Why the US should not simply decouple from China without building new partnerships
- Richard McGregor and Hervé Lemahieu say the US’ trade war with China is also a conflict with the rest of Asia due to the nature of global supply chains
- While there is a need for the US to stand against China’s trade practices, it cannot go it alone and must consider rejoining the Trans-Pacific Partnership
Washington’s new foreign policy buzzword, “decoupling”, has a rather bland ring, especially given the momentous phenomenon it describes – of the world’s two biggest economies, the United States and China, splitting apart. For the White House, the phrase is shorthand for the administration’s commitment, through taxes, tariffs and other punitive measures, to disentangle its companies and their technologies from China’s supply chains.
But without a broader American economic strategy for the region, it’s hard to see how a decoupling between the two countries will work out for the US and friendly countries in Asia. Far from bringing business out of China, America might ensure that global supply chains remain anchored there after all.
Asia is home to the most important global supply chains – from electronics to textiles, to IT to cars – distributed across a vast range of countries. Due to the nature of these cross-border links, and China’s central role within them, a trade war with Beijing means a trade war with Asia.
The very model of Factory Asia – which has allowed developing countries to master the global age, starting with Japan in the 1950s – may be heading for extinction. This alone makes many countries and businesses nervous.
Today, bilateral trade with the US accounts for 14 per cent of China’s trade flows. The US share of Chinese exports in trade in value-added terms actually declined from about 30 per cent in 2002, just after China joined the World Trade Organisation, to 20 per cent in 2011. Since the global financial crisis, China has both overtaken the US as the world’s largest trading nation and seen its gross domestic product growth become less dependent on exports.
China’s trade-to-GDP ratio is 38 per cent. By comparison, Vietnam’s trade as a percentage of GDP is over 200 per cent. This suggests China is less susceptible to the downsides of a bilateral trade war, but the region at large, which, by and large, is strategically friendly to the US, may be much more so.
As things stand, China does 70 per cent more trade with the Indo-Pacific region annually (US$2.5 trillion) than does the US (US$1.4 trillion). Research by the Lowy Institute shows the importance of the US as an export destination for Asian countries is declining relative to an increasingly affluent China. The average export share in 24 Indo-Pacific countries to China is 23 per cent, and just 12 per cent for the United States.
In other words, the economic leverage in Asia rests as much with China as it does the US.
Some regional economies may benefit from decoupling, by luring multinationals now based in China to relocate. There is already evidence that Malaysia and Taiwan are doing just that. But for most countries, including major industrialised allies like Japan and South Korea, decoupling plus “America first” might be toxic. The East Asian tigers see their economic ties with China as a lifeline to be managed, not severed.
There is no question of the need for enhanced resilience against China’s exploitation of vulnerabilities in complex supply chains. Unfortunately, decoupling runs the risk of throwing the baby out with the bathwater.
Globalisation will still involve the US and China – but not the two countries together. The danger is a more hazardous variant of globalisation, less homogeneous and dominated by mutually exclusive zones of influence. Poorly handled, wholesale decoupling will do little to advance Washington’s resolve to compete against an illiberal peer competitor on the world stage. To the contrary, it may only entrench China’s growing gravitational pull.
Richard McGregor and Hervé Lemahieu are fellows at the Lowy Institute in Sydney