On Wednesday 14 October, Xi Jinping visited Shenzhen to mark 40 years since its establishment as China’s first special economic zone (SEZ), which the president dubbed “a miracle in world development history”. The creation of the SEZ in 1980, when today’s futuristic metropolis of 13 million inhabitants was a fishing village, was an early landmark in the opening up of the Chinese economy under Deng Xiaoping, and with it came probably the biggest economic story of our time: the integration of the Chinese and US economies.
US capital streamed into Shenzhen and other manufacturing centres and the output of their factories streamed back across the Pacific and into the hands of US consumers, a process particularly accelerated when China joined the World Trade Organisation in 2001. Supply chains for computers and other electronic products criss-crossed the Pacific – a large part of Apple’s production takes place at the Longhua complex on the edge of Shenzhen – and as China became wealthier, more investment started to flow in the other direction, into the US economy, where Chinese investors hoovered up stakes in car makers, technology firms and energy generation. China also used its surplus of US dollars to buy American debt and keep down the value of its own currency, the renminbi, becoming the biggest foreign holder of Treasury bonds.
Now, however, parts of the process that began in Shenzhen in 1980 are going into reverse. The pulling apart of the world’s two biggest economies, often dubbed a “decoupling”, could prove at least as decisive for the following decades of world affairs as the integration was for the past four. It is a multifaceted and nuanced story. The decoupling is stark in some areas and less pronounced (or not present at all) in others. Some elements of the process are the result of political choices, notably Donald Trump’s trade war, but many are structural; some play into the narrative of looming, near-inevitable conflict between the two superpowers as China’s rise continues; others point in different directions. So now, as the US approaches an important presidential election on 3 November and questions about its wider future abound, the New Statesman Media Group is joining forces to tell that story.
Investment Monitor has dug into the numbers to explain how and where the decoupling is taking place. Click here to read Investment Monitor senior editors Viola Caon and Sebastian Shehadi on the declining trade and investment flows between the US and China, and here for analysis of individual US states’ tortured relationship with China. At Tech Monitor, a new sister publication of Investment Monitor focusing on the tech industry, editor Ed Targett has reviewed the growing impact this shift is having on technology supply chains.
Here on the New Statesman’s international team, US editor Emily Tamkin reports on China as a factor in the presidential election campaign. International correspondent Ido Vock has charted the ways in which the flow of people and culture between US and China’s societies may have levelled off or may even be in retreat. And below are my reflections on the geopolitics of US-China decoupling, and what it means for global affairs in the coming years and decades.
Debates about the US-China economic relationship usually come down to one core question: what is the relationship between the geopolitics and the economics? The optimistic view in the 1990s, as Shenzhen and other Chinese manufacturing centres took off and export volumes across the Pacific expanded, was that the economics dictated the geopolitics; that by knitting together the two economies the US and China would have too many shared interests to come into conflict.
This suited the thinking in Beijing, where the “new security concept” that took hold in strategic circles in the years following the end of the Cold War preached the benefits of mutual security, cooperation, trust and common interests. It also suited the thinking in Washington, where in the wake of Bill Clinton’s watershed trip to China in 1998 an optimistic new consensus was summed up in Thomas Friedman’s 1999 book The Lexus and the Olive Tree, which popularised the “Golden Arches theory of conflict prevention” whereby “no two countries that both had McDonald’s had fought a war against each other since it got its McDonald’s”. The theory rested on the assumption that highly integrated countries with sizeable middle-class populations capable of sustaining branches of the US fast-food chain had too much to lose by entering into conflict. (Shortly after the book’s publication, American planes bombed Belgrade, home to seven branches of McDonald’s at the time; residents even used one of them as a bomb shelter.)
Less explicitly, it also summed up another assumption, namely that the rise of China and other emerging economies would happen in a US-led geopolitical order; that China could become rich without becoming challengingly muscular.
This optimism continued well into the 2000s, as trade soared following China’s entry into the World Trade Organisation and attitudes on both sides acknowledged that with the country’s rising prosperity came both greater leverage over the US and geopolitical power in the world. The “new security concept” of the 1990s informed the more thrusting notion of “China’s peaceful rise” promoted by Beijing under Hu Jintao from 2003; a mix of friendliness and wariness echoed back from Washington in urgings that China be a “responsible stakeholder” in the global order, a term coined by then deputy secretary of state Robert Zoellick.
