The United States is pushing to decouple economically from China, but the Trump administration’s insistence on geopolitical confrontation with Beijing is spooking others that have their own complex interactions with the world’s second-largest economy.
The United States signaled recently that it would build an “Economic Prosperity Network” – an alliance of trusted partners – to encourage other countries to decouple from China. We have not heard much about the concept since a US State Department official floated the idea in May. One thing appears clear: The network has little to do with economic prosperity and much more to do with a new US military intelligence-led confrontation with China that other countries may prefer not to join. Although many nations have cause to be concerned about how China will act as a major power, most benefit from the global rules-based order and continued economic interdependence with the world’s second-largest economy.
The dramatic deterioration in global geopolitics in recent years has generated uncertainty about the next phase of globalization. After decades of China’s growing integration into global supply chains, geopolitical risks have taken center stage. Governments that until recently were actively pursuing closer trade and investment links with China have voiced fears that Beijing will use economic coercion and weaponize infrastructure investment.
Technological change and, now, the Covid-19 experience are prompting a rethink about critical supply chains, which are diversifying, shortening and digitizing. In this period of change, a critical question about global economic governance is whether to develop new rules, norms and safeguards in emerging sectors such as technology – or whether the world will divide into two global trade systems with competing standards.
The Economic Prosperity Network appears to be the Trump administration’s answer to encourage allies toward the second option, a separate system of rules and norms and of production, at least in strategically important industries. The strategy is a critical component of the 2017 US shift from constructive engagement to strategic competition with China. Rather than being about economic prosperity, it has more to do with a securitized response to the rise of China and is based on the premise that Beijing inevitably poses a security threat.
Even mobile applications that collect data from customers, as pioneered by US social media giants such as Facebook, have come under scrutiny for posing threats to national security. The US government is proposing to ban popular Chinese apps TikTok and WeChat and to create a so-called “Clean Network” (carriers, app stores, apps, cloud storage, and undersea cables) to safeguard the privacy of citizens and companies’ sensitive information.
The Economic Prosperity Network takes the Huawei paradox and applies it other strategic sectors. Huawei Technologies, the Chinese information and communications technology group, was first banned from participating in the build-out of the 5G network in Australia, one of the G20 economies most interdependent with China but also a US ally and a critical player in Five Eyes intelligence-gathering network (Australia, Canada, New Zealand, the UK and the US). Despite China and Australia’s economic complementarity and its demonstrable mutual benefits, the emergence of geopolitical concerns in recent years put military-intelligence assessments and concerns above economic considerations. The Australian government was apparently advised that in the event of a deteriorating geopolitical climate, it was possible a 5G network, which used Huawei equipment, could be weaponized at Beijing’s direction to conduct cyber sabotage on critical infrastructure.
The paradox is that such a risk is inherent in all supply chains; all major powers have weaponized their economic power in the past, and China might well be expected to do so if the international climate turned to conflict. Rules, norms and safeguards applied to frameworks of international cooperation have been developed to constrain such actions. In normal times, these conventions function in strategic sectors as diverse as air travel, medical supplies, and food safety.
But these are not normal times, as underscored by the Covid-19 crisis and by the election in numerous democracies of governments with little confidence in the liberal rules-based international order constructed by the West since the Second World War. The Huawei paradox, and its parallel in other industries, therefore comes down to international trust, which has declined in recent years for many reasons. The American answer to this is to decouple.
Decoupling from China, however, is easier said than done in the global economy. The Economist notes that China now accounts for 28 percent of world manufacturing, with a deep and competitive industrial base in which more and more value is added locally and that is underpinned by a huge domestic market. According to the Rhodium Group, the value of foreign mergers and acquisitions in China last year reached the highest level in a decade, with US investment rising despite geopolitical tensions.
Nevertheless, in future, companies can be expected to explore greater diversification as a risk-management strategy in response to the deteriorating geopolitical climate and the experience of Covid-19. A recent UBS survey found that 44 percent of businesses from North Asia were more likely to move production away from China, closing operations rather than just downsizing them. UBS surveys before Covid-19 found that 85 percent were already planning to move some production out of China. For US firms, one third planned to move in the near future, while 76 percent had already moved or were intending to move some capacity out of China, particularly in the healthcare, consumer staples, and technology sectors.
