Trade War Sparks Further ‘Decoupling’ Between US, China

July 22, 2019 Updated: July 22, 2019

WASHINGTON—The U.S.-China relationship has entered into new and ambiguous territory after 40 years of sustained economic engagement.

The lingering trade conflict along with the new technology war has triggered a wider decoupling—loosening of trade and economic ties—of the world’s two largest economies, experts say.

President Donald Trump has sought to change that relationship. He launched a tariff campaign early last year as part of a strategy to end China’s economic and trade practices that harm the United States. Washington also enhanced the investment screening process to tackle, in particular, Chinese efforts to acquire U.S. technology.

The first signs of decoupling began last year, when Chinese foreign direct investment in the United States declined sharply, amid growing distrust between Washington and Beijing. The stringent capital controls imposed by the Chinese regime also amplified the trend. 

Chinese investment in the United States dropped 84 percent in 2018 from the previous year. And the decoupling in the technology sector was particularly striking, according to Cheng Li, director of John L. Thornton China Center and senior fellow at The Brookings Institution.

“There was almost a zero mutual investment in the tech sector between the United States and China last year,” Li said at a panel discussion hosted by Brookings and the American Enterprise Institute on July 18.

As set out in its “Made in China 2025” strategy, Beijing has ambitious plans to dominate key emerging technologies, including artificial intelligence, robotics, new-energy vehicles, and biotechnology. Washington raised concerns over China’s strategy to obtain U.S. intellectual property and technology, calling it “economic aggression.”

So far, the Trump administration has applied tariffs on $250 billion worth of Chinese goods. In addition, it placed Huawei and other Chinese technology companies on the entity list, banning those firms from doing business with U.S. suppliers, and exerted much-tightened export controls.

These measures provoked a significant shift of advanced production out of China, according to Robert Atkinson, president of Washington-based think tank Information Technology and Innovation Foundation. 

“Essentially, what you’re seeing is decoupling,” he said at the panel discussion. He said that technology exports from China to the United States were down 12 percent last year, while countries such as India, Vietnam, and Taiwan saw double-digit growth.

Atkinson believes a lot of international companies are hedging their bets by moving their operations out of China.

“The Chinese are playing a very dangerous and, I think, misguided game,” he said, suggesting that the prolonged trade war would severely hurt the Chinese economy. 

“The longer they play ‘rope-a-dope,’ the longer they don’t come to the table with a real offer that the Trump administration will accept, the more decoupling is going to happen.”

Resumed Talks

Trump and Chinese leader Xi Jinping agreed last month at the G-20 summit in Osaka, Japan, to resume trade talks and hold off on implementing additional tariffs.

As part of an effort to resolve differences in negotiations, U.S. and Chinese senior officials spoke by phone last week for the second time since the Osaka summit.

Trump told reporters on July 19 that Treasury Secretary Steve Mnuchin had a “very good talk” with his counterpart.

“We’re dealing with China,” he said, suggesting that China’s economic troubles may force Beijing to come to the table.

“They had the worst year they’ve had in 27 years. And we’re having the best year we ever had.”

China’s economic growth slowed to 6.2 percent in the second quarter, its lowest level in 27 years, due to pressure from the trade war with the United States.

It is still not clear whether both sides will continue negotiations in person. Before the call, Mnuchin told CNBC that in-person meetings could re-start, depending on the outcome of the call. He also said Huawei wasn’t a major hurdle in the talks, but “there are just a lot of complicated issues.”

The likelihood of a deal now hovers around 50-50, according to Derek Scissors, a resident scholar at the American Enterprise Institute and chief economist of the “China Beige Book.”

Scissors believes the Chinese “are going to get a deal they want or they’re going to stall until 2020.” 

“That doesn’t mean they would give us nothing in a deal,” he said at the panel discussion. “It means that there are certain things they find acceptable and certain things they find unacceptable. That leaves me with President [Trump] deciding what’s better for him politically.”

According to Scissors, the United States should decouple from the Chinese government. He said the idea that Washington can make a lasting agreement with the Chinese regime “is both impractical and morally repugnant.”

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