Decoupling From China Accelerates

Democracies are restricting goods from China, increasing the supply from friendly countries, and leveraging market access to expand decoupling to third countries

Aerial view of shipping containers sitting stacked at Yangshan Deepwater Port in Shanghai, China, on May 19, 2021. Shen Chunchen/VCG via Getty Images

Commentary

Decoupling from China has a history that extends back to the Cold War, but has renewed and is gathering speed. It most recently restarted in the U.S. technology sector, and is now moving to the world’s most important economies in Europe and Asia. The mainstream media is ablaze with what a year ago was seen as a crank idea, and what Beijing propagandists attempt to denigrate as “Cold War thinking.”

But in May, the Financial Times quoted Michael Shoebridge at the Australian Strategic Policy Institute (ASPI) saying, “Decoupling is real and growing. China and US decoupling has now been joined by EU-China decoupling, and we’re facing a common strategic challenge of Russia and China that unifies European actors with Indo-Pacific actors.”

Shoebridge predicts that decoupling will broaden to the energy sector, and advised businesses to ensure that their supply chains are diverted from hostile to friendly powers.

Companies are taking his advice, and that of the Biden administration, which calls it “friend-shoring.”

The idea has a long history. In 2020 it was called “ally-shoring.”

In 1993, the United States and Canada called it the “National Technology and Industrial Base” (NTIB), which allowed imports and exports of sensitive military items between the pair and later expanded to include Britain and Australia.

The Trump administration identified weaknesses in the NTIB and attempted to strengthen America’s industrial base through tariffs on China. According to Alex Gray, former National Security Council Chief of Staff, “The Trump Administration understood the strategic and defense industrial implications of dependence on foreign sources like China and Russia for critical components and materials.”

“The weaknesses of that industrial base, many of which were revealed under President Trump’s Executive Order 13806 (assessing the health of the U.S. defense industrial base), require an aggressive response from Washington that leverages the strengths of our allies and partners,” Gray wrote in an email.

“Tools like the National Technology Industrial Base are useful for filling industrial base gaps, while also serving as a burden-sharing mechanism in the effort by the U.S. and its allies to address Great Power revisionists like China and Russia.”

Following on Trump’s tariffs, the Biden administration is in effect proposing a voluntary, and sometimes legislated, expansion of the NTIB to a broader range of commercial goods. The bipartisan trade pressure over multiple administrations is internationalizing, and shows no sign of decreasing.

The Financial Times on July 29 quoted the Director-general of the Confederation of British Industry (CBI), Tony Danker, as saying, “Every company that I speak to at the moment is engaged in rethinking their supply chains. Because they anticipate that our politicians will inevitably accelerate towards a decoupled world from China.”

Demand-Side Decoupling

Decoupling is the severing of economic links to a country, but necessarily involves replacing them with other resilient links. In addition to friend-shoring, it can include “on-shoring” or “near-shoring,” in which production is brought closer to the intended consumers.

Two recent laws illustrate the demand- and supply-sides of the decoupling process for computer chips, also known as semiconductors.

First, the Uyghur Forced Labor Prevention Act (UFLPA) most immediately affected the demand-side by banning much of the polysilicon it needs for chips.

A GCL-Poly Energy Holdings facility in Changji, Xinjiang region, China, on March 2, 2021. Factories in Xinjiang produce nearly half the world's polysilicon supply. Colum Murphy/Bloomberg via Getty Images

Second, the Chips and Science Act of 2022 will strongly affect the supply-side by subsidizing U.S. chip manufacturing.

The UFLPA, passed in 2021 and to be implemented starting this summer, bans goods from China’s Xinjiang region, on the presumption that they are made with forced labor. This includes a ban on products assembled in any country that are made with materials from Xinjiang.

Xinjiang previously produced 40 percent of the world’s polysilicon (used in chip and solar panel production), 20 percent of cotton, and 20 percent of calcium carbide (used to make acetylene gas).

The extended reach of UFLPA is helping drive decoupling with China not just in America, but globally. Few companies from any country want to produce goods with raw materials forbidden in the world’s biggest market.

Supply-Side Decoupling

The second part of decoupling is its supply side. Without finding alternative supplies, decoupling would be extraordinarily painful and politically difficult.

On July 28, the U.S. Congress passed the Chips and Science Act of 2022, which will pump $52.7 billion into the building of U.S. computer chip factories, called “fabs,” as well as domestic semiconductor innovation.

“Proponents said it would help the supply-chain woes that have dogged Americans trying to buy cars and appliances that rely on chips,” according to the Wall Street Journal, “though it could be years before the true benefits of the bill are seen.”

In addition to being too little, too late, the bill has insufficient protections against China stealing or otherwise benefitting from the spending. But it is a start, and those protections can be put in place later. They better be.

These subsidies for American chips are part of a larger $280 billion bill that includes support for a range of U.S. technologies, including lasers, nuclear physics, and clean energy.

Leveraged Global Decoupling

The United States is also encouraging decoupling from China with its Indo Pacific Economic Framework for Prosperity (IPEF). Unlike the Trans-Pacific Partnership (TPP), IPEF is a trade forum rather than a formal free trade agreement.

IPEF is a “paradigm shift” according to Robert D. Atkinson, who wrote about it in Foreign Policy in early July, because it seeks to use access to the U.S. economy as leverage with third countries against China, rather than as a given.

U.S. President Joe Biden listens to other leaders participating in the Indo-Pacific Economic Framework for Prosperity (IPEF) launch event virtually, at Izumi Garden Gallery in Tokyo on May 23, 2022. Jonathan Ernst/Reuters

The fourteen member states of IPEF are some of Asia’s biggest economies, including Australia, India, Japan, and South Korea. It also includes Asian countries that America wants to draw away from China, like Brunei, Fiji, Indonesia, Malaysia, New Zealand, Philippines, Singapore, Thailand, and Vietnam.

But unlike the TPP, the United States is not granting easy access to its economy without regard to the elephant in the room. Rather, IPEF is a negotiating forum that, in addition to TPP requirements like improved labor and environmental regulations, will be used to help encourage, among third countries, the economic isolation and weakening of Beijing, until the Chinese Communist Party (CCP) improves its human rights practices and stops threatening the territory and maritime exclusive economic zones (EEZ) of its neighbors.

The same Washington strategy of leveraging access to American markets can be used against Moscow and other particularly aggressive dictators. Threats of secondary sanctions against countries that violate sanctions on Russia, Iran, and North Korea are examples.

China has been the hardest of the rogue nations to decouple from because of its massive economy (about 10 times bigger than Russia’s) and deep integration into the global supply chains.

But international moves to decouple from China are thankfully accelerating, and will increase demand for American and allied jobs, innovation, technology development, and the diversity and resilience of our industrial ecosystems.

U.S. and allied economies will grow, as will the government revenues needed to fund our military defense against Beijing. And, decoupling will weaken and deter Beijing from aggression against countries like Japan, Taiwan, and the Philippines, and slow the CCP’s attempts to globalize their illiberality.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.