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The case for strategic recoupling with China

Mon, 15 Nov 2021 07:33:00

The various shortages caused by problems with the global supply chain have provided the latest boost in momentum for an increasingly popular idea in Washington: making the American economy less dependent on China.

What policymakers refer to as “selective decoupling” is intended to protect the United States against some of the risks from China’s unsteady economy while also lessening the possibility that Beijing could use its economic tools coercively against Washington. In short, selective decoupling reduces two types of vulnerabilities: economic and strategic.

But one of the best, and most overlooked, ways to lessen China’s leverage is, counterintuitively, deeper coupling in certain areas. In other words, Washington should be playing offense, too, not just defense. Making China more dependent on the U.S. should be part of any strategic approach toward Beijing.

For several years, economic decoupling has been a main topic of conversation when it comes to China, but most changes have taken place at the margins. Data show that the American and Chinese economies remain deeply dependent on one another. Yet, leaders in both countries remain concerned about the potential for that interdependence to be weaponized. The Biden administration has therefore stressed the need to secure supply chains, while Beijing has talked about “dual circulation,” which would reduce its own dependence on foreign markets.

Chinese experts and officials generally blame this move toward separation on the Trump administration, but the reality is that its roots go much deeper. Beijing has long sought to avoid dependence on foreign companies in areas it deems sensitive. This has been particularly true in terms of information technology — just ask Google, Facebook, Twitter, and other U.S. technology companies that have effectively been barred from operating in China. In other words, the United States is a relative latecomer to the selective decoupling game.

But Washington is catching up. Over the past five years, American leaders from both parties have talked openly about the need for some degree of decoupling. Trump administration officials put in place tariffs on a broad range of Chinese products. They hoped that this would not just decrease Beijing’s leverage over Washington, but also shrink the U.S. trade deficit with China. Some officials, such as Peter Navarro, even endorsed tariffs as a tool to limit China’s ability to compete with the United States economically.

Although some experts have suggested that decoupling should explicitly be used to help the United States gain an upper hand in the ongoing Sino-American rivalry, many in Washington favor efforts to “run faster” by stimulating the U.S. economy rather than trying to slow down China’s growth. A key question that policymakers in Washington are now debating is whether American action alone can enable the U.S. to out-compete China, or whether it is also necessary to respond more forcefully to China’s unfair economic practices.

The Biden administration has thus far surprised many observers by keeping in place the vast majority of Trump’s tariffs. Early on, President Joe Biden appeared to accept the argument that selective decoupling could help reshape aspects of the U.S.-China economic relationship. Although Biden has been clear that he does not intend to use these tariffs to slow China’s growth, officials believe that it would be unwise to cede this leverage without gaining something in exchange. In addition, some Biden administration officials appear to believe that it is necessary to defend American industries by limiting trade in certain areas. This is essentially selective protectionism.

But the past few months have brought a shift in tone. U.S. Trade Representative Katherine Tai has promised “to chart a new course to change the trajectory of our bilateral trade dynamic.” Some expect this will lead to renewed efforts to expand trade with China, potentially by reversing decoupling. As Xi Jinping and Joe Biden try to set the relationship on a new course after their virtual summit, it is likely that Chinese and American trade negotiators will be looking for opportunities to decrease (although not eliminate) the tariffs both countries have put in place.

Skeptics warn that this could strengthen China’s hand and weaken the U.S.’s ability to protect its industries or penalize Beijing for its unfair economic practices. These are legitimate concerns. But if done right, these actions could actually increase U.S. leverage. There is no reason that the United States should deny itself a major instrument of potential influence over China. If carefully coordinated with key allies and partners, strategic recoupling with China could become an effective tool for shaping Beijing’s behavior.