As the world’s largest economy, with proven resilience and demonstrated capabilities for rapid trade diversion and innovation, the US can probably withstand decoupling from Chinese supply chains for security reasons. In the short term, however, even the US will sustain an economic cost. Washington proved unable to find alternative suppliers for a range of manufacturing products in the first year of its trade war with Beijing. Other nations will be much less likely to embrace a wholesale decoupling from China.
To have any real impact, the US would need to bring Europe, a critical part of the world trading system, into its decoupling plan. That is unlikely to succeed. Even though there are common concerns in both the US and Europe about more assertive Chinese actions in the international arena and concerns about China’s hardening domestic authoritarianism, Europe will not support decoupling that is driven by aggressive geopolitical aims. European nations see trade and investment as arenas of competitive advantage, not geopolitical competition, and would prefer strategies that encourage China to act as a responsible member of the global trading system rather than to isolate it.
Indeed, as ”Dealing with the Dragon”, a joint report by the Asia Society Center on US-China Relations, the Bertelsmann Stiftung and the China Policy Program of the Elliott School of International Affairs at The George Washington University, finds, “due to the Trump administration’s aggressive use of tariffs against China and the EU, Washington has badly eroded trust and squandered a golden opportunity to bring concerted multilateral pressure against Beijing.”
The rest of Asia, which is central to most global supply chains, would also need to choose either a US-led or China-led order in any decoupling scenario. Yet most Asian states are uncomfortable with a new era of geopolitical confrontation, which unsettles the region’s prosperity and peace, and would not wish to choose between Washington and Beijing. Most will seek pragmatic co-existence. Unlike the US and its allies, most would accept a new multipolar balance in the region. As long as a new strategic balance is not unstable, this can mean continued interdependence with the US and China, as well as Japan and other key economies.
To be sure, key Asian powers remain suspicious of a more powerful China and how it may throw its weight around. They may, therefore, consider US demands for partial decoupling in certain strategic industries, but would make decisions only on evidence of real security risks. Chinese actions will therefore be critical. To date, Beijing’s economic coercion against a number of countries in the region has certainly not engendered trust.
Yet shifting supply chains is not as simple as it may sound to those in the military-intelligence community who are urging it. Few countries have the scale, logistics and industry clusters, let alone the business environment, to compete with China, as opposed to participating in Chinese supply chains. Indonesia, for example, is failing to attract business relocating from China because of unfavorable local conditions. Japan, on the other hand, has the resources to fund selective reshoring and supply-chain diversification.
The question of how China will respond to US-led decoupling Is also critical, although it appears the US move to decouple is an admission that it had been kidding itself for years that it could change China. It is also tacit acknowledgement that the US has fallen behind in certain sectors and cannot compete. Will China use economic coercion to threaten its trade and investment partners to keep in line? If so, it might risk pushing some of its key economic partners to take a closer look at the Economic Prosperity Network. Indeed, some of China’s recent actions have undoubtedly opened the door to the decoupling concept, but its future actions could yet close it.
China could double down on its recent strategy of support for the multilateral system, the United Nations, the World Trade Organization (WTO), the World Health Organization (WHO) and the rest, at the very time the US is undermining it. If so, it will need to demonstrate more than just words. The rules-based global order needs some reform such as new rules for the Fourth Industrial Revolution. Europe is developing rules for 5G and the new digital economy. The engagement and leadership of Huawei and ZTE, another Chinese technology firm, in abiding by these new rules would send a strong message to those who claim that these companies pose security risks. Equally, China has joined the EU, Australia, Singapore and over 20 other members to launch an interim appeal arbitration system in place of the WTO appellate body, crippled by the US withholding appointment approvals.
Through the Belt and Road Initiative (BRI), the Regional Comprehensive Economic Partnership (RCEP), the Asian Infrastructure Investment Bank (AIIB) and a raft of other international activities, China is demonstrating that it has arrived as a major power and it seeks to contribute to the next phase of globalization. Whether that contribution strengthens the prevailing rules-based order or not, and whether the US continues to walk away from that order that it helped build, remain uncertain. The US election in November will be pivotal in determining the direction that Washington takes.
Bartsch, Bernhard; Medeiros, Evan; Schell, Orville; Shambaugh, David; and Stanzel, Volker. (June 2020) “Dealing with the Dragon: China as a Transatlantic Challenge”, Asia Society Center on US-China Relations, New York, NY, USA; China Policy Program, Elliott School of International Affairs, The George Washington University, Washington, DC, USA; Bertelsmann Stiftung, Gütersloh, Germany.
Originally published in Asia Global Online, August 13, 2020