Decoupling: Myth or Reality?

I had a debate with my Taiwanese friend on if there would be a New Cold War. He claimed there would, but I disagreed.

The world today is not divided by an Iron Curtain, and 30 years of globalization remain the primary economic backdrop for discussions on international politics between great powers. Trump's claim that China is taking advantage of the U.S. does not hold. The first lesson in international economics is the accounting identity of balance of payment:?Current Account = -Financial Account (given capital account is negligible). It's neither an economic "law" nor wishful ideology. It's again, an accounting identity, meaning that it holds unconditionally, universally and eternally, as solid as law of physics. Trade is fundamentally an exchange where both parties get what they need. The U.S. has reaped significant benefits while also bearing negative consequences, and so has China.

I do not believe history will simply repeat the Cold War. One needs to be careful when using analogy. The U.S.-China relationship is vastly different from that of the U.S. and the Soviet Union. Neither Trump nor Biden has wanted or set such a goal. Before proceeding, note that high-intensity conflicts like World Wars and the Cold War are among the rarest events in human history, surpassing any other period in terms of the extent of militarization. Neither the U.S. today nor China (since its foundation) has the resources or the will for such a confrontation.

It is undeniable that the U.S. has been expanding its list of export restrictions on China. However, these measures are essentially the maximum of what the U.S can do, and their impact, though significant, is far from fatal. America, at present, has no longer a leader like F.D. Roosevelt or Ronald Reagan, who could rally overwhelming national support. The country is deeply divided by populism and burdened with massive debt (part of which borrowed in the Reagan administration to defeat the Soviet in an expensive arms race). While the U.S. stays the absolute hegemony, its relative decline makes a new Cold War impractical.

U.S.-China tensions will inevitably persist, but so will trade and economic ties. China continues to be the largest offshore hub for the U.S. dollar. The U.S. conducts both deterrence and collaboration. If China’s authority moderates its stance even slightly, U.S. would be more than happy to ease tensions, and vice versa.

Since 2016, U.S.-China trade volume has remained stable rather than declining. In fact, China’s inland regions have outperformed all potential replacement countries, becoming the fastest-growing exporter to the U.S. (source: WSJ). Despite the outflow of low-end manufacturing to Southeast Asia and India, China’s?mid-to-high-end exports—such as second/third-tier semiconductors, solar panels, and electric vehicles—have been increasing. There is no reason for China to forever remain a manufacturer of socks. Recently, the BBC cited SCMP data indicating that "Made in China 2025" plan has achieved 86% of its goals, with certain sectors surpassing expectations. The outflow of low-end manufacturing is simply an expected economic trend.

Whether it’s good news or not, the fact is: post-Clinton U.S.-led global order inherently includes China, and today’s America is built on mutual benefit with China, and so is China. Meanwhile,?to protect themselves from Trump’s policy,?Europe and Japan are also improving their relations with China, and Japan’s new prime minister leans more toward the left. Therefore, a blockade by a unified Western alliance is very unlikely.

Were decoupling to succeed, it would require China to be replaceable. Many would expect India and Southeast Asia to fill that role. Nevertheless, to achieve that, they each face numerous challenges. I think the media has exaggerated their “rise” (as they had for almost every country that is performing well).?India’s economy remains dominated by agriculture and services, skipping manufacture altogether.?Localism and sociopolitical complexities discourage international investment, and its reputation for protecting foreign capital is poor.?Vietnam’s real estate bubble has already burst—trying to replicate the China Model but missing the mark. Additionally, India’s?corruption and inefficiency may even surpass China’s. The biggest difference between the two countries is that India lacks an?education system like?China’s, which has produced tens of millions of qualified graduates.

Hence, we could see why?Biden explicitly defines U.S.-China relations as "competition"?because both parties know that?decoupling is impossible.?Should it be possible,?aside from triggering economic and social crises simultaneously in China and the U.S., decoupling would paralyze the globalization-dependent export-oriented economies of one democratic U.S. ally (and their middle-class way of life) after another—from?Germany to Taiwan. Like China, they produce for U.S. consumers. It would also open the door for?authoritarianism, radicalism, terrorism, and communism to reemerge, bringing about?the true “end of history”,?a?far more terrifying version than Francis Fukuyama's, which declared a victory of liberal democracy. To conclude,?Decoupling is neither feasible nor desirable.