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https://scmp.com/economy/china-economy/article/3149027/us-china-decoupling-if-it-comes-down-us-bloc-vs-china-bloc China Economy
US-China decoupling: if it comes down to a US bloc vs China bloc, who stands to gain the most?
- Prominent Beijing adviser says loss of access to hi-tech goods from US would equate to having an abundance of rice but no delectable foods
- China is already trying to tackle the challenge through its dual-circulation strategy that aims to reduce reliance on other economies
US-China decoupling, which started under the Trump administration, has widened under the Biden administration. Photo: AFP
If the decoupling between the world’s two largest economies were to continue gradually – with supply chains rearranged rather than completely severed – the consequences would be much more disruptive to the China bloc than to the United States bloc, according to a new report by Capital Economics.
This is largely because most of the global economy rests in the US bloc. Based on bilateral relationships involving all 217 global economies recognised by the World Bank, plus Taiwan, a total of 114 are categorised in the US bloc, while 90 are in the China bloc, the report says.
It also noted that although the China bloc has a slightly larger share of the global population, it accounts for just a quarter of the world’s gross domestic product (GDP), while the US bloc accounts for 68 per cent.
“China has a large number of countries in its camp, but most are small in economic terms,” the report said. “China still relies far more on the West for both final demand and inputs.”
Penned by economists Julian Evans-Pritchard and Mark Williams, the report contends that the biggest economic impact from decoupling will be on trade.
More than half of global trade takes place within the US bloc. But that figure is just 6 per cent within the China bloc – with 40 per cent of that small percentage being between mainland China and Hong Kong, and a good portion of those goods are then re-exported to countries outside the China bloc, the report said.
“A key implication is that the China bloc is far more dependent on demand from the US bloc than vice versa. 59 per cent of China bloc exports go to the US bloc, even before accounting for Hong Kong re-exports. In the other direction, the share is just 15 per cent,” the report said.
In 43 of the world’s 50 largest economies, trade across the board is heavily dependent on demand from, as well as production in, the US bloc, but the reliance is somewhat lower among countries in the China bloc.
On average, the largest economies derive 12 per cent of their GDP from exports ultimately consumed in the US bloc, and they spend a similar amount of their GDP importing foreign value added generated in the US bloc. In contrast, reliance on China is much lower, averaging around 4 per cent of GDP in both directions, irrespective of bloc.
US-China decoupling, which started under the Trump administration, has widened under the Biden administration, partially as a result of the coronavirus pandemic.
Yu Yongding, a prominent economist and a former adviser to China’s central bank, said decoupling looks to have a “huge” impact on China.
“But that doesn’t mean China cannot overcome the challenge,” Yu told the Post. “Decoupling can actually accelerate China’s determination to restructure its own economy, and it can turn out to be a good thing.”
China is indeed taking steps in this direction, such as through its dual-circulation economic strategy introduced by President Xi Jinping last year.
“As for who will be affected a bit more – the US or China – I don’t think there is much significance in predicting that, because there are so many uncertainties in the world,” he said.
Calls for more tech bans on China have got louder in Washington this year. In June, the US Senate passed sweeping legislation to strengthen Washington’s hand in its escalating geopolitical and economic competition with China.
Economic gains by China may simply increase the urgency for the US and its allies to promote decoupling rather than encourage greater engagement
Touching on nearly every aspect of the complex and increasingly tense relationship between Washington and Beijing, the 2,400-page Innovation and Competition Act of 2021 allocates hundreds of billions of dollars for American semiconductor manufacturing and research and development.
Capital Economics’ report says decoupling will be faster and more far-reaching in some areas than others, and countries that share a similar alignment may find that their degree of integration with China changes dramatically.
In the 2021 State of Southeast Asia survey of Asean stakeholders – published in February by the ISEAS-Yusof Ishak Institute – a total of 61.5 per cent of respondents said that, if push came to shove, they would side with the US over China, marking an increase of 7.9 percentage points from last year. Meanwhile, 46.4 per cent of respondents said they would choose China – a decrease of 7.9 percentage points from 2020.
“There is no guarantee that greater economic heft would translate into more political influence in the rest of the world,” the report said. “[China’s] souring of ties with countries in Europe is one example. The faltering Belt and Road Initiative is another sign that increased economic engagement does not always lead to increased affection.”
“And as long as China’s political system is perceived as a threat to Western values, economic gains by China may simply increase the urgency for the US and its allies to promote decoupling rather than encourage greater engagement,” it added.
Shi Yinhong, an adviser to the State Council and a professor of international relations at Renmin University, said the US would welcome a tech war with China even if it seriously impacts the US economy. This is a tactical and calculated decision, he explained, because if China were to take the lead in the hi-tech realm, the US would lose out not only economically, but also strategically.
As for the potential impact on China, Shi put it this way: “After the US restricts its hi-tech exports to China, China will still be able to feed itself. But what happens will be like, after eating a single bowl of rice today, two bowls may be available tomorrow through quasi-high-tech and non-hi-tech means, but upscale foods such as sea cucumbers, fish and meat will be gone.”
But Yu said that suggestions of a full decoupling between the US and China may be premature, or at least far off.
“The two countries are still doing business while they brace for a potential decoupling,” Yu said. “It is still unclear what will happen in the future, but there is still a glimmer of hope that we won’t see further decoupling.”