Today’s US-China trade and tech decoupling make Trump’s tariff war look tame

Decoupling policies are playing havoc with global supply chains, fuelling inflation and creating impossible hurdles for businesses
Worse still, heightened protectionism has led to the formation of new defence alliances, pushing China ever closer to Russia

Anthony Rowley

Published: 1:30am, 14 Feb 2022

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Sometimes it’s tempting to wish for a return to the “good old days” when China bashing by then-US president Donald Trump focused simply (even if simplistically) on erecting tariff barriers against China. Or we might go back to the days of Japan bashing by the US, decades earlier, using similar tactics.

Things have moved on since then, albeit in the wrong direction, and now we have supposedly more sophisticated policies of trade and technological “decoupling” being deployed by Washington and other Western capitals against China and others.

Trade wars were simple: the US levied punitive tariffs on Chinese and other foreign merchandise imports (often doing more harm to itself than to the target in the process) but otherwise economic life went on much as usual, with trade imbalances and economic relations being scarcely affected.

Some commentators (myself included) argued that the US consumed too much by way of imported manufactures and failed to export sufficient capital goods to achieve “balanced” trade. That and the fact that US firms exported too much production and too many jobs overseas.

But, instead of remedying the situation by improving its own competitiveness by means of increased productivity and better trained human resources, the US decided that the best way to get even with the likes of China and other “upstarts” was to wage technology wars against them.

Now, the decoupling which is being promoted in the name of “economic security” through technological and trade barriers is degenerating into something more dangerous as it gets caught up with human rights and other issues that are raised to justify protectionism and economic sanctions.

Defensive alliances – created or strengthened by the Biden administration among countries such as Japan, Australia and India – have resulted in the formation of counter alliances between China and Russia as trade wars metamorphose into threats of cold (or even hot) wars.

Where will it all end? Business lobbies that supported the process of economic globalisation (which is now going into reverse) are not happy with recent events. The “borderless world of business” (to quote Japanese consultant Kenichi Ohmae) is crumbling before their eyes.

Supply chains vital to production, and upon which the idea of globalisation was largely predicated, are being disrupted, not so much by Covid-19 as by the economic security concerns of hawkish political and economic lobbies. Regional arrangements are being fostered among allies as an alternative.

The Port of Long Beach in California is one of many US ports facing an ongoing supply chain crisis, prompting US transport secretary Pete Buttigieg to visit local leaders in the area on January 11. Photo: Bloomberg

This disintegration process is no inconsiderable factor behind the surge in inflation as production costs are forced up by supply inefficiencies. But the sheer complexity of trying to comply with new barriers to trade in technology is a much wider impediment to business.

As Stephen Adams, senior director at strategic advisers Global Counsel in London noted during a recent event on the “Politics of Decoupling”, “it is now commonplace to hear calls from some in the US and Europe to block future integration in sensitive areas, or even reverse elements of the status quo”.

Even those committed to integration speak of “selective decoupling”, as Adams observed. Yet selective decoupling – like opting for partial divorce – is unlikely to work in practice once trust has broken down among economic partners and once they begin to form new relationships.

US-China relations have become almost untenable. As was noted during the Global Counsel event, “amid record-high partisanship, there is one issue that seems to unite Republicans and Democrats in Washington – US policy vis-à-vis China and the desire to take a tough approach to Beijing”.

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US policies have affected businesses whose supply chains and consumers straddle China and US markets. Chinese investment in the US is scrutinised and US companies in China are pressed to ensure their supply chains are not implicated in forced labour concerns or involved with military interests.

As Global Counsel says, “the US does not want to, and cannot fully, decouple from China. China is the top supplier of goods to the US and the third-largest export market for American products. US and Chinese economies are deeply intertwined. Yet, there are signs pointing to fragmentation.”

Likewise, Chinese companies are an integral part of the supply chain of many European businesses and an aggressive investment strategy has bought China considerable stakes in important sectors in the European member states.

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Europe is trying to reconcile stresses in its China relations with a policy of “open strategic autonomy”, which the European Parliament has defined as “the ability to act autonomously, to rely on one’s own resources in key strategic areas and to cooperate with partners whenever needed”.

Britain, meanwhile, has moved from what former chancellor George Osborne described in 2015 as a “golden era” in bilateral Sino-UK relations to a situation where debate turns now on what is termed “selective decoupling”. There are frequent calls for closer scrutiny of UK-China engagement.

These kinds of tortuous relationships, which are becoming more prevalent, will inevitably push China to strengthen economic and maybe strategic ties not only with Russia but also with Middle Eastern, Latin American and other countries. And that can only sunder further an already divided world.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs