China analyst Gordon Chang warned on Fox News that the U.S. must “decouple” economically from China, because all the products this country is buying from China is paying for its military build-up--including doubling its intercontinental nuclear missile capabilities--to “kill Americans.” Chang praised Donald Trump’s intention to “completely decouple” from China. China certainly has the potential to be a danger to the world, particularly given its continuing lack of transparency in its COVID-19 data; I mean, they actually haven’t had a single death from the virus in two months?
The problem is that, besides Trump playing with a new word he probably doesn’t really understand the meaning of, is if “decoupling” is even “doable,” given that practically every consumer item from the most innocuous trinkets to apparel to electronic items seems to have a “Made in China” label on it. Sure, Trump talks “big,” but all he has done in four years is antagonize China’s leadership and make it even more dangerous to U.S. interests. His tariffs and phoney trade deal have done nothing to lower our trade deficit, and have only increased consumer prices in the U.S. for Chinese-made goods.
Still, many foreign policy hawks are saying that decoupling is not just necessary, but it is already happening, although it is hard for consumers to notice at this point. Yes, China has been a bad international actor, many of its nationals in this country are here for spying and “technology transfers”--especially by Chinese students and academic “researchers.” But complete “decoupling” is far from simple. “Suspect” Chinese nationals would have to be denied admission to the colleges and universities that crave their high tuition fees, denied H-1b visas, have their businesses here shut down, force all U.S. businesses to leave China and find alternate manufacturing locations and markets--and most importantly, get the cooperation of the international community, which is hardly likely given that Trump has alienated traditional allies, and because even the cooperation of U.S. businesses operating in China is far from certain.
With the advent of China’s entry into the WTO, when it was hoped that China would become a more “democratic” and cooperative partner under the influence of “capitalism,” its percentage of manufacturing imports to the U.S. jumped from 11 percent to 26 percent in 2018--but down to 22 percent in 2019--while those of other Asian countries went down from almost 30 percent to 22 in 2019. Although tariffs did cause a decrease in the percentage of manufacturing products imported from China, the U.S. has had trouble finding alternative sources for such product, and imports for manufactured goods fell by $39 billion last year, which was not in anyway covered by increased domestic manufacturing. And even if “official” imports from China decrease and used as “evidence” of decoupling, this might not be exactly true, for there is evidence that Chinese-made goods are simply “rebranded” in other countries, like Vietnam, in order to avoid tariffs.
Many Asian countries also want to decouple from dependence on China, which is why many were “enthusiastic” about the Trans-Pacific Partnership, but it was doable only if the U.S. followed through on its end, which of course did not happen because of Trump. As I mentioned before, this was a huge blunder on Trump’s part, who only reneged on it because it was an “Obama” deal. As a result, Southeast Asian countries are even more dependent on Chinese imports.
The Peterson Institute for International Economics suggests that despite all the political hot air, decoupling is simply not happening, particularly in the financial sector:
But for all the fireworks over tariffs and investment restrictions, China’s integration into global financial markets continues apace. Indeed, that integration appears on most metrics to have accelerated over the past year. And US-based financial institutions are actively participating in this process, making financial decoupling between the United States and China increasingly unlikely. An examination of the data shows the danger of generalizing based on misleading anecdotal evidence.
The attraction of the Chinese financial market for foreign firms is substantial and will only grow larger. The size of China’s financial services market is $47 trillion, but previous restrictions meant that foreign firms have only a tiny slice of most sectors of this market, for example less than 2 percent of banking assets and less than 6 percent of the insurance market. Given the large size of China’s domestic financial industry, if foreign firms can increase their shares in these market sectors, they stand to generate large profits.
PIIE notes that major U.S. players like PayPal, J.P. Morgan, Goldman Sachs and American Express have signed huge deals with China, and are in no mood for “decoupling.” Neither is Apple, which manufactures most of its iPhones in China; the Taiwanese company Foxconn claims that it can outsource iPhone manufacturing outside of China, but that could take time, because most of its manufacturing plants are, in fact, in China. Although Samsung claims to manufacture 70 percent of its smart phones in Vietnam, there are questions concerning the exact “origin” of these phones.
In fact, if any real “decoupling” is in evidence, it is by the Chinese, not the U.S.. PIIE notes that since the trouble with Trump, there has been a sharp decline in direct investment in the U.S. by Chinese firms. And while there is movement to deny China access to capital markets by being delisted on the stock market, China can still raise capital through private equity firms, or shift to the Hong Kong’s stock exchange, which currently U.S. citizens are still permitted to invest in--as well as the rest of the world.
It is true that the U.S. still has some significant manufacturing capacity, such as in automobiles, aircraft and appliances, in which the majority of parts come U.S. suppliers. Although Apple, Lenovo and Hewlett-Packard have computer assembly plants in the U.S., most of the parts for them are manufactured in Asia, and mostly in China. The U.S. does manufacture some computer parts, like Intel processors, RAM chips and solid state drives, but not much else. The reality is that the global supply chain is such that the U.S. will simply continue to buy product and parts from other low-wage countries, and manufacturing capacity is unlikely ever to come back to the U.S. to any significant degree.
Another problem is that 80 percent of the nations of the world trade more with China than with the U.S.; what incentive do they have to play along with the U.S--especially countries in Europe where Trump in his frequent fits of pique has imposed or threatened tariffs? No country wants to follow Trump’s lead in isolating China at this point, and any unilateral move on the U.S.’ part would only further isolate the U.S. than it already is under Trump. While many U.S. companies think that diversifying outside of China can be done, they also think that Trump’s “go it alone” approach is the wrong way to go about doing it. They more favor Joe Biden’s approach, which is to bring in allies who also share concerns about China’s nefarious trade activities--especially because without their cooperation, European markets would step into the China market share vacated by U.S. companies. Just another reason why Trump has got to go.
Not everyone in the White House wants complete “decoupling”; in fact, Trump seems to be the only one making it a talking point. Steve Mnunchin and Larry Kudlow want to “normalize” trade with China, while hardliners like Mike Pompeo and Peter Navarro merely want to prevent China from gaining access to the telecom, energy and healthcare sectors. Whatever happens, everyone needs to get on the same page, because that is not happening now; a recent report by the American Chamber of Commerce in China asserts that over 80 percent of American companies operating in China currently have no plans of “diversifying” its supply chains outside of China.
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