Just as total decoupling from China proved unrealistic, complete recoupling would be equally unwise. After all, China’s leaders have demonstrated that they are willing to use economic leverage coercively, as U.S. allies in Australia and Lithuania are currently experiencing. Just as there is no reason that the United States should stop importing many cheap manufactured goods from China, there is also no reason that the United States should rely on China for critical components of sensitive systems. Microprocessors used in military applications and precursors used in pharmaceuticals are increasingly likely to be sourced from elsewhere.

The question now is when and where the two economies should be linked — and whether the United States can turn the tables on Beijing. After all, part of the logic of Xi Jinping’s “dual circulation” strategy is that it seeks to maintain foreign countries’ dependence on China, which gives Beijing both economic and strategic leverage. But China’s leaders did not invent the concept of weaponized interdependence. In fact, the United States has long been the leader in using various economic tools for strategic effects. We can use this tactic as well.

Strategic recoupling will require that U.S. leaders consider maintaining, or even deepening, China’s dependence in key areas, rather than seeking to cut off related exports. Yes, Beijing has been remarkably effective at innovating, copying, or stealing technology, but this cannot be done across the entire economy. China will remain deeply dependent on foreign imports and technology. No amount of effort by Beijing can circumvent this reality.

There is, however, a tension between short- and long-term objectives. Economic leverage can be used to shape behavior today or accumulated to provide influence that can be used strategically tomorrow. But there is a trade-off between the use and accumulation of economic influence. If U.S. leaders are hoping to alter China’s behavior in the near term, then it will be tempting to use all tools at their disposal. This may be necessary in certain areas, particularly those with military applications. But there must be a recognition that doing so comes at the cost of future leverage.

In the long term, it is in the United States’s interest that China continues to be dependent on America and its allies and partners for a wide range of goods. This is true both in high-technology areas, such as advanced semiconductors, but also in more basic but essential commodities such as agricultural products. One need not look any further than Australia to see how critical goods such as iron ore are to China, which gives foreign governments real leverage. Therefore, the offensive tool of strategic recoupling should be seen as a natural counterpart to defense-oriented selective decoupling.

If U.S. leaders are willing to embrace the concept of strategic recoupling, how might they go about implementing such policies? The first step would be a careful assessment of China’s economic dependencies, including which areas are most difficult for Beijing to ignore or offset. Ideally, this work would be done quietly in conjunction with a small set of allies and partners. These countries could then match their assessments to find the areas in which continued Chinese dependence on foreign goods might provide valuable future leverage. After these areas are identified, governments should move forward by strategically removing certain trade restrictions.

If leaders in Washington try to practice strategic coupling unilaterally, counterparts in Beijing will find it relatively easy to source many goods from elsewhere. Therefore, Washington must begin engaging foreign partners in discussions about coordinating efforts to heighten China’s dependence on certain foreign products. U.S. officials will have to bring together a handful of like-minded foreign leaders to coordinate their responses. This will not be easy. But it is a natural response to the pressure that China has put on a growing number of U.S. allies and partners.

There is, however, a political challenge involved — namely, how it looks in practice to the public. From the view of many on the outside, strategic recoupling will be hard to differentiate from accommodation. Some observers will no doubt claim that Washington is backing down in the face of pressure from Beijing. After all, U.S. leaders will not want to be explicit that they are loosening restrictions in an area to maximize China’s dependence on foreign products. It will be critical, therefore, that the Biden administration actively, but quietly, engages members of Congress and key outside experts to explain the logic of its approach in certain sectors and on certain products.

Some will argue that the United States should seek to cut China off from any product that might be necessary to China’s development. But the reality is that it may benefit the United States and its allies and partners for China to remain dependent on us for some specific products. Therefore, even those most concerned about recent Chinese behavior have reason to support deeper economic ties in certain areas. After all, China has shown that economic leverage can be effective at shaping the strategic choices of other actors, so turning the tables is clearly fair game.

Selective decoupling and strategic recoupling are two sides of the same coin. Both are important tools, and defensive and offensive measures can and should be used in concert. That is what Beijing is doing, so it’s time for Washington to get back in the game.