In response, the state-run Chinese media are trying to put lipstick on a pig to keep the spigot of foreign direct investment that props up the Chinese economy going. Here are a few of those happy-talk headlines of late: “CPI falls, but demand to recover soon” (China Daily, Aug. 8); “China rolls out measures to boost economic recovery, confidence” (People’s Daily, Aug. 5); and “Foreign firms get further incentives” (China Daily, Aug. 3).
China’s “economic miracle” is anything but, as the foundations for its growth were purposely laid by Western politicians and businessmen who benefited directly from “opening China” to the world. Now that the communists at Xi Jinping’s direction are revealing the foolhardiness of the original assumption that Chinese belligerence could be disincentivized and curtailed through engagement policies, as well as China’s successful influence peddling among the U.S. political class, what the communists must consider being a curse word—decoupling (and its softer version “de-risking”)—is now widely being discussed and implemented in some instances in Western political and business circles.
Let us examine the topic.
The Pillars of the Chinese Economy
China is an export economy. A long-term Chinese goal has been to become the world’s primary manufacturing hub. This is the core of Mr. Xi’s Belt and Road Initiative: to build the transportation infrastructure required to access foreign sources of raw materials and export finished goods from Chinese factories to destinations worldwide. The West facilitated the Belt and Road strategy by deregulating trucking, railroads, ports, and open shipping in the 1990s, which are key elements of the global system for shipping goods from factory/producer to final destination/consumer.
U.S. engagement policy has further gifted the Chinese Communist Party (CCP) with cheap money, free trade, technology transfer, and extensive foreign direct investment in building up Chinese industries that have been the engines behind the spectacular growth in China’s economy, especially since the Clinton administration.
These pillars have provided multiple benefits to communist China: (1) a seemingly never-ending stream of foreign direct investments in Chinese factories and other businesses by foreigners eager to participate in the “Chinese economic miracle”; (2) direct access to the latest Western technology through joint ventures that enable theft and transfer of intellectual property to Chinese businesses and the People’s Liberation Army (PLA); (3) trade surpluses that have funded China’s military modernization and buildup as Chinese products undercut the prices of domestically made products in the United States and other nations; and (4) supply chain dependencies on China that have developed over time.
Employees working on aluminum products at a factory in Huaibei, in China's eastern Anhui Province, on Jan. 30, 2023. STR/AFP via Getty Images
Investopedia defines a supply chain as follows: “A supply chain is a network of individuals and companies involved in creating a product and delivering it to the consumer. Links on the chain begin with the producers of the raw materials and end when the van delivers the finished product to the end user.”
For decades, China has pursued a strategy to capture end-to-end supply chains for profit and geopolitical pressure purposes. As a result, China is a dominant supplier of rare earth elements, pharmaceuticals and their precursors, electric vehicles, lithium batteries, solar panels, hand tools, car parts, and many other products that Americans and others have come to depend on over the years.
One key area of strategic vulnerability is that China is the only country with a fully integrated permanent magnet supply chain (permanent magnets are used in refrigerators, tools, vehicles, etc.). A PLA cross-strait invasion of Taiwan would disrupt another key supply chain, as the United States is dependent on Taiwan for the production of semiconductors and microchips, which are used in computers and information technology products.
According to the Henry Jackson Society, “the US is strategically dependent on China for 424 categories of goods. 114 of these have applications in critical national infrastructure.” U.S. strategic planners and Congress are examining ways to minimize these dependencies through decoupling.
Decoupling
Decoupling is the strategy of reducing dependence on foreign technology and capabilities. In the case of China, this refers to seeking other sources of supply for critical products and technologies than those produced in communist China. Decoupling reduces the geopolitical pressure that China can exert on the United States during international crises.
Workers pull a line from a cargo ship as it prepares to berth at a port in Qingdao, in China's eastern Shandong Province, on Oct. 19, 2018. STR/AFP/Getty Images
The chorus for decoupling has grown louder as the PLA has raised tensions with the United States, Taiwan, the Philippines, and Japan. The imposition of tariffs, financial incentives for onshoring manufacturing back to the United States and other countries, and regulations that prohibit the export of certain classes of advanced technologies are being explored by the United States and its allies as methods of decoupling from China in many ways.
Researchers at the Baker Institute argued last December “that the U.S. and its allies must divorce strategic industries from Chinese REE [rare earth elements].” China’s stranglehold on REEs gives it a geopolitical advantage and leverage that is dangerous to the world as Beijing pursues confrontational strategies with nations along its periphery in competition for oil and other raw materials.
Automobile company executives are involved in a “concerted effort to cut their reliance on China’s sprawling network of components makers,” according to the Financial Times. The concerns expressed involve a desire for “stable procurement and supply” (a euphemism that implies concerns about interruptions for “geopolitical reasons”).
Some large businesses are beginning to reduce their supply chain risks with China. Bloomberg points out that “companies are seeking more resilient supply chains—padded with more inventories or outfitted with better visibility—as well as a diversification of sources.” For example, according to Apple Insider, “Apple is working to speed up its shift of part of its supply chain out of China, with supply chain partners warned to plan for increases in assembly in India and Vietnam.”
Another important form of decoupling involves finance and investments. Reuters reported on Aug. 14 that “U.S.-based hedge fund investors including Coatue, D1 Capital and Tiger Global cut their exposure to Chinese companies in the second quarter.”
Hitting a Nerve
The communist Chinese understand their dependency on foreign investment, free trade, and continued domination of key supply chains. Trade surpluses from their export economy fuel domestic tranquility and the expansion and modernization of the PLA.
As a result, Chinese state-run media are focused like laser beams against the rising bogeyman of “decoupling.” Some headlines include the following: “China decoupling comes with ‘a high price tag’ for US” (People’s Daily, Aug. 2); “‘Decoupling’ should be in history’s dustbin” (China Daily, June 28); and “Decoupling from China is not the answer” (People’s Daily, Feb. 3).
Concluding Thoughts
The CCP will always telegraph what it fears most. With a faltering economy reported by many China watchers, Beijing understands the need for foreign investment (money, technology, no tariffs) to prime the pump. The CCP fears the strategy of decoupling greatly, which may put terminal pressure on the faltering Chinese economy if the United States and other countries seriously decouple from China.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Stu Cvrk
Author
Stu Cvrk retired as a captain after serving 30 years in the U.S. Navy in a variety of active and reserve capacities, with considerable operational experience in the Middle East and the Western Pacific. Through education and experience as an oceanographer and systems analyst, Cvrk is a graduate of the U.S. Naval Academy, where he received a classical liberal education that serves as the key foundation for his political commentary.
