The case for a complete decoupling between China and the US
Trading between enemies is a bad idea
The current Sino-US relationship is not sustainable in the long run. The US won’t give up its global hegemony. China won’t give up developing its economy and national power. US hostility is open and palpable. China is defiant and confident. There is no way to square a peg in the round role here.
A Plaza Accord type of arrangement, when Japan self-castrated, is out of the question. The balance of power between the two, at this point, is such that neither side will back down. Time is on China’s side and the US knows that. So, a delay game is unlikely to sustain.
Decoupling is inevitable. Trump’s tariff war provides both sides the perfect opportunity to unwind economic and trade relationship.
The economic ties between the two countries include –
- $440 billion Chinese goods and services export to the US and $190 billion import from US
- $500 billion US direct investment in China (Apple, Tesla, Starbucks, etc.) with $700 billion annual revenue generated in the Chinese market
- Most large US companies have significant China domestic sales in every industry from GM, Nvidia, Nike, P&G, McDonald’s, Coca-cola, to Citibank.
- Revenue from China sales for US multinationals range from 20% global sales for Apple and Du Pont to 10% for Starbucks and Johnson & Johnson to 6% for Walmart. Many count China as the second largest market after the US.
- Most US MNCs are dependent on Chinese supply chains for both sales in China and outside. Large US retailers like Amazon and Walmart source 60-70% of their merchandise from China
- 10-15% Hollywood global box office is from China, the second largest movie market in the world
- 300,000 Chinese students go to study in the US every year and roughly a million is currently enrolled in US universities. Annual tuition from Chinese students is $12 billion
- $28 billion annual China direct investment in the US, including in manufacturing, real estate and equity market. $80 billion annual revenue for Chinese companies operating in the US; largest Chinese manufacturer in the US is Fuyao Auto Glass in Ohio and Illinois with $448 million annual revenue
- Few Chinese brands count US as a large market. None of the 100 largest Chinese companies (such as PetroChina, Alibaba, Huawei, BYD) derive more than 2% of their revenue from the US.
- China holds $760 billion US Treasury; total Chinese foreign reserve is $3.2 trillion, in a mix of dollar and non-dollar assets
- There is no known US government holding of Chinese assets
- Around 280 Chinese companies are listed in US stock markets with total market cap around $1.1 trillion
A full decoupling would entail the following –
- Severe all trade, including service trade in tech, intellectual property, media and entertainment
- Cleanse supply chains that are dependent on the other side
- Liquidate financial holdings – China sells its US Treasury and other US assets, US delists Chinese companies on US stock exchanges. US could steal Chinese assets as with Russia. China could confiscate US companies’ assets in China in return.
- Expel each other’s businesses operating in the other country
- Stop flow of students and tourism
A full decoupling is good for both countries as –
- Trading with the enemy is risky business for both sides
- Dependency and vulnerability can be exploited when two countries are geared up for a showdown, including a kinetic war
- Severing economic ties remove frictions on one important dimension, negating any further quarrel on unfair trade or one side taking advantage of the other (e.g. Chinese peasants lending money to the Americans to buy stuff made by the same Chinese peasants)
A full decoupling is good for the US -
- Removes China as the economic bogeyman and a distraction from real economic problems in its system like inequality of wealth distribution
- We can find out how successful the US will be to restore trade balance and eliminate deficit with others
- We can find out how successful the US will be to reshore manufacturing and get factory jobs for Americans
- We can find out how the US will improve its inflation and standard of living
- We will find out how successful the US will be to establish alternative supply chains, source critical materials, and develop skilled labor to reindustrialize
Decoupling is also good for China -
- Accelerate the push to achieve technological self-reliance and fireproof its economy
- Reduce risk exposure to US financial assets
- Chinese companies can take over the domestic market share of US companies once they exit from China
- Stimulate domestic consumption and expand trade with others, especially countries not aligned with the US
- Internationalize RMB and accelerate alternative financial ssytems (CIPS vs SWIFT, digital RMB vs. US dollar)
Decoupling is a win-win proposition. With an even playground, let’s find out who will succeed in the ensuing economic and technological competition.
If I were China, my concern would be not decoupling from the US alone (which is most likely manageable for China), but also from its network of vassals (who are in a kind of rebellion currently) if the US commands them to do so. I don't think a sudden disruption that big would be a win-win for anyone, but the vassals have shown in the past that they are happy to be suicided at their master's request under certain circumstances.
I think there is another important dimension. What is best for humanity and the world? As China often points out as one of the major powers in the world it holds responsibility to a more stable, global geopolitical and economical climate. I realize that each nation acts selfishly for its own interests, but a preservation of some economic tidings is safer for the world at large. To fully decouple and pursue a path to make RMB the new global reserve currency, I fear is just following the imperialistic behavior of the past. We are definitely at an inflection point of the relationship.