Washington has made it clear that it wants this economy to de-couple from China’s. American business wants the same thing, if not entirely then to a greater degree than in the past. Biden has a national security focus. Business has its own reasons. The efforts, however, are proving to be harder than either the government or business expected.
Apart from narrow interest groups, Washington, as it should, wants de-coupling to thwart Beijing’s ambitions — to rival this country on economic, diplomatic, and military levels. To lessen the economy’s vulnerability to China, that is American dependence on Chinese imports, and to promote domestic American sources of economic strength, Biden, in contradiction to his campaign promises, has kept in place the Trump tariffs on Chinese imports. The White House has also forbidden the export of advanced semiconductors to China and limited the extent to which Americans can invest in Chinese technology. It has also denied electric vehicle tax credits to any car constructed in China or containing a significant proportion of Chinese parts. Beyond these specifics, Washington wants to limit the vulnerability of the American economy generally should Beijing cut off global supplies of vital products, as it did during the Covid pandemic and even afterwards under its zero-Covid policies.
U. S. companies share some of those concerns, but their decoupling needs come primarily from other sources. The first is a question of cost. For decades, after China opened up to the world in the 1970s, one of the main reasons for sourcing from China and creating production facilities there was low production prices. But for some time now, Chinese wages have been rising faster than elsewhere in Asia and Latin America. China is no longer the country of low-cost airlines, which is vital in any business decision.
Reliability is another issue. Earlier on, China was considered supremely reliable, respectful of contracts and delivering on time. During the Covid pandemic, however, and for a long time afterwards under Beijing’s zero-Covid policies, Chinese producers failed to deliver in designated amounts or on time. What is more, Beijing, during the emergency banned the export of certain products, notably medicinal inputs and surgical masks. If these failures are understandable, American business wants to avoid such problems in the future. Still more recently, Xi Jinping’s obsession with national security has made it more difficult for foreigners to operate in China.
At first glance, it appears that those not unusual interests are making significant strides toward decoupling. According to the Census Bureau, Chinese production in 2017 accounted for 22% of all U. S. imports, while so far this year it accounts for just 13%. But those otherwise eye-catching figures mask some practical difficulties that save the United States from separating itself from the Chinese economy.
The challenge is that Americans, when they move their materials to Vietnam, Indonesia or even Mexico, realize that the maximum productive services are possessed by the Chinese. It appears that when Trump first imposed his price lists, many Chinese corporations opened facilities in other countries to avoid those taxes. According to the National Bureau of Statistics in Beijing, Chinese direct investment in Southeast Asia, for example, rose from the equivalent of about $7 billion in 2013, before the price lists came into force, to about $20 billion. in 2022, the recent maximum for which information has been published. They’re available. American corporations looking for opportunities for China in those countries are finding that the greatest productive characteristics have something to do with this Chinese investment. The products of those corporations, despite their Chinese involvement, appear in Census Bureau accounting as exports of the host country and not China. Of course, ownership matters little in finding economic relief from Chinese regulations and efforts to thwart U. S. economic gain, but it matters a lot whether Vietnamese, Indonesian, or other facilities require inputs produced in China, which is the case.
U. S. decoupling efforts will eventually triumph over this obstacle. Buying and investment trends, as well as sentiment surveys, show that the preference of U. S. corporations to diversify outside of China persists. corporations will move away from resources that remain dependent on China. At the same time, the comforts of those other countries – even Chinese-owned ones – will naturally depend, as they become more sophisticated and less dependent on Chinese resources. But for now, the wonderful decoupling that is so much talked about — in Washington and in business circles — will happen a little worse than Washington or business people would like.