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Expanding U.S.-China Decoupling Beyond Economic Relations Will Only Hurt U.S. Business More

As Donald Trump’s re-election bid moves into high gear, with voting scheduled to take place in little more than three months, his campaign team now realizes his only real potential talking point for his much touted skill in conquering the country’s thorniest economic challenges—”he came and tamed China’s underhanded international trade practices where others before him barely tried and failed”—rings hollow. 

Bragging about the state of the domestic economy under Trump’s watch certainly would not. This week Mr. Trump’s Commerce Department reported that with the freefall in growth induced by the COVID-19 pandemic, 2020’s second quarter GDP is estimated to have shrunk at an annualized rate of -32.9%, the lowest rate for the U.S. economy on record. 

So, what is a U.S. President—who plays to his supporters’ anathema to Beijing and their fervent embrace of his objective for a forced decoupling of the U.S. from China’s—to do?  

Mr. Trump’s response is to pursue not only a more full-throated forced decoupling but expand it to areas outside the economic realm.  It is as if the President’s mantra is “if you can’t tame ‘em, just decouple from them.” (As discussed earlier in this space, firms enter and exit foreign markets all the time based on routine commercial decisions made endogenously; forced decoupling implies decisions resulting from the dictates of firms’ home governments.)

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This may be just as well for the President, inasmuch as the biggest economic policy card Mr. Trump has tried to play with the Chinese is anything but a decoupling strategy. And, it has not turned out well.  

This is, of course, his vaunted ‘Phase One’ agreement, whose crown jewel is a series of huge state-to-state commodity transactions directly designed and managed by Washington and Beijing.  

Yes, under President Trump, U.S. trade policy has resembled more of a ‘command and control’ regime of deals that resembles more of Xi Jinping’s Communist Party apparatus rather than the converse.  In large part, this is driven by Mr. Trump’s single metric for U.S. international trade performance—reduction of the nation’s bilateral merchandise trade deficits with our partners, as if such a measure was economically meaningful. In and of itself, it is not.

Although this week China, owing to surging domestic demand for corn feed to fortify the revival of its pork industry, which was decimated by swine flu in 2019, made its largest-ever daily corn purchase from the U.S.—estimated at $US300 million—and earlier has made other agricultural purchases from the U.S., the Chinese will not meet Trump’s Phase One 2020 purchase target of $36.5 billion. If for no other reason, this outcome stems from the fact that the deal’s targets were defined in dollar terms: with the downdraft in commodity prices generated by the drop in demand due to the COVID19 pandemic, this means Beijing would have to purchase a significantly larger volume than could have ever been anticipated.  

Such it is that he tasked his Secretary of State, Mike Pompeo, to ratchet up our country’s foreign policy and diplomatic decoupling from China. The first major salvo in this regard, following a speech by Pompeo titled, “Communist China and the Free World’s Future” was Washington’s closure of the Chinese consulate in Houston. Beijing swiftly retaliated by shutting down the U.S. consulate in Chengdu, the capital city of Sichuan, the 4th largest province in China, which is the southwest heart of the country and whose population is over 80 million people.  

On its face, Houston provides a far more important opportunity for gathering economic intelligence for the Chinese than does Chengdu for the U.S. Chengdu is a listening post for China’s activities of the country’s minority groups in Xingjiang and Tibet. Houston, while historically a major energy hub of the U.S., is now a more significant center for advanced technology, aerospace and medicine, and it is a key U.S. port.  

In this regard, Beijing’s response to Washington’s was billed by the Chinese—and interpreted by the U.S. and the rest of the world—as measured.  But do not let that fool you. The Chinese do not rely heavily on their formal diplomatic missions to gather economic intelligence in the U.S. They do not need to:  America’s open society provides numerous other avenues for China (and other economic adversaries) to do so. 

In contrast, the U.S. and other countries cannot avail themselves of equivalent opportunities within China, where even the domestic population is more than mindful that the Party not only listens in to conversations, tracks electronic correspondence, but also watches citizens’ movements through a sophisticated network of remote cameras deploying facial recognition technologies. 

It is this asymmetry that Washington—at least in the area of policy-making towards global business matters—does not fully comprehend.  The result? U.S. firms operating in China have far more to lose by retaliatory actions in the foreign policy and diplomatic sphere than Chinese business interests do within the U.S. 

This is different from the impacts of forced U.S.-China decoupling in the economic realm, which as discussed in this space earlier, would be neither easy nor quick.  And it would not be costless to U.S. businesses, their workers, and their customers. China is referred to as the “world’s factory” for a reason, and the global network of tiered supply chains is far more complex than many—including some C-suite executives and corporate board directors—have recently learned during the COVID19 pandemic. At the same time, the notion that the globe’s growth would not be adversely affected if there were a bifurcation of technological standards (as forced decoupling would seem to imply) is questionable—even if such a bifurcation was sustainable.

But even in other ways, Trump’s more expansive forced diplomatic and foreign policy decoupling from China likely hurts U.S. business and economic interests more than China’s. It certainly would strengthen Xi Jinping’s authoritarian rule and provide ammunition for him to intensify his nationalistic domestic policies, reducing the already sparse chances for a democratic movement to emerge in China.

Moreover, as we are already seeing, it fortifies Xi’s ability to form a multilateral anti-U.S. coalition of other nations.

In contrast, Mr. Trump’s proclivity has been to deal with China (as well as with other countries) on a bilateral basis—no doubt a product of his career structuring real estate transactions, especially in New York City.  Curiously, Secretary Pompeo’s speech (and subsequent actions) seems be an incipient attempt to create a coalition of other democratic nations to take on China. The challenge there is, after almost four years of Trump’s chiding of fellow leaders of such countries, there will likely be few takers.

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