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US and China -- the great decoupling

Washington risks losing Asian allies by cutting back its economic ties with Beijing

| North America
Washington is committed to upending the foundation block of the global economy based on modernized Asian nations.   © Reuters

It is barely a decade since the publication of "The World Is Flat," the Thomas Friedman book which painted globalization as a seemingly unstoppable trend along with the enmeshment of the world's giant economies, the U.S. and China.

But if the world was ever flat, as The New York Times columnist insisted, it doesn't look that way anymore. In Washington at least, since the election of Donald Trump, the world has begun to buckle.

For evidence of this megatrend, look no further than the new phrase that has become the talk of Washington, of a "decoupling" between the U.S. and China.

Put simply, the U.S. has decided it should start to disentangle its economic relationship with China in key sectors in its own national interest and security.

But the U.S. should think carefully about how it goes about such a policy, as it comes with potentially debilitating flaws, particularly with Trump in charge. Since most of America's allies and partners in Asia, Japan, South Korea, Taiwan and Singapore and so forth, are far more integrated with China than they are with the U.S., they won't necessarily follow Washington's lead.

The economies of all four countries are intertwined and interdependent with China. They supply high-tech components, such as semiconductors, for the final assembly of products in China, often into factories which are owned by their multinationals. They also export into China.

Washington's new policy is to make its friends choose, between the U.S. and China, the last thing many of them want to have to do, particularly on the terms Trump is contemplating.

Trump envisages an extreme version of decoupling, to bring home to the U.S. supply chains of all kinds, not just those involving technologies integral to national security.

To take one example, Trump wants companies like Apple to relocate the final assembly of its iPhones and other products, now done under contract in factories in southern and central China, back to the U.S.

A narrower version of the same policy focuses on select product lines, technologies and capabilities which the U.S. government believes it must preserve on national security grounds.

The policy is already underway: The first batch of $50 billion of Chinese imports that Trump placed tariffs on earlier this year effectively make up a watch list of tech goods that the U.S. would like to see made outside of China.

However such a plan is finally designed, Washington is committing itself to upending the foundation block of the global economy since Asian nations began to modernize and grow in the 1950s, starting with Japan.

China represents the pinnacle of this model, in which Asian countries initially used cheap labor and subsidized capital to make themselves the final point of assembly for a range of goods, using the wealth generated to build advanced industries of their own.

The U.S. reacted with alacrity when Japan emerged as a direct economic competitor in the late 1980s, and pressed Tokyo to adopt all manner of export restraints and market openings.

But Japan and the U.S. were allies, which meant the two sides' trade wars were circumscribed by common security interests. China, by contrast, is a geostrategic, political and military rival, and a potentially much more formidable economic competitor than Japan ever was, if only because of its size.

U.S. policy toward China, once based on the premise that Beijing's embrace of the market economy would bring it closer to the western political model, has now been turned on its head.

In meeting after meeting in Washington in October, I was told that the U.S. had now decided that it would no longer, as officials put it, "enable" China's rise. Instead, the U.S. would pursue policies to protect its own interests much more directly.

This is where decoupling comes in, the idea that the U.S. government, either through tariffs or some other tax, will force U.S. companies in key technology and industrial sectors to manufacture almost anywhere but China.

The Americans argue, with much validity, that they are late to the game of decoupling. Beijing's signature policies to build and protect local industries, such as China 2025, are all aimed at displacing foreign technology, especially from the U.S.

Having benefited from an open trading system underwritten by the U.S., Washington says that the Chinese want to use their newly generated wealth to close strategic sectors of their economy to foreigners.

Ironically, the Trump administration's policies will only hasten China's own instinct to pull up the high-tech drawbridge and keep the U.S. out.

One case alone galvanized Beijing's policymakers -- the U.S. threat, since withdrawn, to punish the Chinese telecommunications company, ZTE, for breaching Iran sanctions by refusing to sell American technology to it.

So dependent was ZTE on U.S. semiconductors and the like that such a decision would have put ZTE out of business, and upward of 80,000 workers out of a job.

It is true that some regional countries might benefit from decoupling by luring multinationals now based in China to relocate to their countries. There is already evidence that Malaysia and Taiwan are trying to do just that.

But in trying to push China out of the global supply chain, Washington might end up hurting businesses in friendly countries, and their governments along with them.

Put another way, decoupling may be fine in theory, but, badly handled, disastrous for the U.S. in practice, politically and economically.

Far from bringing business out of China, America's decoupling plan might ensure the global supply remains anchored there after all.

Richard McGregor is a senior fellow for east Asia at the Lowy Institute in Sydney.

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