US and China are in the process of economic decoupling, driven by geopolitical tensions and policy changes. What does this mean for global trade, impacts trade, technology, and financial flows,?
The relationship between the US and China is undergoing a significant transformation, marked by a shift towards economic decoupling. This process, resulting from geopolitical tensions and policy changes, aims to disentangle the deeply intertwined economic relations that have existed between the two superpowers for decades. The decoupling encompasses a broad spectrum of areas, including trade, technology, and financial flows, and reflects a growing consensus in Washington that there is a need to address Chinese expansionism and its implications for global economic stability and security. Ultimately, this of this transition will have a profound effect on global trade and economic diplomacy.
The Covid-19 pandemic served as a catalyst for a significant shift in US-China relations, exacerbating existing tensions and raising several important questions for policy-makers. The emergence of “wolf warrior diplomacy” and the imposition of the National Security Law in Hong Kong, prompted a debate in the US on the need for a more assertive form of economic statecraft, and policies of containment. As a result of this, the next years have witnessed a gradual departure from US’s efforts to negotiate a balanced economic relationship and move towards a strategy of decoupling.
Most prominent are efforts for economic separation in the tech sector – with US restricting sale of critical items such as semiconductors and artificial intelligence chips to the Chinese – but also in terms of investments, communications, manufacturing and chemicals. This process can have a significant effect on global trade, impacting availability of certain goods and services, and posing potential risks for both economies’ growth capabilities.
Bilateral trade has witnessed a significant downturn, with a 22% fall from a peak in September 2018 due to Beijing-Washington heightening tensions. On the investment front, Chinese outbound Foreign Direct Investment (FDI) to the US has dwindled to negligible levels, while US FDI into China remains within its historical range but is modest in the context of the broader economic relationship. Going further, enforcement of compliance with listing standards on US capital markets could lead to the delisting of Chinese-based companies from US exchanges. Conversely, China’s attempts to attract foreign participation in its capital markets face increasing resistance from US policymakers, who express concerns over potential economic leverage and geopolitical expansionism.
Another significant development is the emergence of the digital Yuan – seen as China’s preemptive move to circumvent potential restrictions on access to the US dollar payment system. The introduction of the digital Yuan by China represents a significant milestone in Beijin’s financial decoupling from Washington. This move would reduce China’s reliance on the US dollar-dominated global payment system, thereby mitigating vulnerabilities to potential US sanctions or financial restrictions. Transitioning to a digital currency will allow China to safeguard its economic sovereignty in an increasingly fragmented global financial landscape.
As both nations recalibrate their economic strategies, the potential for a bifurcated global economy becomes increasingly likely. This division could lead to the emergence of distinct economic blocs, influencing global trade patterns, technological standards, and financial systems. Politically, this change also signifies the removal of economic obstacles for continuing tensions and escalation, and the possibility of building separate alliances to achieve geopolitical objectives. The importance of this shift should not be underestimated, as China and US’s roles as superpowers have significant effect on international relations, economic diplomacy, and global balance.
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