The United States and China on the way to an economic divorce?

For thirty years, China has forged close economic ties with the West and particularly the United States. But the interdependence between the two giants has taken a hit. In the United States, the initial optimism gave way to mistrust and the desire to curb the rise of a rival.

“Opposition to China is one of the few commonalities between Democrats and Republicans,” observes Mary-Françoise Renard, professor at Clermont-Auvergne University and author of China in the global economy (Blaise Pascal University Press, 2021). This posture has only reinforced China in its project to become less dependent on Western countries.

Europe is no stranger to this development. The pandemic and then the war in Ukraine brought its own addictions to light. Germany – the European country that exports and invests the most in China – is preparing a new “China strategy” for 2023 in order to learn from it.

Is the United States, or even the West in general, about to distance itself from China? For some time now, a word has been coming up repeatedly to evoke the question: “decoupling”. A concept with variable geometry, which designates, in a very broad sense, a split between two economic blocks.

In reality, none of the actors wants a general “decoupling” and all reject the term. “We are not pleading for a decoupling of our economies, you will not hear anyone defending that”, recently assured an American diplomat. All, however, want to limit their addiction. Starting with China.

Since 2015 and its “Made in China 2025” plan, Beijing has shown its desire to ” upgrade to a higher range “ and reach “maximum technological independence”, recalls Mary-Françoise Renard. Donald Trump’s trade war against China has accelerated the Asian giant’s efforts to develop innovation on its soil and “self-sufficiency”.

In 2020, President Xi Jinping defined a “dual circulation” strategy: this involves strengthening the market and value chains within the country (domestic circulation) and adapting its international openness (external circulation) to be less exposed to external risks.

Selective Chinese opening rather than closing

This does not mean that China is shutting down. Rather, it proceeds to a chosen opening. “It controls more companies on its territory but it has relaxed the conditions for foreign investment in certain sectors. In 2021 and 2022, we saw a sharp increase in investment in China” emphasizes Mary-Françoise Renard.

However, in sensitive or strategic sectors such as 5G, foreign firms are “faced with increasing obstacles » : national security reviews, barriers to data transfer, even discriminatory treatment.

It is not the tariff barriers that worry Beijing the most. The United States has significantly tightened its export controls since 2018

In the opposite direction, but following the same logic, China has reduced its own investments abroad for several years. “She refocused them” in strategic areas and countries “and no longer controls them” continues the researcher.

This desire to strengthen “inner circulation” comes up against the contradictions of Chinese development. Household consumption remains weak and as a result, the trade surplus is not shrinking – it is even breaking records. Exports to the United States, the main customer, are close to their 2018 peak, even if the customs duties imposed by Donald Trump have clearly limited them in certain sectors.

But it is not the tariff barriers that worry Beijing the most. The United States has considerably strengthened its export controls since 2018, extended to emerging technologies where American leadership is considered a national security issue.

A license is thus required to export certain technological goods to China, or to sell them to an ever-growing list of Chinese firms. A form of targeted embargo, to which China has responded by adopting similar control instruments.

At the beginning of October, Washington took a new step by taking a whole arsenal of measures to deprive China of certain advanced semiconductors, and prevent it from producing them. In particular, companies around the world are prohibited from selling semiconductors used in artificial intelligence to China if they are made using American technologies or materials. A very powerful measure, which had already been used to break the telecom giant Huawei.

The United States Offensive

The United States has also strengthened the screening of investments on its territory. Huawei paid the price by being excluded from the deployment of 5G on American soil. Result: in recent years, new Chinese investment in the United States has collapsed.

In addition, requirements to raise funds in US markets have been tightened, which led several Chinese public groups to withdraw from the New York Stock Exchange in August. Beijing then avoided the exclusion of some 200 Chinese firms by opening access to their audits.

At the same time, the United States is pushing manufacturers to establish themselves elsewhere than in China. A few years ago, American representatives in Taiwan were putting pressure on an Apple supplier, asked to move its Chinese activities more quickly. Last spring, Finance Minister Janet Yellen encouraged the ” friend shoring or “relocation to friends”. Washington “trying to create certain value chains that basically avoid China,” argues Mary Lovely, a researcher at the Peterson Institute for International Economics (PIIE), a think tank American.

“Multinationals are not leaving China, they are looking to diversify” – Mary Lovely

For now, these incentives have limited effects. China has increased its export market share in recent years for goods of all technological levels; its know-how and huge workforce are hard to replace.

However, Western settlements in other Asian countries are no longer limited to basic sectors such as textiles. Apple manufactures sophisticated products like AirPods in Vietnam and has begun assembling some of its iPhone 14s in India. “This could snowball, with the development of networks on which multinationals rely », believes Mary Lovely.

Decoupling reserved for strategic sectors

In addition, Beijing’s very strict response to the pandemic has greatly disrupted companies, which were already worried about geopolitical risks. According to a survey, American firms operating in China have never been less optimistic, even if only a minority (13%) intend to reduce their allocation of resources in the country. Large American and European companies are choosing not to leave China but to “decouple their operations in China from their global operations”.

“Multinationals are not leaving China, they are looking to diversify”, ultimately believes Mary Lovely. The same could be said of countries: neither China, nor the United States or Europe wants to sever economic ties. It is therefore not surprising that they are maintained or even deepened in certain areas. This is why Mary-Françoise Renard prefers to talk about “dependency reduction”.

All in all, relations will continue to evolve in contrasting – and difficult to predict – ways. “I clearly think that there is a general tendency towards “decoupling”, of economic and geopolitical origin”, says Mary Lovely. But this centrifugal force manifest itself more clearly in areas important to national security on both sides “.

Leave a Comment