Two New Reports on Decoupling

Two new reports on economic “decoupling” between the United and China have just been released. The U.S. Chamber of Commerce has issued a report entitled “Understanding U.S.-China Decoupling” that warns of the economic impact of a decoupling; and U.S. Senator Tom Cotton (R-AR) has issued a report entitled “Beat China” that pushes for it.

The Chamber report, prepared by the Rhodium Group, projects a large negative economic impact on trade, investment, movement of people, and idea flows. The report estimates annual output losses of up to $51 billion for the aviation industry, $23.6 billion for the medical device industry, $124 billion for the semiconductor industry, and $38 billion for the chemical industry.

It concludes with the following recommendations for U.S. policymakers:

First, data analysis is critical to policymaking. International relations require a more systemic evaluation of evidence. China policy requires economic impact assessments, cost- benefit analyses, and a process of public debate and discovery. Policy that proceeds from fact-based analysis has a greater likelihood of success and reduces unnecessary costs.

Second, even based on our rough assessment, we can see that the costs of anything approaching “full” decoupling are uncomfortably high. Alternative approaches—including mitigation and in many cases forbearance—would complement any decoupling scenario. A rational approach would be partial (tolerant of goods and services that have no bearing on national security or economic resilience), provisional (adjustable in response to future Chinese changes), and peaceful (stated without malice, to avoid gratuitous, costly escalation).

Third, many elements merit inclusion in a comprehensive U.S. China policy program. They include promoting industry, innovation, and technology; preserving the rules-based, open market order and its institutions; and protecting systemically and strategically important assets and industries from threats, intended and incidental. But success cannot mean that Washington or other market economies offset all the costs of decoupling or prevent painful structural adjustments. In fact, this pain and adjustment is not a side effect of our competitiveness, but the wellspring of it. In the policy reengineering to come, the central role of market forces in determining winners, and the finite capacity of governments to redistribute resources to ease the process, must be respected.

Fourth, policymakers should do their utmost to avoid unilateral catch-all policies that create cost and uncertainty within the U.S. and among like-minded foreign partners. Alignment between national security architects, U.S. business leaders, and leaders of other open-market economies is far preferable to unilateral action. Calls by the Trump administration for new thinking on China resonated with allies and with U.S. business, but attempts to compel alignment through threats should be a last resort and reserved for the most serious threats to national security. Sustainable alignment can only be rooted in a common sense of purpose and shared economic interests and values, and should be based on transparency and institutions.

Finally, policymakers need a clearer timeline for adjustments to the U.S.-China relationship. Trying to decouple this extensive relationship overnight would lead to counterproductive economic hardship. The U.S. and China share a combined $737 billion in two-way trade (in 2018) and more than 100,000 discrete cross-border investment transactions built up over decades. Vast amounts of IP are at work in these transactions and indirectly in commercial arrangements flowing through third-party locations from Ireland to Hong Kong to Bermuda. U.S. policymakers should take the time necessary to collect data, set priorities in light of that data, consult with industry as needed, and draw together like-minded policymakers from other nations to address shared concerns about the choices Beijing has made in recent years.

In contrast, Senator Cotton, who is considered a hawk on China and on foreign policy in general, advocates for “targeted decoupling” in his report, which is bluntly titled “Beat China: Targeted Decoupling and the Economic Long War.” He concludes his report with the following “path forward”:

… policymakers should consolidate many of the authorities necessary to manage America’s economic competition with China under cabinet officials whose primary concern is national security. This consolidation can reduce bureaucratic incentives to evade responsibility and water down or delay decisive policies.

A national security-focused organization does not need to have responsibility for the health of the overall U.S. industrial base and supply chains, so long as the responsible department coordinates heavily with national security entities. The same departments which were institutionally hostile to restricting ties to China can be quite adept at assessing and overseeing funding toward building up U.S. productive capacity and supply chains, so long as other organizations can voice a national security perspective during the decision-making process.

Lastly, responsibility for improving the coordination of the vast array of federal entities which fund R&D—and then instituting the tough measures necessary to protect that research from Chinese espionage—is a vital task that will require an interagency solution. The federal government funds far too broad a spectrum of research for any one department to be solely responsible for managing the U.S. research enterprise. A more formal interagency system with common policies will also make it more difficult for parts of the research enterprise to resist the efforts necessary to combat Chinese foreign influence and insider threats.

With these objectives and concerns in mind, the United States should pursue the following changes to government roles and responsibilities in order to position itself to win the economic long war:

• The government should consolidate export control licensing authorities within the State Department. …

• The Secretary of Defense should share in oversight of CFIUS. …

• The Department of Commerce should be responsible for conducting continuous analysis of the industrial base and supply chain. …

• The Department of Commerce should be responsible for supporting the regeneration of U.S. productive capacity in key sectors. …

• Policymakers should establish a permanent interagency committee to oversee the security of the U.S. research enterprise and to coordinate federal funding of research. …

Current U.S. federal government organization is not optimized to thwart China’s whole-of-society approach to the economic long war. This has led to serious gaps in the performance of U.S. institutions, which today punch well below their weight, even given the positive reforms and initiatives of the past few years.

By putting national security concerns at the forefront of our economic contest with China, strengthening our industrial base and supply chains, and better coordinating and protecting our nation’s research enterprise, America can create the government infrastructure it needs to properly utilize its vast capabilities and triumph in the long economic war.