Index > Briefing
Wednesday, May 27, 2020
U.S.- China Decoupling Heads Towards Institutionalization

The relations between the United States and China have seen a sharp deterioration amidst the Covid-19 pandemic. While both countries are no strangers to disputes in the past and have escalated to the point where diplomatic etiquette matters little, this marks the one time where bilateral relations between the world’s two largest economies may be at its worst since its establishment. Clearly, this spells a potential geopolitical disaster for the rest of the world.

Have China and the United States started a Cold War? And if it isn’t so, will they move towards one?

ANBOUND’s chief researcher Chan Kung had expressed that both countries were not involved in a Cold War. An important feature of the Cold War that took place between the United States and the Soviet Union previously was the presence of an order. Common cold war order includes treaties, alliances, exchanges and principles in espionage wars, arrangements and groups for close economic relations, ideology and consensus, division of camps, and supporters. During then, there were also two opposing military alliances, namely NATO and Warsaw. Compared to the Cold War between the United States and the Soviet Union, China possess neither of the trait associated with a Soviet camp, thus a Cold War does not exist now.

That said, the international environment in which China is in now, is one that is rife with suppression from the United States and other countries. Judging by Trump administration's suppression against China and Chinese companies, save for a few policies such as strategic adjustments to China (i.e. the U.S. National Defense Strategy Report), most measures of suppression are not systematic and are without regulations; more often than not, they are situational.

One thing is certain however, and that is the decoupling between China and the United States is worsening.

The decoupling of both countries isn’t something that either side of governments wishes to see. In a speech titled “Delusions of Decoupling” in 2019, former U.S. Treasury Secretary and Chairman of Goldman Sachs Henry Paulson expressed strong concerns about the possibility and trend of decoupling between the United States and China, and warned of its impact and huge risks. As an elite from Wall Street, Paulson’s views represent the views of the proponents of globalization. The risks he pointed out include:

The "zero-sum” notion of competition in the military field that is replacing the "positive-sum" of healthy economic competition. China and the United States are under increasing pressure to decouple in four areas, namely flows of goods, capital, people, and technology. While both countries have denied news of decoupling, they are moving towards the wrong direction, one of decoupling. Once this happens, the economic iron curtain will fall. Two, the decoupling will diverge Chinese and American technology and standard systems. If the world's technology and standards system are torn apart, other countries cannot participate in each other's economic activities or build cross-border supply chains, which is what today's global business depends on. The global innovation ecosystem will fall apart, thereby destroying the supply chain that connects economies. Three, China needs to further open-up and resist the urge to protect domestic enterprises, as should the United States, since decoupling will not help its leadership and central position.

Unfortunately, it appears that Paulson’s concerns are coming true, and the decoupling is no longer a mere concern, but a reality. In the past, U.S.- China frictions were mainly reflected in the trade war. Now, it has completely extended to the financial markets, science and technology, and many more. Michael Howell, an American investor and CEO of Crossborder Capital, warned that the novel coronavirus crisis will accelerate capital, trade and technological wars between the world's two largest economies. He believes that the initial trade agreement between China and the United States is under threat and there may even be a new battlefield - investment capital. He believes that the real imminent tension is not just the trade war, but also the capital war.

As a matter of fact, the financial war has already begun. On May 20, the U.S. Senate passed the Holding Foreign Companies Accountable Act. The bill states that if foreign companies listed in the United States fail to comply with the U.S. Public Company Accounting Oversight Board (PCAOB) for three consecutive years, they will be delisted. One possible outcome of the implementation of the bill is to prevent many of the Chinese companies from listing on U.S. exchanges. There are multiple indications that the U.S. capital market will close its doors on more Chinese companies. In fact, various institutions in the American society have begun strengthening financial control measures against China.

The decoupling of technology too has already begun. The United States has placed large numbers of Chinese companies on the list of sanctioned entities, and there is the global blockade of Huawei and 5G technology. The restrictions in the field of technology and education in the U.S. against China, both explicitly and implicitly, are more intense than the U.S.’ previous policies. Recently, President Trump even threatened to cut off U.S.- China relations completely. The latest decoupling measure is that the U.S. Bureau of Industry and Security (BIS) announced a plan on May 15 to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad.

Final analysis conclusion:

Geopolitics has never been an easy game. Instead it is a game of power struggles based on specific interests. Judging by how much the U.S.- China relations has deteriorated, it is safe to say the decoupling of both countries is taking a turn for the worse, and it is showing increasing institutional characteristics. This means that once the decoupling of China and the United States is promoted on a legislative and systemic level, the negative effects caused by such decoupling will be solidified and long lasting.

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