US-China partial decoupling is inevitable, and must be carefully managed to minimise disruption

In a US election year with the global economy battered by Covid-19, deteriorating relations between the two biggest economies have little hope of being mended
Given the political realities, constructive dialogue won’t be possible until after a newly elected US administration is inaugurated in January 2021

Stephen Olson

Published: 1:00am, 27 May 2020

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As 2020 commenced, White House political calculations on trade, China and President Donald Trump’s re-election campaign appeared firmly on track. The three-step political strategy was clear. First, present China as a country which has broken trade rules for decades, taking advantage of the naivety of previous US administrations to achieve its unprecedented economic rise.

Second, after pursuing a “get-tough” policy, including substantial punitive tariffs, conclude a phase-one trade agreement that obliges China to significant purchases of US products. Third, as US exports to China surge in the run-up to the election, position the US-China trade relationship as yet another “problem” that had been “solved” by Trump, and reap the political pay-off.

The strategy was entirely plausible from a purely political point of view. But the coronavirus pandemic has now completely upset the political apple cart, forcing an abrupt change in course.

Despite recent increases in agricultural purchases, the global economic slowdown spawned by the pandemic will make it virtually impossible for China to fulfil its phase-one purchase commitments. The agreement calls for China to increase purchases of US products this year by US$76.7 billion more than its 2017 purchases – a highly ambitious target under the best of circumstances.

This would require a 41 per cent increase in US exports to China, but in the first quarter of this year, US exports to China actually dropped by 10 per cent compared with 2019.

Beyond the trade frictions, the pandemic itself is threatening to blow up the broader bilateral relationship. As the death toll and economic costs of the pandemic mount, unusually harsh recriminations have been on the rise.

Trump has tweeted that “100 trade deals” would not make up for what he referred to as the “Plague from China”. Several senior administration officials have gone to great lengths to highlight the Chinese origins of the virus, and slam China for its lack of transparency and inability – or unwillingness – to prevent its spread abroad.

The administration’s critical views of China are evidently shared by the US electorate. According to a March opinion poll of Americans conducted by the Pew Research Centre, roughly two-thirds hold an unfavourable view of China.

China is now front and centre in the 2020 presidential campaign. White House trade adviser Peter Navarro has even gone so far as to say that the election will be “a referendum in many ways on China”.

While the US is losing friends, China must do better at winning them

What does the political chessboard now look like? Since China is unlikely to live up to its obligations, the phase-one trade agreement can no longer be presented as a success story. Worse yet, a “failed” agreement with China would make the president look guilty of the same gullibility of which he has accused previous administrations and would constitute an unacceptable political liability.

This will have policy implications. Trump has openly mused about slapping punitive tariffs on China, or even terminating the agreement outright, if China did not meet its purchase commitments. The political dynamics have shifted so dramatically that torpedoing the deal and going back on the “offence” against a strategic rival is, for Washington, increasingly appealing from a political perspective.

The pandemic has also robbed the president of his strongest re-election asset: a vibrant US economy. With the US tipping into what could be the deepest recession since the Great Depression, thanks to the virus, the political need for an external enemy to blame becomes that much greater.

China fits the bill. Trade war-related economic distress in the politically crucial Midwest has been compounded by high unemployment brought on by Covid-19. At the same time, there is virtually no significant political constituency in the US today (and certainly not in the handful of swing states that will decide the election) advocating for positive, proactive engagement with China.

China should rein in ‘wolf warrior’ diplomats and let its actions talk

Trump’s presumptive challenger for the White House, former vice-president Joe Biden, has attacked Trump for his “tough talk, weak action” on China, while Trump, a notorious political counter-puncher, has taken to referring to his opponent as “Beijing Biden” in political ads, and slamming him for his opposition to the administration’s early decision to suspend flights from China. The net result is that both candidates are trying to outflank the other in showing “toughness” with China.

Political calculations, public health fears, economic recession, broken trust and rising nationalistic antagonisms are a combustible mix that rarely produces enlightened policy decisions. Yet this is the cauldron we find ourselves in today.

04:12

Are Xi Jinping’s China and Donald Trump’s US destined for armed conflict?

The timing could hardly be worse. It has become increasingly clear that the level of deep economic integration that has taken place between the US and China over the past two decades is no longer sustainable. The optimism that accompanied China’s accession to the World Trade Organisation in 2001 now seems, with the benefit of hindsight, to have been unrealistic.

Profound differences between the US’ market-driven economy and China’s state-capitalism model have produced intractable frictions which are especially acute in strategic sectors and continue to defy resolution. While a complete economic decoupling between the two countries is neither desirable nor possible, a partial decoupling is inevitable and already under way.

The challenge is to successfully manage the partial decoupling, which would limit disruption and still allow for a level of integration that is economically and strategically sustainable.

Given the political realities, don’t expect to see constructive dialogue until after the newly elected administration is inaugurated in January 2021. In the meantime, the risk of a sharp deterioration in the bilateral relationship is probably higher than at any other time since the re-establishment of diplomatic relations in 1979.

For the remainder of the year, the best we can hope for is a holding pattern that limits unnecessary collateral damage. Cooler heads in Washington and Beijing need to work below the political radar to temper extreme policy options and keep the focus on successfully managing a challenging but necessary partial economic decoupling between the two countries.

Stephen Olson is a research fellow at the Hinrich Foundation

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