China and U.S. decoupling is a disaster for the whole world
Updated 19:18, 30-Oct-2019
Zeng Peiyan
VCG Photo

VCG Photo

Editor's Note: This is an excerpt from a speech by Zeng Peiyan, Chairman of China Center for International Economic Exchange, at the CCIEE-Brookings-LKYSPP international symposium, themed "U.S. and China: Forging a common cause for the development of Asia and the world." It reflects the author's opinions and not necessarily the views of CGTN. 

Decoupling is an expression that includes tariff hikes, decoupling in trade and investment and then in the supply chain, industrial chain, value chain, and decoupling in science and technology. This goes against the law of economics, international rules, and fair order. It is, in essence, an extreme expression of trade protectionism and unilateralism, which is quite concerning. If we let it go unchecked, it would be a disaster for both China and the U.S. and the whole world.

Decoupling will benefit no one 

Since last year, trade frictions launched by the U.S. against China have affected the economies of China, the U.S., and the world. China's economic growth rate in the first three quarters of this year was 6.2 percent. Under the impact of a relatively shrinking external demand, narrowing growth margins in foreign trade and more prudent business investments, China's economy faces greater downward pressure. 

There have also been signs of recession in the U.S. economy. Its economic growth rate in Q2 slid to two percent, and yields of the long and short-term treasury bonds have been inverted. PMI in September dropped to 47.8, the lowest since 2009. Globally, trade growth nearly stalled while financial risks are rising. IMF lowered its forecast for this year's economic growth rate to three percent, the lowest since the financial crisis in 2008. 

 It's evident that decoupling will cause extreme damage to the interests of businesses and consumers. Trade-in intermediary goods have accounted for two-thirds of the global trade volume. Imports and exports of goods between China and the U.S. and around the world have been conducted based on the optimized allocation of resources in line with market rules.  

Chinese made jackets for sale at a Manhattan department store in New York City, May 07, 2019. /VCG Photo

Chinese made jackets for sale at a Manhattan department store in New York City, May 07, 2019. /VCG Photo

Any decoupling is bound to increase production costs of businesses and cause losses to producers. The threefold increase of product sale costs brought by more tariffs, rising prices of intermediary goods and reconstruction of the industrial system will also result in losses for consumers. According to Peterson Institute for International Economics, a tariff hike of 25 percent on all Chinese exports to the U.S. will lead to additional expenses of around 2,000 U.S. dollars for every American household annually.

Decoupling will lead to a breakdown in the global value chain

China and the U.S. both enjoy important positions in the three global chains (industrial chain, supply chain, and value chain). If one forcefully gets out of the system, that will hurt the other, as well as itself. For instance, the U.S. threatens to cut off the chip supply to Huawei. It seems a blow only to Huawei, but actually, it has gravely undermined American companies like Qualcomm, Broadcom, and Intel, which supply chips to Huawei.

The idea of pushing for a decoupling between China and the U.S. and attempting to build an independent and exclusive industrial system has overlooked the complexity of the linkage of the three global chains, and huge costs will be paid. What stands behind "Made in China" has been a mix of human capital and factors with massive quantities and profound depth as well as huge and complicated industrial supporting capacities and systematic production capacities. It is a result, thanks to decades of hard work. 

Currently, it's very challenging to find such a complete system in other countries to offset the shortfall caused by the decoupling. Even if we found one, we would have to pay high costs for company relocation, infrastructure building, personnel training, and industrial chain rebuilding. It would be a long process of rebuilding the three chains, which would be impossible to achieve in the short or medium term. More importantly, such a replacement cannot change the status of the U.S. trade deficit. The fact that for the first half of this year, the trade deficit in the U.S., instead of going down, has increased by eight percent year-on-year, is a clear proof of that.

A Chinese flag in front of containers at the Yangshan Deep-Water Port, an automated cargo wharf, in Shanghai, China, April 9, 2018. /VCG Photo

A Chinese flag in front of containers at the Yangshan Deep-Water Port, an automated cargo wharf, in Shanghai, China, April 9, 2018. /VCG Photo

In a long-term perspective, to build another set of the industrial system, standards, and rules that reject the existing international cooperation is not in compliance with the market rule of optimized resource allocation and will substantially lower economic efficiency. Are American companies and people ready to bear such consequences of high costs and low efficiency? According to the statistics of the Rhodium Group of the U.S., investments by U.S. companies in China in the first half of this year reached 6.8 billion U.S. dollars, 1.5 percent higher than the same period of the previous two years. U.S. companies have made their attitude clear with their actions.

Decoupling goes against the trend of the era of the digital economy

Development and innovation of science and technology in the era of the digital economy is the process of succession and integration of systems, which cannot be completed on one's strength. Even if independence could be obtained at the technology end, it could not be achieved in the real sense of the application. 

Therefore, the development and innovation of new technology emphasize more than ever cooperation and sharing. Over the past decade, the share of papers written under international cooperation has risen significantly in the papers published in top global scientific publications.

China and the U.S. have the foundation for cooperation in the digital economy. The U.S. enjoys globally leading capabilities of scientific innovation, strong capacities in R&D in basic science, and a large number of high-caliber researchers. China, with its large population and vast market, has tremendous amounts of data and types of data and a complex structure of data. 

This has justified China as the most important place for incubation and application for scientific innovation. China's competitive capacity in digital equipment manufacturing can also offer help to the development of the information industry in the U.S. strengthened cooperation in science and technology serves the common interests of the two countries. 

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