Both countries were weighing up the intertwining of economics and geopolitics in a new symbiotic reality christened by the historian Niall Ferguson in 2006 as “Chimerica”; whereby American consumers fuelled a Chinese export boom, which Beijing recycled into US government debt that kept interest rates low and American consumer spending high. Larry Summers called this interdependence a “balance of financial terror”, where China relied on US spending and the US relied on Chinese financing.
All of these concepts – peaceful rise, responsible stakeholder, Chimerica, the balance of financial terror – speaks to a “what if?” 2000s in which the optimistic old assumptions of the 1990s, like the Golden Arches theory, were being questioned on both sides of the Pacific, and the risks of alternative realities were being tacitly acknowledged. That was particularly the case after the global financial crisis. Reflecting on Chimerica in 2009, Ferguson wondered whether it would speed up China’s rise and delink it from American consumption. With Beijing “relying less on exports to the US market, caring less about its currency’s peg to the dollar”, he theorised, “the end of Chimerica would have arrived, and with it the balance of global power would be bound to shift… China would be free to explore other spheres of global influence.”
The 2010s were the decade in which the “what if?” became a “what now?” They began with China overtaking Japan to become the world’s second largest economy and ended with it being within striking distance of overtaking America to become the largest (a feat already achieved in measures of purchasing power). They were the decade in which, in the process, geopolitics started to dictate economics, and the integration, by some measures, peaked and started to decline.
It is often assumed this began in the US with the election of Donald Trump. But some of the trends were already under way during the Obama administration, with the recognition that China posed a geopolitical challenge in the Indo-Pacific and was undermining US strength by sapping its manufacturing base. A 2016 assessment of its record on China noted that “parts of American public opinion have degenerated into hostility” and that “the incumbent superpower undoubtedly feels under pressure”. The “pivot to Asia” and the Trans-Pacific Partnership under Obama were partly conceived as (and understood by Beijing as) efforts to contain China. Obama had encouraged the reshoring of manufacturing from China to the US and took aim at unfair Chinese subsidies for industries that threatened American jobs.
But it is accurate to say that Trump has presided over the move towards decoupling. Having won the 2016 election in Midwestern states whose economies have been particularly affected by the economic integration of the two countries, the president imposed tariffs on Chinese goods in 2018, on some $250bn of imports. The result was a fall in the volume of trade between the two countries in 2019 (when America’s trade volume with both Mexico and Canada exceeded that with China).
Chinese firms got the message: there has been a precipitous fall in Chinese investment in the US, and while US investment in China remains flat overall, it has fallen in crucial areas such as information and communications technology, machinery and financial and business services. The decoupling has been particularly stark in the technological sphere, amid concerns about the Chinese appropriation of US intellectual property, and with the forced sale of the American operations of TikTok (a Chinese video app) and a blacklisting last year of the Chinese telecoms giant Huawei (which was founded in Shenzhen and whose founder and CEO Ren Zhengfei was in the audience for Xi Jinping’s speech there last week). US technology companies such as Apple, Microsoft and Google are all reportedly looking to move their supply chains out of China.
Part of this is down to Trump, who has called for tariffs since the 1980s. But another big part is down to the raw geopolitics. If the 1990s were the era of the Golden Arches theory, and the 2000s the era of the peaceful rise and Chimerica, then the 2010s were the era of the “Thucydides trap”. This is the notion popularised by the Harvard political scientist Graham Allison in 2012 that describes the historical pattern whereby war almost always follows when a rising power threatens to displace a sitting hegemon. America recognises China is now a challenger power.
In an era when so much about politics and production is determined in the digital space, this is leading not only to a stalling or a reversal of aspects of the trade and investment integration between the two powers, but also a “splinternet”, whereby the hardware and software elements of the next step forward in the communications revolution is being bifurcated into an American-led system and a China-led system. It says much about the structural (rather than political) character of this shift that, as Emily writes, it is unlikely a Biden win on 3 November would greatly alter the course of US-China relations.
What is less well known in the West, but also significant, is that China too – while protesting Trump’s trade war measures and playing the “responsible stakeholder” – has also shifted its attitude towards the economic interdependence of the two powers. A centrepiece of Xi’s vision for the country is the “Made in China 2025” strategy, launched in 2015, which envisages the country not just making technological products but also designing them in the first place, and not only assembling the most high-tech parts, but producing them (chips, especially) as well.
