China’s Response to Decoupling

Wenzhao Tao
(Researcher, Chinese Academy of Social Sciences )

Discussions about decoupling China and the United States have been going 
on for more than a year, during which time scholars from both countries 
and elsewhere have aired various opinions. The U.S. side hasnót given a 
formal definition.

But judging from the remarks and actions of President Donald Trump and his 
team over the past two years, the decoupling they envision includes two 

One is cutting off all exchanges between the two countries in all aspects 
and degrading bilateral relations to the level of the U.S.-Soviet Union 
during the Cold War. Trump has said that the U.S. reserves ǒcomplete decouplingō 
from China as a policy option.

The other scenario refers to a U.S. strategic orientation, meaning the U.S. 
would try its best to limit, restrain and reduce exchanges with China to 
suppress it in various ways.

The first scenario is unrealistic. Since China and the U.S. established 
diplomatic ties four decades ago, bilateral relations are no longer limited 
to government-to-government ones. They have become a complex and convoluted 
relationship between two societies, which canót be cut off with a single 
executive order by any government. The two countriesó economies have become 
inseparable owing to their very high mutual dependence.

China boasts tremendous development potential and is expected to continue 
contributing one-third of global economic growth in next decade. As a country 
of 1.4 billion people, it huge potential consumer demand is no doubt appealing 
to entrepreneurs.

So decoupling ultimately boils down to market behavior. Businesses are the 
main actors in the market, and they would be the ones to determine whether 
or not the countries should decouple.

An annual report by the American Chamber of Commerce in Shanghai indicates 
that U.S. businesses still consider Chinese consumers as a great opportunity.
 Despite trade and political tensions between the two countries, 92 percent 
of American companies have no plan to leave China, and more than  two-thirds 
of them say they will maintain current staff numbers. Only 4.3 percent of 
them intend to move back to the U.S., and those are rather small companies.

Through the past decades of globalization, China has become an integral 
part of the world economy. In recent years, in particular, it has worked 
hard to develop balanced trade; and trade with ASEAN nations and the European 
Union has continued to grow rapidly. The U.S. clamor about decoupling will 
disrupt global industry and supply chains, and has already stirred up profound 
anxiety in the international community.

Judging from Singapore Prime Minister Lee Hsien Loongós article in Foreign 
Affairs titled ǒEndangered Asian Centuryō and remarks by Angela Merkel and 
other EU officials, others wonót follow suit if the U.S. seeks to forcibly 
decouple from China. For U.S. allies and partners, China is an important 
economic partner. Trade ties with China are closely related to their economic 
growth, and their feelings about Chinaós rise are different from those of 
the U.S. While the United States worries about Chinese challenges to its 
global hegemony, other countries have no such concerns.

Of course businesses may come and go, and industrial layouts will be adjusted 
according to market conditions. But those are normal phenomena in a market 
economy, and have nothing to do with decoupling.

The second scenario ù a U.S. attempt to suppress China in various ways ù 
has already been unfolding over the past few years. American suppression 
of China is all-around but most of the focus is on technology, especially 
core technologies. For many years, the U.S. has led global science and technology 
from commanding  heights, boasting the most Nobel Prize laureates and the 
most patents. It remains the clear leader in technological innovation.

The American IT industry has been the absolute global pacesetter since the 
1990s, but in some areas, such as 5G and artificial intelligence, China 
has either overtaken it or is rapidly catching up. This is unacceptable 
to the U.S., which wants to preserve its monopolistic advantages in the 
most important fields of science and technology.

The key to China-U.S. competition, either in the economic sector or the 
military arena, is core technologies, and the U.S. will not willingly allow 
China to catch up or overtake it. The current focus is on chips.The Trump 
administration has issued multiple executive orders prohibiting U.S. government 
agencies and private companies from using Huawei technologies and products. 
It has barred U.S. companies from doing business with Huawei or supplying 
chips to Huawei, and is even blocking foreign companies using American technologies 
from expanding business relations with Huawei, on pain of long-arm sanctions.
 Ranking Trump administration officials have spared no effort to persuade 
European allies and partners to severe ties with Huawei, resorting to both 
carrot and stick.

Such attacks on a private company are unprecedented in the history of international 
relations. But the assault against Huawei does not hurt Huawei alone because 
it is a key client of American software suppliers. In 2019 alone, Huawei 
purchased $18.7 billion in parts manufactured by American companies. Cutting 
off relations with Huawei will deprive American businesses of opportunities 
to sell hardware and software, endangering tens of thousands of U.S. jobs.

A recent study by Boston Consulting Group shows that, over the long term, 
an all-around China-U.S. decoupling would result in U.S. chip manufacturing 
revenues shrinking by 37 percent, greatly reducing its global market share. 
Is the Trump administration ready to pay such a price by suppressing Huawei?

China has no choice but to cope with U.S. suppression of Chinese technologies.
 Its main countermeasure has been opening-up and innovation. That China 
defines the period since the Third Plenum of the 11th Communist Party of 
China Central Committee as the period of reform and opening-up shows the 
importance it attaches to opening.

Despite the U.S. trade war against China and the COVID-19 pandemic, as well 
as negative impacts on Chinaós international environment, the countryós 
commitment to opening-up hasnót changed a bit. China has further revised 
and shortened its negative list for overseas investors; the central government 
has pledged full support to Hainan province as it deepens reforms and opens 
up, as well as to building the entire island into an experimental free trade 
zone. Notably, Beijing just held the first offline post-pandemic international 
fair for trade in services and plans to build a comprehensive demonstration 
zone for an expanded service trade.

These moves provide evidence that Chinaós doors are opening wider to the 
rest of the world. This will no doubt increase its appeal to international 
economic and trade partners and serve as a powerful response to U.S. efforts 
to decouple.

And Chinaós efforts have paid off. Despite the impact of COVID-19 in the 
first eight months of 2020, the country took in 619.78 billion yuan ($91 
billion) of overseas capital, a 2.6 percent year-on-year increase. In August,
 84.13 billion yuan of overseas capital was used nationwide, an 18.7 percent 
year-on-year growth. Facts tell the tale.

After 40 years of reform and opening-up, Chinese economic growth has transitioned 
from high-speed to high-quality. And the main connotation of high quality 
is that it has mastered more core technologies. Innovation is the primary 
driver of quality growth. It is unrealistic for a big developing country 
like China to rely on large-scale imports of technologies from overseas 
to support long-term economic progress.

China is a big manufacturing country, but not yet a strong one, and the 
difference all lies in core technologies. The country will remain vulnerable 
without mastering core technologies. This is a problem we must resolve in 
building a modern country. Even without U.S. suppression, China would have 
to strive to grasp core technologies. And it has had some success stories 
to tell in recent years. In high-speed railway technologies, for instance, 
China has already developed some core technologies with indigenous intellectual 
property rights.

U.S. suppression of Chinese technologies will not ease in the foreseeable 
future, and bilateral competition in technology will be long-term. Chips 
and semiconductor technologies can be seen as Chinaós primary weakness and 
a key area awaiting a breakthrough to deal with the technology war the U.S. 
has launched.

Suppressive policies by the United States will bring some difficulty to 
China but will at the same time inspire us. The state and domestic enterprises 
will increase inputs; society will be more respectful of knowledge and talent; 
state policies on IPR protection will be improved.

With the Chinese peopleós solidarity and wisdom, difficulties will be temporary 
and surmountable. The U.S. attempt to contain Chinaós development via decoupling 
will only end with the U.S. eating the bitter fruit it has cultivated.

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