The U.S. and China Haven’t Divorced Just Yet

Decoupling is all the rage. But a strong dollar and long-term corporate ties make the relationship as co-dependent as ever.

hirsh-michael-foreign-policy-columnist
hirsh-michael-foreign-policy-columnist
Michael Hirsh
By , a columnist for Foreign Policy.
U.S. and Chinese officials meet to discuss U.S.-China relations in Anchorage, Alaska, on March 18, 2021.
U.S. and Chinese officials meet to discuss U.S.-China relations in Anchorage, Alaska, on March 18, 2021.
U.S. and Chinese officials meet to discuss U.S.-China relations in Anchorage, Alaska, on March 18, 2021. FREDERIC J. BROWN/POOL/AFP via Getty Images

If any common thread ties together two U.S. presidents as opposed to each other as Donald Trump and his successor, Joe Biden, it is their warnings about the strategic threat from China. Both leaders have sought ways to partially “decouple” the world’s two largest economies and reduce U.S. dependence on China. Chinese President Xi Jinping, meanwhile, has tried to shun U.S. business with his “Made in China” policy, embracing “independence and self-reliance” as the Communist Party credo.

And there has been significant separation in the high-tech and social media sectors, thanks in large part to China’s strict censorship policies. Facebook has been banned in the mainland since 2009 for not complying with Chinese censorship rules. Google mostly gave up as well, and Amazon recently announced that it would close its Kindle operations in China. Beijing’s harsh restrictions on information-sharing, coupled with U.S. threats, have forced a slew of Chinese high-tech firms, including Didi, Alibaba, Baidu, and electric carmakers Nio and Xpeng Motors, to face the possibility of “delisting” from U.S. capital markets. As of June, the U.S. Securities and Exchange Commission (SEC) has identified 150 mostly China-based companies that could be delisted, with the SEC saying they are in violation of U.S. auditing rules.

But in terms of overall U.S.-China trade in goods and services, decoupling isn’t yet happening in any significant way, not by a long shot. And it’s not likely to, despite the trade war begun by Trump and supported, to some degree, by Biden.

If any common thread ties together two U.S. presidents as opposed to each other as Donald Trump and his successor, Joe Biden, it is their warnings about the strategic threat from China. Both leaders have sought ways to partially “decouple” the world’s two largest economies and reduce U.S. dependence on China. Chinese President Xi Jinping, meanwhile, has tried to shun U.S. business with his “Made in China” policy, embracing “independence and self-reliance” as the Communist Party credo.

And there has been significant separation in the high-tech and social media sectors, thanks in large part to China’s strict censorship policies. Facebook has been banned in the mainland since 2009 for not complying with Chinese censorship rules. Google mostly gave up as well, and Amazon recently announced that it would close its Kindle operations in China. Beijing’s harsh restrictions on information-sharing, coupled with U.S. threats, have forced a slew of Chinese high-tech firms, including Didi, Alibaba, Baidu, and electric carmakers Nio and Xpeng Motors, to face the possibility of “delisting” from U.S. capital markets. As of June, the U.S. Securities and Exchange Commission (SEC) has identified 150 mostly China-based companies that could be delisted, with the SEC saying they are in violation of U.S. auditing rules.

But in terms of overall U.S.-China trade in goods and services, decoupling isn’t yet happening in any significant way, not by a long shot. And it’s not likely to, despite the trade war begun by Trump and supported, to some degree, by Biden.

From agricultural goods—for which China has been the United States’ largest market—to an array of raw materials and components for manufacturing, the economic relationship remains profound and is growing deeper in many sectors. In May, the U.S. Department of Agriculture reported that farm exports to China alone were forecast to come in at a record $36 billion this fiscal year, more than double the $17 billion of the 2020 fiscal year.

On paper, the U.S. trade deficit with China has dropped significantly—plunging by $8.5 billion to $34.9 billion in April, according to U.S. Commerce Department data released this month. But it’s a bit of a chimera. Trade experts and economists say that reflects in part China’s decision to reroute its U.S. exports through other nations, especially such East Asian economies as Vietnam, Malaysia, Indonesia, and Taiwan, where Chinese-owned companies are dominant. And overall ​​the U.S. trade deficit has soared massively over the past two years—particularly with those countries toward which Beijing has diverted its operations, as well as others closer to home, such as Mexico, that have received a boom in Chinese business investment in the last few years. Reuters reported this month that China had overtaken the United States in trade with Latin America.

