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.