Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The US-mainland China relationship that has underpinned
globalization for decades has begun to unravel, with far-reaching
consequences for business operations around the world. A dispute
that centered around commercial issues of trade, investment,
currency, market access, and intellectual property rights as
recently as 2018 has rapidly expanded to into a broad political
rivalry that encompasses geopolitical alliances, state security,
and public health.
Through October our Economics & Country Risk group will be
exploring two scenarios for the 'decoupling' of the world's two
largest economies. A qualitative narrative rooted in country risk
coverage over the last three years will be modelled in our
Global Link Model (GLM) of 68 major economies and 57 industrial
sectors. As with any scenario, we consider economic dependencies,
pathways, and focus on which sectors are most affected to identify
business impacts and indicators to monitor that give early warning
of those impacts. We begin with an analysis of political
drivers.
Political drivers
Trade to geopolitical rivalry
Decoupling is not new. Over the last decade China has been the
more proactive 'decoupler'. The Belt & Road Initiative (first
announced in 2013), the Make in China 2025 industrial policy
(2015), and efforts to internationalize the renminbi (bilateral
swap arrangements with Japan, South Korea, and some ASEAN countries
were established in the early 2000s) can be seen as a clear-eyed
mission to reduce China's dependence on the US.
But the speed and range of US actions over 2020 have made
decoupling an urgent strategic issue. Just this year, the US
government has, for example, blocked semi-conductor supplies to
Huawei; called for divestment out of US-listed Chinese entities;
sanctioned senior Chinese officials; sanctioned 24 Chinese
state-owned enterprises; sent a senior official to Taiwan for the
first time since 1979; and substantially increased force levels in
the South China Sea. In a speech in late July, US Secretary of
State Mike Pompeo moved the US attitude to China from
'pro-engagement' to 'distrust and verify' - riffing on President
Ronald Reagan's 'trust and verify' attitude towards the Soviet
Union during the Cold War.
US resolution may alarm the Chinese government in at least two
ways. First, it seems to have wide and deep bipartisan support. A
Democratic administration in 2021 is likely to maintain the
direction of policy even if it adopts a more consultative,
multilateral approach. Second, US action has quickened the resolve
of several other major economies - most clearly in China's
Asia-Pacific neighborhood. On 5 June Australia announced changes to
its foreign investment rules that will tighten scrutiny of foreign
investments in assets categorized as 'sensitive national security
business'. It followed Japan's implementation of similar new rules
in May. Then in August Japan, Australia and India jointly announced
a new supply chain initiative. All three items intend to reduce
economic exposure to China - especially in strategically important
sectors that bear on core national interests. There are examples
from other regions too, for example the UK's decision to phase out
Huawei from its 5G infrastructure by 2027.
Preparation for 'comprehensive escalation'
China, meanwhile, is not passive. Officially, the Chinese
government frames its US policy as pro-dialogue and
'anti-decoupling', aiming to reassure a public whose confidence has
been shaken. But the forthcoming Five-Year Plan is likely to
emphasize a policy of 'dual circulation' that will seek to make
China more economically independent. Former deputy minister of the
CPC's International Liaison Department Zhou Li has said that China
should prepare for a "comprehensive escalation of US-China
rivalry", and that China must break away from the "US dollar
hegemony" by decoupling the renminbi from the US dollar system. The
People's Bank of China has accelerated its efforts to
internationalize the renminbi by relaxing restrictions around
cross-border trade, facilitating foreign investment, and
increasingly currency convertibility. China's longer-term strategy
will seek to reduce reliance on US technology too. This will
include development of 'core competencies': President Xi Jinping
has stressed the need to advance China's indigenous capabilities in
integrated circuits, biomedicine, and artificial intelligence.
Recent policies such as China Standards 2035 and New Infrastructure
are in support of these development.
Qualitative to quantitative
This overview of political drivers already yields three key -
and quantifiable - variables that will shape our scenarios:
Sectoral disruption
The US-China rivalry has explicitly moved beyond the narrow issue
of trade to a broader strategic confrontation. That, and the
actions of US allies like Japan, India, Australia and the UK,
indicates the decoupling will be nuanced at the sectoral level.
Policy is aimed at minimizing foreign control of critical sectors
and supply chains. Sectors considered 'critical' may be
recalibrated. But sectors will not be affected equally by
decoupling policies.
Strategic realignment
As the world's two largest economies 'decouple', several other
countries will have to balance their economic, strategic and
security interests and reassess their geopolitical alignment. The
points of balance can be recalibrated so that under more severe
scenarios more governments opt to realign/ deepen their foreign
alliances - despite their economic interests.
Pace of policy
The priorities and approach of the incoming US administration are
likely to determine how fast sectoral and strategic policies are
implemented. In a 'hard decoupling' scenario, the US would apply
further tariffs on several Chinese goods and could cancel the Phase
One Trade Agreement. The US would also consider using additional
sanctions or regulatory barriers, such as enhanced reporting
standards, to stop state-affiliated Chinese companies establishing
dominant global market positions. In a softer, 'moderate
decoupling' scenario, the US would maintain its current policy
trajectory but disputes with Beijing would be addressed through
existing multilateral institutions, and after consulting US allies
instead of through a unilateral introduction of tariffs. In both
cases, China would seek to retaliate proportionately to the US in
terms of tariffs and regulatory barriers, rather than escalate,
while continuing its longer-term strategy to develop 'core
competencies'. The net effect would be that the implementation of
decoupling policies would be slower under the second, softer
scenario.
US-China decoupling
Taking into account the above and more, we will quantify two
scenarios. Our starting point will be our ongoing, country-level
analysis of complex geopolitical dynamics and baseline forecasts of
economic and sectoral developments. We will quantify the
macroeconomic impacts, including:
How will global trade and investments be affected?
What will be the effects, by sector, on production, employment,
capital expenditure and profitability?
How much would decoupling weigh on economic growth in
Asia-Pacific, Europe, Latin America, the Middle East, and
Africa?
What will be the purchasing power losses for US consumers?
Could decoupling set the stage for a banking crisis?
What are the ramifications for labor markets?
Who will benefit from the trade and investment diversion - in
Asia-Pacific and beyond?
Will other countries be drawn into trade and/or currency
wars?
Which industries in which countries will gain or lose?
How will decoupling impact China's technology advancements and
long-term economic growth?
If you would like more
information, or are interested in reading the report, it is
available for purchase.