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US-China decoupling is more rhetoric than fact -- for now

Technology barriers are going up, but economic relationship is deep and complex

| China
The U.S. and China remain much more coupled than uncoupled.   © Reuters

The casual, nonchalant and, for some at least, apparently satisfying deployment of the term "decoupling" to describe the current trajectory of the U.S.-China relationship reminds us of the classical wisdom that in foreign policy, words are bullets.

Indeed, decoupling has become the term of the moment for U.S.-China relations, reflecting for some the unfolding reality of the relationship; for others, its desired destination. This is despite neither the U.S. nor the Chinese governments deploying the d-word as part of their official vocabulary.

This simplistic debate reminds us that in international relations, language can reflect realities just as easily as it can create them. In the Great Decoupling debate now raging, contingency plans are being generated against a range of economic scenarios just in case decoupling actually comes to pass.

This, in turn, heightens the danger of these plans actually being activated in response to minor provocations, thereby creating a cycle of action and reaction which could eventually spiral out of control.

Those supporting comprehensive decoupling between China and the U.S. are seeking to create the conditions for a substantive rather than rhetorical second cold war, but the complex connections which actually exist make decoupling harder than the liberal use of the term might suggest.

China will have noted that neither Secretary of State Mike Pompeo nor Vice President Mike Pence in their hard-hitting speeches on China actually embraced any form of economic decoupling. Indeed Pence explicitly ruled it out. But the open question is whether Beijing accepts these assurances at face value, given the complete collapse in political trust between the two sides over the last couple of years.

The irony is that whereas President Donald Trump's administration may indeed be genuine when it says it does not want economic decoupling with China, it may be President Xi Jinping's administration that initiates the process in the name of national self-reliance -- in anticipation of future and further American action.

A sense of vulnerability can do strange things to people, just as it does to states. China could combine a push for greater self-sufficiency, where it can succeed in doing so, with a new, more accommodating international posture toward its non-American friends and partners around the world.

China would seek to offset its vulnerabilities in export, technology, talent, foreign direct investment and capital markets in the U.S. by seeking strategic economic alliances in Europe, Japan, Korea, India, the Gulf, Southeast Asia and countries of the Belt and Road Initiative. Indeed, the emerging pattern of China's economic diplomacy suggests that it has already begun to do so.

This is despite the actual state of U.S.-China decoupling being mixed. Indeed, the U.S. and China today remain much more coupled than uncoupled, with large mutual export markets. Foreign direct investment represents a different story where Chinese investment flows to the U.S. have dried up.

Decoupling is likely to become more acute in technology markets, product regulation and industry standards, as a reflection of U.S. national security concerns but also because of China's desire to maximize its self-reliance.

Capital markets provide a radically different story again where the sheer magnitude of mutual self-interest -- a combined $5.1 trillion relationship -- appears to be militating against any significant decoupling. This is reinforced by China's increasing liberalization of its capital markets, driven in part by the country's emerging current-account deficit.

As for talent, the early signs are not encouraging as U.S. visa restrictions begin to bite, Chinese students head to Europe in greater numbers and China itself begins canceling research collaboration with foreign universities.

So, where to from here? After a debilitating, 18-month-long trade war, it appears that both sides have stopped, stared into the abyss and concluded that it is a very long way down and that many people on both sides could get seriously hurt -- without any real lasting benefit to anybody.

Given that both presidents have an interest in strengthening their respective economies in the year ahead, we are likely to see a phase one deal by the end of 2019.

As for a phase two deal, it is probable it will be agreed next year. If so, it would need to be accompanied by the elimination of all tariffs. This is China's bottom line for policy concessions on intellectual property, technology transfer, state subsidy of Chinese companies and market access. Removing all tariffs may be too difficult in a presidential election year, in which case negotiations may continue through 2020.

Resolving or reducing the scope of the trade war is one thing. But that will not of itself mean the end of the technology war, the talent war, declining flows of Chinese foreign direct investment or emerging uncertainties on currency. These wars are likely to continue in response to political and regulatory toughening in both countries.

The danger of a negative spiral therefore remains. Some decoupling is now unavoidable. But full-scale decoupling does not at this stage seem probable.

This piece was adapted from the Robert F. Ellsworth Memorial Lecture at the University of California-San Diego.

Kevin Rudd is President of the Asia Society Policy Institute and a former Prime Minister of Australia.

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