Report envisions partial decoupling from China

BY DEREK SCISSORS

Key Points

• Partial decoupling from China is overdue. The People’s Republic of China (PRC) suppresses foreign competition and infringes intellectual property. It is an ugly dictatorship at home and increasingly aggressive overseas.
• Decoupling involves a range of tools and economic activities. Policymakers should quickly move to document and respond to Chinese subsidies, implement already legislated export control reform, monitor and possibly regulate outbound investment, and provide legal authority to move or keep supply chains out of the PRC.
• Decoupling has costs—higher prices, lower returns on investment, and lost sales. But they are dwarfed by the costs of continued Chinese economic predation and the empowerment of the Communist Party.

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Introduction

While the notion of economic decoupling from China has received a good deal of attention, there has been almost no action. President Donald Trump’s phase 1 deal is intended to expand trade, American investment in China has risen, and implementation of much-discussed technology restrictions has been repeatedly postponed. It is past time for the US to partly separate from the People’s Republic of China (PRC) across a range of activities, from importing to investing. This report suggests ways to do so.

American carrots aimed at improving Chinese economic policy date back to the start of World Trade Organization accession talks in the mid-1990s. Carrots ultimately failed, with pro-market reform in the PRC ending more than a decade ago. Market reform has no chance to restart as long as committed statist Xi Jinping remains the “core” leader, a position he seeks to hold indefinitely.¹ The true choice is a sharp change in American policy or more of the same from China, not delusions of Beijing as a partner it has no intention of becoming.

An obvious alternative is sticks—enacting across-the-board trade barriers, applying financial sanctions to bad Chinese entities, throwing out all Chinese students, and the like. But heavy Section 301 tariffs and a recent plunge in the PRC’s investment in the US, for instance, have not changed Beijing’s predatory development model at all.

Decoupling is a distinct, third approach. While some Chinese behavior certainly calls for punitive sanctions, the US should not imagine these will bring meaningfully better policy from Beijing. Decoupling is a recognition that America should drop the pretense of changing the PRC, instead restricting and shrinking the economic relationship for an indefinite period because parts of it are harmful.

The bulk of what follows concerns policy tools to shift supply chains, control exports, and alter other US-China economic links, as well as some costs of doing so. The starting point is indicating why decoupling is already overdue.

Read the full report.

Derek Scissors is a resident scholar at the American Enterprise Institue.