U.S. businesses, meanwhile, continue to invest heavily in China, and they are growing more outspoken about their intention to continue doing so. In a speech in Washington this month, Evan Greenberg, a former chair of the U.S.-China Business Council, called decoupling an “economic impossibility” and urged U.S. companies to redouble their efforts to enter the Chinese market. Decoupling, Greenberg said, will only “feed China’s worst instincts” and at the same time undercut U.S. global competitiveness.

“The less reliant China is on American-produced technology, the less leverage the United States will have to influence how China pursues its interests over time,” he said. According to a new survey by the American Chamber of Commerce in Shanghai of more than 300 American companies in China, 60 percent reported increased investment compared with 2020. 

The notorious “China shock” caused by the rush of U.S. producers overseas may have led to the loss of millions of U.S. jobs, especially in manufacturing, in recent decades, helping to spark the rise of anti-China populism. But many economists say a hard decoupling, or total separation of the two economies, would be devastating to both nations.

“Economically speaking, it is a lose-lose scenario for both China and the West,” Allen J. Morrison and J. Stewart Black, two trade experts, write in a forthcoming book, Enterprise China. “While not quite the same as the mutually assured destruction in a nuclear war, hard decoupling is an outcome that few rationally minded people would want.”

Yet the real bottom line for continuing U.S.-China trade is profits, executives say. “Why would we want to decouple from this gravy train?” said Doug Barry, a spokesperson for the U.S.-China Business Council, a nonprofit that lobbies for U.S. business in China. A lot of financial legerdemain is the result. “U.S. executives will tell you off the record how much money they’re making, how good the Chinese market is,” Morrison said in an interview. “But they bury this data in their financial reports. They don’t separate out the China results and instead call them ‘Asia-Pacific’ revenues. They move profits around, obfuscate what’s happening, because it’s not politically correct.”

The mixed fortunes of Alibaba, the Chinese-owned digital giant, are evidence of how complex the issue is. While it may be under pressure from Beijing to separate its stock listings from U.S. financial markets, Alibaba is still selling record amounts of U.S. goods to the Chinese market on its e-commerce platforms—and in the wake of the COVID-19 pandemic and other trends, digital retail is becoming the trend of the future.

“In e-commerce, we don’t see much evidence of decoupling,” said Eric Pelletier, the head of international government affairs for Alibaba. Overall, U.S. goods exports to China hit an all-time high in 2021. According to a recent study by NDP Analytics (and partly funded by Alibaba), U.S. companies generated some $40 billion in revenues from products sold to Chinese consumers—mainly electronics, apparel, leather products, and personal care goods—through Alibaba in 2020.

Most of the continuing trade relationship is driven by the soaring dollar, which is only going to make it more difficult to decouple, said Robert Scott, a longtime expert in U.S.-China trade at the progressive Economic Policy Institute. Thanks to tightening by the U.S. Federal Reserve and large-scale buying of U.S. financial assets as a safe haven, it has become far more expensive in recent months to sell U.S. goods abroad—and cheaper once again to buy Chinese.

“The fundamental problem we haven’t confronted is the fact that the U.S. dollar is now 25 to 30 percent overvalued,” Scott said. “This has continued to be driven by flight capital into the United States during the pandemic and also the legacy of currency manipulation by China. That has made it cheaper for U.S. companies to import from the rest of world, and at the same time the pandemic decimated American domestic retail chains. That’s why so many U.S. shopping malls are closing down.”

This trend in turn will further drive the predominance of giant online shopping giants such as Amazon and Walmart, which depend on inexpensive products coming from China and other low-wage nations.

With the Biden administration’s encouragement, Congress has sought to promote some decoupling with bipartisan legislation. But the House and Senate have different bills. What began more than a year ago as a bill to help U.S. ​​semiconductor-makers develop domestic capacity with government funds has turned into an imbroglio over whether other industries ought to be supported as well and whether Washington should create a controversial industrial policy.

The pushback from the business sector is at least moderating the debate in Washington. “For the most part, in the last few years, the business community has really ceded the debate to the China hawks in Washington,” said William Reinsch, a former U.S. undersecretary of commerce and China trade expert. “The result is you’ve got the inmates controlling the asylum as far the public interest is concerned.”

Under inflationary pressures, the Biden administration has begun to slightly temper its rhetoric against Beijing and consider lifting some of the China tariffs imposed by Trump. “The United States does not want to sever China’s economy from ours or from the global economy—though Beijing, despite its rhetoric, is pursuing asymmetric decoupling, seeking to make China less dependent on the world and the world more dependent on China,” U.S. Secretary of State Antony Blinken said in a major speech in late May.

Biden has also begun to address the problems created by dramatically conflicting agendas: Having made climate change a top priority, he wants to convert the U.S. economy to renewable energy, yet at the same time he refused for most of his 17 months in office to lift tariffs on solar technology, which China dominates. Finally, in early June, Biden declared a 24-month tariff exemption for solar panel products from Southeast Asian nations—though a lot of the panels are actually made in China.

