Beijing seems to agree with Washington that decoupling the U.S. and Chinese economies is a good idea.
From the U.S. side, President Joe Biden has not only kept the original Trump tariffs on Chinese goods in place but has also banned the sale of advanced semiconductors to China and U.S. investment in Chinese technology.
From the Chinese side, Chinese Communist Party (CCP) leader Xi Jinping has begun a campaign to replace any foreign—mostly U.S.—technology in China with a home-grown substitute. The pace of decoupling seems set to accelerate. Without interactions, chances are that the world—including the United States and China—will lose out on advances that otherwise would have occurred. China will likely lose more in the bargain than the United States.
China’s authorities have favored home-grown technology for some time, but recently, they have accelerated the process with a program called “Delete A.” Among other things, it requires state-owned firms—dominant in finance, energy, and many other important sectors—to replace foreign software in their IT systems and complete the transition by 2027. This is part of Xi’s stated goal to free China from any dependence on Western food, technology, energy, finance, and raw materials—in other words, to make China self-sufficient in everything from computers to wheat production. To help the transition in technology, Beijing has increased spending on science and technology by some 10 percent this year to the equivalent of $51 billion, a big jump from last year’s 2 percent increase.
U.S. businesses can see the writing on the wall. Though “Delete A” is new, Americans note that the deleting process has been going on for some time. As recently as six years ago, U.S. products garnered most of the tenders from Beijing and state-owned firms. It is a different world now.
Hardware makers such as Dell, International Business Machines (IBM), and Cisco Systems have replaced much of their equipment with Chinese-made products. Cisco reports that orders have declined in China since 2019. Dell’s share of the Chinese market has fallen by half since 2015. Years ago, Hewlett Packard Enterprise got as much as 14 percent of its revenue from China sales. At last measure, the figure had fallen to a mere 4 percent. Adobe, Citrix, and Salesforce have either pulled out of China altogether or are significantly downsizing. Hewlett Packard recently announced that it is selling its almost 50 percent stake in a Chinese joint venture.
Beijing has identified three companies to fill the gap left by the soon-to-be banished Americans. They are Tongfang, Alibaba, and Huawei. The order has already come down from on high that in all government operations, Tongfang equipment will replace all foreign-made computers. The authorities have faced some pushback because the domestic Chinese software and machinery are not up to the same standard as the U.S. products.
However, if history is any guide, the CCP will easily overcome such resistance. However, one can have little doubt that Chinese products will eventually rise to the challenge and ultimately offer products as good as those of Microsoft, Oracle, and others like them. However, in the interim, China will suffer delays and inefficiencies that it would not have otherwise had to deal with.
Because of the attitudes of Washington and Beijing, both economies will lose opportunities. In the long run, however, the CCP will have done its economy greater harm. For security reasons, the United States wants only to limit Beijing’s power and influence in particular sectors. It will lose some efficiencies and opportunities for the sake of that security. Otherwise, the United States will remain open to the world. But Xi wants self-sufficiency just about across the board; in other words, a complete break with the West and presumably Japan, too.
No economy, no matter how dynamic, can do everything better than every other economy. If China’s ambition offers security, it will give it at the expense of ongoing inefficiencies and a diminution of economic dynamism. Such a situation all but ensures that China will trail other economies, including that of the United States. It is an open question whether Xi and his colleagues in Zhongnanhai realize this fact of life.
