Decoupling: A Permanent Change Is Underway

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Posted in China, Uncategorized

James Kynge, Financial Times bureau chief in Bejing from 1998-2005, is among the China-watchers whom I have followed, especially since China Shakes the World: A Titan’s Rise and Troubled Future – and the Challenge for America appeared, in 2006.  Today he operates a pair of proprietary research services for the FT.

So I was disheartened to see to see Kynge employ an ominous new term in an FT op-ed column Friday, Righteous Anger Will Not Win a Trade War.  President Trump thinks that the US becomes stronger and China weaker as the trade war continues, Kynge wrote, but others see an opposite dynamic at work: “mounting losses for American corporations as the US and Chinese economies decouple after nearly forty years of engagement.”

Decoupling is so incipient as a term of art in international economics that Wikipedia offers no meaning more precise than “the ending, removal or reverse of coupling.” A decade ago, it implied nothing more ominous than buffering the business cycle (The Decoupling Debate). Former World Bank chief economist Paul Romer, no professional China-watcher but better connected than ever, since he shared a Nobel Prize in economics last year, returned from a trip there in June with something of a definition. The mood in China, at least in technology circles, was grim but determined, he told Bloomberg News.

I think what they’ve decided is that the US is not a reliable trading partner, and they can’t maintain their economy or their tech industry if it’s dependent on critical components from the United States.  So I think they are on a trajectory now, that they’re not going to move off of, of becoming wholly self-sufficient in technology. Even if there’s a paper deal that covers over this trade war stuff, I think we’ve seen a permanent change in China’s approach…. There’s no question that they’re on a trajectory to become completely independent of the United States because they just can’t count on us anymore.

How long might it take to pretty fully disengage at the level of technological standards?  More than five years, maybe ten, Romer guessed, citing Chinese estimates. For that length of time, Kynge reckons, US high tech vendors would continue to suffer.  US companies and their affiliates sell nine times more in China than their counterparts operating in the United States, according to one estimate he cited. Cisco and Qualcomm report being squeezed out of China markets, he says.  HP, Dell, Microsoft, Amazon and Apples are considering pulling back.

The long-term competition for technological dominance worries Kynge more than the trade war.  In many industries, he writes, China is thought to be already ahead. Among those he lists are high-speed rail, high-voltage transmission lines, renewables, new energy vehicles, digital payment systems, and 5G telecom technologies. And while there is no agreement about which nation possesses the more effective start-up culture, in university-based disciplines such as artificial intelligence, quantum computing, and biomedicine, in which the US has been thought to have been well ahead, China is making rapid gains.

This decoupling of two nations that for forty years gave grand demonstration of the benefits and, latterly, the costs, of trade is a bleak prospect.  If there is a silver lining, it lies in the fact that rivalry often produces plenty of jobs along with the mortal risks that passionate competition entail. But if America is to do anything more than simply capitulate, it must find a leader and begin to move past the disastrous presidency of Donald Trump.

Friday’s shocking escalation brought that eventuality a little closer.  The president is on the ropes. There is no sign of trade war fever beyond his base that might restore the confidence required for him to win a second term.

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New on the EP bookshelf:   The Narrow Corridor: States, Societies, and the Fate of Liberty, by Daron Acemoglu and James A. Robinson (Random House, 2019)

The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, by Emmanuel Saez and Gabriel Zucman (Norton, 2019)