U.S. executives still want government money to support decoupling. This month, more than 100 chief executives, including from Alphabet, Amazon, and Microsoft, urged Congress in a joint letter to pass legislation aimed at boosting U.S. competitiveness against China, including in semiconductor manufacturing.

But with Chinese growth slowing dramatically under Xi’s hard-line policies, there are a few signs that China, too, is reconsidering its own approach. Restrictions on financial disclosures that would have forced Alibaba and other companies to withdraw from Wall Street are reportedly being eased. The world’s largest property and casualty insurer, Chubb—of which Greenberg is CEO—will soon become the first foreign firm to secure a majority ownership of a Chinese insurance partner, Huatai Insurance Group, raising its stake to 86 percent this year.

Nonetheless, some degree of a broader decoupling is also beginning to show up in the trade numbers. Despite the petering out of the COVID-19 pandemic, which dramatically raised demand for cheap consumer goods, U.S. goods trade with China remained below its 2018 peak in 2021. “Given the explosion in demand for durable and other consumer goods in the wake of the pandemic, I would have bet my house that U.S.-China goods trade would have hit a new record in 2021 were it not for the tariffs and restrictions,” said Nicolas Lamp, a former dispute settlement lawyer at the World Trade Organization.

Some experts believe much more decoupling will occur slowly on its own, particularly as human rights concerns begin to affect consumer decisions. Even Walmart, the world’s largest retailer—which once strong-armed U.S. producers into relocating to China and other low-wage economies so as to ensure rock-bottom prices for its U.S. customers—has found itself embarrassed in recent weeks when it sought to ban exports from Xinjiang in compliance with a new U.S. law seeking to punish China for brutally oppressing the Uyghur minority. Chinese social media erupted in anger upon reports that Walmart had stopped stocking products from Xinjiang in its China-based Walmart and Sam’s Club stores.

“What you’re seeing is an acceleration of at least a 10-year trend of companies thinking about shortening their supply chains due to increased political risk [and] volatility in shipping costs due largely to energy costs,” Reinsch, who is now with the Center for Strategic and International Studies, said in an interview. “But those are pressures that are going to grow. Consumers are, in their own way, getting ‘woke.’ But we’re talking about sand leaking out of the bag, not a sudden, measurable movement out of China.”

“Decoupling is not only about reducing current trade and investment, but also about future trade and investment,” Lamp said in an email. “Some of the most severe restrictions,” he said, are on things that haven’t happened and won’t—such as the inclusion of China’s Huawei in U.S. 5G cellular networks.

Yet even there U.S. companies are looking for workarounds to remain in China. Facebook has continued to “rake in revenue through advertising by Chinese companies,” Business Insider reported in December 2021, adding that 40 percent of Apple’s net sales came from China the previous quarter. Major online search providers, including Google, still sell billions of dollars a year in ads to China-based businesses.

And there are dangers to U.S. policy if the push to decouple goes too far, too fast. As yet, there is no clear strategy from Washington, experts say. “The U.S. technology base—foundational to national well-being and power—is thoroughly enmeshed with China in a larger, globe-spanning technological web,” Jon Bateman of the Carnegie Endowment for International Peace concluded in a new study. “Without a clear strategy, the U.S. government risks doing too little or—more likely—too much to curb technological interdependence with China. In particular, Washington may accidentally set in motion a chaotic, runaway decoupling that it cannot predict or control.”

As Greenberg noted in his speech, “We’ve run this experiment before. Previously, the United States unilaterally banned the sale of satellite technology to China. The result: U.S. companies lost revenue, European competitors filled the vacuum and reaped profits, and China got the capabilities it sought.” Indeed, a generation ago, during an earlier period of China hawkishness, U.S. legislators caused permanent damage to the satellite industry when it barred sales to China. Two years after Congress imposed new restrictions on commercial satellite sales, the U.S. share of this global market had dropped from 75 to 45 percent.

Similar risks exist in the semiconductor sector, which is made up of complicated supply chains that stretch from Beijing to the American heartland and add value to both U.S. and Chinese innovation in the field. What happened with satellites could happen with semiconductors. A 2020 study by the Boston Consulting Group found that a serious decoupling could hand semiconductor leadership to South Korea in the near term—and to China in the future.

Breaking up, it turns out, is hard to do.

Michael Hirsh is a columnist for Foreign Policy. He is the author of two books: Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street and At War With Ourselves: Why America Is Squandering Its Chance to Build a Better World. Twitter: @michaelphirsh

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