The China expert Julian Gewirtz describes three schools of thought in the Chinese elite today: those who embrace the ongoing interdependence of the two economies; those who think Beijing should use that interdependence to “win” the trade war; and those who want to cut the dependence. The momentum, he writes, is with the latter group: “Even if Xi would like to temporarily de-escalate the trade and technology conflicts, there is now powerful momentum behind what we might call a ‘security-first’ future for US-China interdependence.” Gewirtz quotes a warning from China’s former finance minister Lou Jiwei, a member of the pro-interdependence group: “The next step in the frictions between China and the United States is a financial war.” Beijing is desperate to give the renminbi the international power of the dollar and could yet unleash the “financial terror” identified by Summers more than a decade ago.
What comes next really depends on whether the geopolitics have firmly succeeded the economics, on whether the Thucydides trap has replaced the Golden Arches theory (China currently has 2,391 branches of McDonald’s, more than any other country except the US and Japan) of foreign relations. This NSMG feature does not pretend to have a certain answer that question. It tells a complicated story, of US-China entanglement in some fields but not in others. But it is only fair to note that the events of 2020, this opening year of a new decade, point heavily towards the decoupling narrative.
Covid-19 began in China, in Wuhan, and Beijing’s opacity about the pandemic hugely undermined international trust in it. Meanwhile, the past year has also seen the country’s diplomats (some of whom have taken a newly belligerent tone dubbed as “wolf warrior diplomacy” after a trashy action film) and its military (which has taken harassment of Taiwan and neighbours around the South China Sea to new heights) adopt a newly aggressive stance towards the US and its allies. Beijing in June imposed a new Security Law in Hong Kong that cracks down on the protest movement and other freedoms in the very city that has often acted as the economic portal between the US and China; Xi has made it clear that he wants Shanghai to eclipse Beijing as Asia’s pre-eminent financial centre. In the US, legislation responded by stripping privileges from Hong Kong and gave the administration the power to impose sanctions on Chinese officials. This year also saw China ditch more of its US debt holdings (Japan had already overtaken it last year as the largest foreign holder of Treasuries). The financial war that Lou warned of may now be under way.
If Biden wins, the Democrats too are more wary of China’s rise. They are more concerned by Beijing’s human rights abuses, especially against the Uighurs in Xinjiang, than the Trump administration has been. A Biden White House might pursue a more multilateral counterweight to Beijing, especially by paying more sincere attention to the emergent Indo-Pacific alliance, but it would not drastically shift the American foreign policy course. Meanwhile Beijing too is pursuing the logic of decoupling: recent manoeuvres by the People’s Liberation Army suggest Beijing may be mulling an invasion of Taiwan in the event of an inconclusive result at the US election on 3 November. In early October it handed out some $1.5m – in Shenzhen, of course – to test a digitisation of the renminbi that Chinese officials hope will help lead to a counterbalance to the dollar.
So if the 1990s were the decade of the Golden Arches theory, the 2000s the theory of Chimerica and the 2010s the decade of the Thucydides trap, what will the 2020s bring? The spectrum of conceivable possibilities ranges from a new affirmation of mutual dependence and a de-escalation of tensions, probably focused on a common commitment to decarbonisation, to some form of localised war (especially if China invades Taiwan) threatening to spill over into global conflict. Our own decade’s Big Idea about US-China relations is yet to emerge but if I had to predict one I would invoke either “decoupling” pure and simple, or something related like “spheres of interest”. The US remains the world’s dominant military power and largest economy, but wants to pull back from some of its commitments and focus on the contest with the rising power. And China is indeed rising, but is most concerned with establishing a clearly demarcated zone of influence.
So the nice ideas of the 1990s and 2000s can be put to rest. And it can be assumed that there will be some sort of contest between the two. But it is not likely to be direct (on that point the Golden Arches theory lives on). More probable is that the contest will force a choice for other countries and technology platforms; between the US and China, between Silicon Valley and Shenzhen. Some forms of bilateral trade and investment may continue healthily. But others, especially those relating to strategic sectors, will continue to decline. The great US-China economic synthesis is over. Decoupling is the new reality.
Look out for the next episode of our World Review podcast, on which Emily and I will be joined by Courtney Fingar of Investment Monitor and Sommer Mathis of City Monitor (another new NSMG site, focused on urbanism) to discuss US-China decoupling and other mega-stories that define the backdrop to the US election.
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