DESPITE YELLEN, U.S.-CHINA DECOUPLING HAS MOMENTUM OF ITS OWN / THE WALL STREET JOURNAL

Despite Yellen, U.S.-China Decoupling Has Momentum of Its Own

U.S. and Chinese officials have a small window to stabilize economic ties before the political calendar in both the U.S. and Asia starts driving events

By Nathaniel Taplin

U.S. Treasury Secretary Janet Yellen arrived in Beijing last week. PHOTO: MARK SCHIEFELBEIN/AGENCE FRANCE-PRESSE/GETTY IMAGES

Treasury Secretary Janet Yellen, who visited China this weekend, is determined to convince Beijing that Washington doesn’t want wide-scale economic decoupling from China.

If she and other like-minded administration officials succeed in stabilizing Sino-U.S. ties over the next half year—before presidential elections in both the U.S. and Taiwan—that would remove a major risk factor for markets in 2024, to say nothing of the world at large. 

But a partial decoupling of the two economies has strong momentum of its own now. And China’s unexpected economic weakness this year—along with the U.S. economy’s surprising resilience—may further embolden hawks in Washington.

Students of international relations will be familiar with the concept of the security dilemma, whereby actions meant to boost security—for example, raising military spending—sometimes damage a nation’s security over the long run, because rivals conclude it is preparing for war and take countermeasures.

An economic twist on the concept might go something like this: The world’s two largest economies, both increasingly worried that armed conflict is inevitable at some point, begin pulling apart their long-intertwined technological and trade supply chains. 

Over time, much weaker economic and interpersonal links hand more and more influence to security hawks in both capitals. 

Meanwhile the economic impacts of disentanglement ultimately damage growth in both nations, in different ways, and fuel populist politics. 

That makes managing unexpected crises more difficult.

Yellen’s painstaking efforts to reassure are probably aimed, at least in part, at avoiding precisely such a scenario. 

In comments to CBS on Sunday, Yellen told viewers, “My purpose is to make sure that we don’t engage in a series of unintended escalatory actions that will be harmful to our overall economic relationship.”

Beijing is sending some obvious signals of its own: The announcement of plans for new export restrictions on minerals gallium and germanium, both important for tech and defense applications, was a clear sign that if the U.S. continues strangling China’s chip sector, it won’t be cost free.

One problem is that while the Chinese and American economies are still deeply entangled, the impact of the fraying relationship on supply chains has already been very significant. 

And as Apple’s moves in India show, “de-risking” is now being driven by major corporate actors and not just politicians.

Imports from China as a percentage of total U.S. goods imports fell below 12% in March. 

That was, excluding March 2020 at the onset of the pandemic, the lowest level since 2005, according to figures from data provider CEIC—and down from over 20% as recently as 2018. 

Over the same period, U.S. imports from Taiwan and Vietnam have roughly doubled their share to about 6% of the total. 

Some of these shifts may represent Chinese goods being “repackaged” in third-party countries, but even so the 2018 and 2019 tariffs, uncertainty over future tech-sector restrictions and the general downturn in relations have already had a large effect.

Another reason for pessimism is that while the White House is eager to avoid a full breakdown in relations, the U.S. has a clear upper hand economically right now—and that may tempt hawkish administration members to keep pushing for additional restrictions, like the ones on investment and artificial-intelligence chips reportedly under consideration.

China’s post-Covid recovery is shaping up to be far weaker than expected, and while it does have clear points of economic leverage—for example, plane orders for Boeing and key points along the battery and solar supply chains—the U.S. and its allies’ dominance of the entire chip sector limits its options for retaliation in semiconductors.

Even the mooted controls on Chinese gallium and germanium may be something of a red herring. Analysts at the Center for Strategic and International Studies, a leading Washington-based security think tank, conclude that China’s gallium restrictions may be “mostly symbolic,” in part because there are other significant suppliers and processors, including core U.S. allies like Japan. 

China may succeed in raising costs for U.S. users by forcing transshipments of such goods, but in general restricting trade flows of commoditized items is very difficult—just look at what has happened recently with Russian oil, or U.S. efforts to keep low-tech semiconductors out of Russia.

The optimistic view of the weekend’s visit is that more direct contacts between high-level U.S. and Chinese officials is, in and of itself, an essential lubricant to the relationship. 

But ultimately, it may take some incident in the South China Sea or Taiwan Strait to focus minds in both capitals on the real downsides of a further deterioration in relations.