From China Realistic?

Less than two months ahead of the election, U.S. President Donald Trump has again floated the idea of decoupling the U.S. economy from China.

“When you mention the word decouple, it’s an interesting word,” Trump said on Labor Day at a White House news conference. “We lose billions of dollars and if we didn’t do business with them [China], we wouldn’t lose billions of dollars. It’s called decoupling, so you’ll start thinking about it.”

Trump also accused Democratic presidential candidate Joe Biden of having a lax attitude toward Beijing.

“If Biden wins, China wins, because China will own this country,” Trump claimed.

In the event he gains a second term as president, Trump declared that he would, among other things, ban federal contracts with companies that outsource jobs to China.

“We will make America into the manufacturing superpower of the world and will end our reliance on China once and for all,” Trump added. “Whether it’s decoupling or putting in massive tariffs like I’ve been doing already, we will end our reliance in China, because we can’t rely on China. We will bring jobs back from China to the United States and we will impose tariffs on companies that desert America to create jobs in China and other countries.”

Trump has already threatened to ban Chinese-owned software and apps including TikTok and WeChat, citing that they pose risks to national security. The U.S. government has also vowed to expel Chinese companies from its stock exchanges if they do not adhere to transparent accounting practices. Trump has also sanctioned some Chinese and Hong Kong officials for imposing a controversial national security law in Hong Kong.

Trump added: “We’ll manufacture our critical manufacturing supplies in the United States, we’ll create ‘made in America’ tax credits and bring our jobs back to the United States.”

In June, U.S. Treasury Secretary Steven Mnuchin said that the decoupling of the U.S. and Chinese economies would occur if American companies could not compete fairly in China, Reuters reported.

“If we can compete with China on a fair and level playing field, it is a great opportunity for U.S. businesses and U.S. workers, as China has a large, growing middle class,” Mnuchin said at the time. “But if we can’t participate and compete on a fair basis, then you are going to see a decoupling going forward.”

However, as the two largest economies in the world, the U.S. and China’s business ties are deeply intertwined, illustrated by the phase 1 trade deal that was signed in January. Still, as Trump has pointed out, China has a massive trade surplus with the U.S. – amounting to $34.2 billion in August, the highest level since November 2018.

But decoupling might hurt China more than the U.S.

A study by Bloomberg Economics determined that a total decoupling would reduce China’s annual growth rate to about 3.5% in 2030 – down from the current forecast of 4.5%.

But China could partially mitigate the effects of decoupling by significantly increasing its own technological innovations.

“If China moved to increase domestic funding for research and development, and expanded its ties with other advanced economies, it could hope to offset a significant amount of the drag,” Bloomberg economists Tom Orlik and Bjorn van Roye wrote.

But in the event the U.S. is able to persuade other key trading partners to decouple from China – namely Japan, South Korea, Germany and France – China’s growth rate could potentially plunge to 1.6% in 2030.

Michael A Witt, professor of strategy and international business at INSEAD business school in Singapore, wrote in the Harvard Business Review that decoupling might arise as an inevitable result of de-globalization, which has been under way for more than a decade.

“At best, international trade was stagnating before the pandemic hit, and foreign direct investment had fallen by 70% in 2018 from its peak in 2007,” Witt wrote. “Never easy, Sino-U.S. relations have taken a more confrontational turn under [Chinese President] Xi Jinping.”

Witt noted that COVID-19 has accelerated the process of deglobalization by “providing a justification for re-shoring production of strategic goods.”

Abishur Prakash, a geopolitical futurist at the Center for Innovating the Future, a strategy consulting firm based in Toronto, told International Business Times that at the heart of a potential U.S.-China decoupling is technology.

“This is what makes this current decoupling a new phenomenon,” he said. “By targeting Chinese technology – i.e. 5G, chips – the U.S. is forcing China to ‘disconnect’ in certain areas, like where Chinese tech firms [can conduct] IPOs or where China gets its chips from. [But] as China becomes more self-reliant, it may take radical steps, like replacing U.S. technology systems and platforms with its own alternatives. The world will [then] be divided along brand new faultlines as the two largest economies in the world try to operate independently of each other.”

Prakash also noted that decoupling from China is really more about Washington trying to take back the power it lost as businesses moved manufacturing and supply chains to Shanghai and Shenzhen in China.

“The U.S. can do this in two ways: Invest in local, U.S.-based initiatives, or tap [its] allies,” he stated. “For example, the U.S. and Australia are working on ‘China-free’ supply chains for rare earth minerals.”

Prakash further noted that other decouplings are gradually taking place.

“As tech drives geopolitics, India and Japan are decoupling from China, while the European Union is decoupling from the U.S.,” he said. “Ideas like globalization are being tossed out. Now, it’s all about nations putting themselves first. And [now] tech companies [are] becoming global stakeholders.”

But is decoupling of the U.S. and China realistic?

“In theory, it’s possible,” Prakash said. “In application, it’s a lot harder. However, things are moving a lot faster than most expected. For example, Japan is preparing subsidies for Japanese companies to move from China to India. And, the recent targeting of TikTok and Huawei Technologies shows that the West, led by the U.S., does not want to become reliant on Chinese technology.”

The big grey area right now, Prakash added, has to do with what steps China will take.

“If China starts targeting Western tech firms, banning products or forcing new compliance, it will only speed up the decoupling,” he indicated. “This may not be in China’s interest economically. But, at the same time, if China does nothing, the U.S. is trying to decouple itself from China anyway. If this were a game of chess, the U.S. has moved its bishops but China is yet to move its pawns.”