The US Unanticipated Costs of Decoupling from China

• Published date: 01 November 2020
• Author: Jun Zhang,Shuo Shi
• Date: 01 November 2020
• DOI: http://doi.org/10.1111/cwe.12359

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–27, Vol. 28, No. 6, 2020 1

*Jun Zhang, Professor, School of Economics and China Center for Economic Studies, Fudan University;

Shanghai Institute of International Finance and Economics, China. Email: junzh_2000@fudan.edu.cn; Shuo

Shi, China Center for Economic Studies, Fudan University, China. Email: shishuostone@foxmail.com. The

authors are grateful to the Shanghai Institute of International Finance and Economics, Fudan-Pingan Center of

Macroeconomics, Sige Yipi Cultural Master Program 2014 on “China’s Industrial Transition and Employment

Chang: Theoretical and Empirical Studies,” and to the China Scholarship Council, for funding the research

on which this paper is based. The authors would also like to thank an anonymous reviewer for constructive

criticism and most helpful advice on an earlier version of the manuscript, although any errors are our own.

The US Unanticipated Costs

of Decoupling from China

Jun Zhang, Shuo Shi*

Abstract

The decoupling policies enforced by the Trump Administration aim to break the US

economic relationship with China. Those policies, however, are escalating strategic

costs for the US in at least three unanticipated ways: the decoupling policies are losing

the endorsement of US multinational corporations, undermining the solidarity of the US

and its allies, and making supply chains more likely to disengage from the US than to

disengage from China. We argue that the ongoing decoupling policies are costing more

than the US can bear and will end in vain. If the Trump Administration enforces further

decoupling policies without considering those implicit costs, it will only set the US up

for a more expensive failure.

Key words: China, COVID-19, decoupling, global supply chains

JEL codes: F5, F6, L5, O5

I. Introduction

While COVID-19 is continuing its brutal rampage across the world, another tough

“pandemic” is accelerating in the global debate on China. “Decoupling” – the notion

that the US and other major developed countries should break their supply-chain

relationships with China – has captured the attention of policymakers, pundits, and the

media worldwide. Proponents of decoupling believe that deeply intertwined supply

chains bind the developed countries to China and that decoupling can sever this binding.

But would decoupling make sense?

Jun Zhang, Shuo Shi / 1–27, Vol. 28, No. 6, 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

2

To begin with, while the US Trump Administration focuses on decoupling, it is

bewildered about “recoupling” the global supply chains disrupted by the COVID-19

pandemic. As Farrell and Newman (2020) point out, despite the official enthusiasm for

decoupling, those decoupling policies lack comprehensive doctrines, stratagems, and tactics

needed for managing the US–China rivalry, and would risk hurting the US as well as China.

China, moreover, has been more connected to the global market than decoupled

from it. Lardy and Huang (2020) fi nd that the recent liberalization by China has led to

a substantial increase in the number of foreign-owned financial institutions operating

there, including many US institutions. Meanwhile, both FDI and portfolio capital are

increasingly fl owing into China, which shows the steady increase in foreign ownership

of Chinese stocks and bonds. Lardy and Huang conclude that China’s integration into

global fi nancial markets is accelerating, making fi nancial decoupling between the US

and China increasingly unlikely.

This paper investigates the possibility of decoupling global supply chains from

China in the full array of manufacturing sectors. So far, the decoupling policies of

the Trump Administration have targeted high-tech manufacturing sectors, including

semiconductors and telecommunications, and fi nancial sectors. However, by escalating

decoupling in the high value-added sectors, the Trump Administration has two

underlying goals. The first is to encourage spontaneous decoupling in more supply

chains with China. The second is to lure more countries and non-state actors into

decoupling from China. Hence, we examine the impact of the decoupling policies on

both of the targeted manufacturing sectors with high value-added and the untargeted

ones with medium or low value-added.

We follow the current skepticism about decoupling. Like Farrell and Newman (2020)

and Lardy and Huang (2020), we agree that decoupling is unlikely to happen eventually

because the US has decreasingly relied on a comprehensive China strategy while China

has become increasingly integrated into global fi nancial markets and supply chains.

The decoupling policies have not transpired as expected. Indeed, those decoupling

policies are escalating and driving the US–China relationship in a zero-sum direction.

The Trump Administration is counting on those policies as a source of maximum

pressure on China but it should also evaluate the pressure that the US is bearing before

it enforces more decoupling policies.

Unlike the current literature, which expands on state competition between the US and

China, we focus on the interests and policy choices of other stakeholders in the global

supply chains – including US companies and other major developed countries – which

are affected by Trump’s decoupling policies. In fact, as neither the US nor China seems

to outweigh the other side in the near term, those stakeholders are now the critical factors