It was in 2014 that many were introduced to the term ‘conscious uncoupling,’ a term originally coined by sociologist Diane Vaughan, when Gwyneth Paltrow announced her separation from Coldplay frontman Chris Martin. For those emotionally invested in the love lives of celebrities, I imagine such events induce a lot of hand-wringing (and a collective shrugging of shoulders from everyone else).
In recent years, however, economic commentators the world over have made hand-wringing an internationally recognised sport. More surprising still, it is over the quarrelsome decoupling and occasional bitter divorce settlement of economies (see Brexit).
Inarguably, the two ‘A-list celebrity’ economies most talked about in recent years have been the US and China. Over the last 20 years, China has become a production powerhouse, attracting upstream players – those focused on components and raw materials – and handling their needs.
A 2021 Harvard Business Review article indicated that in 2010 China “overtook the US to become the largest value-added manufacturer in the world, accounting for 28 percent of all global production by 2018.” The article goes on to say that in order to achieve this dominant position, China had not only leveraged its size and low-skilled labour workforce, but also invested heavily in education and infrastructure to achieve its aims.
It was during 2018 that Trump began his trade war with China, with the US placing “25 percent duties on around $34bn of imports from China, including cars, hard disks and aircraft parts,” according to an article in the South China Morning Post.
China did not come close to meeting the purchasing targets of the phase one trade agreement in the first year
It set off a long retaliatory back and forth involving tariffs, duties and taxes. With over a million foreign companies operating in China, the implications of moving production anywhere else is seriously complicated – not to mention costly. Many of these companies, having invested significant time developing a fruitful relationship with China, were now weighing up the tearful possibility of packing up and moving out.
US over-reliance on Chinese labour (see Fig 1) is at least partly to blame for the scaling back of imports. From a US perspective, decoupling was about preserving or repatriating American jobs, to paraphrase the Harvard Business Review, but as the world’s largest trading partners, this has to be delicately navigated. What strikes me as remarkable is how clumsy and indelicate both sides so often appear to be.
Speaking about his opposite number in China at Davos in January 2020, mere months before the pandemic hit (another curveball for US-Sino relations), Trump said: “our relationship with China has now probably never, ever been better,” adding “He is for China, I am for the US, but other than that, we love each other.”
This seemingly rosy assessment of the relationship followed the signing of a phase one trade deal, not quite putting an end to the past two years of tariff brinkmanship, but easing some of the tension. In a Rose Garden speech four months later, the rekindled spirit of healthy relations seemed to have evaporated, with Trump stating “China’s pattern of misconduct is well known. For decades, they have ripped off the US like no one has ever done before.”
Undoubtedly the arrival of the pandemic played its part, but despite Trump’s boasts that the deal “could be closer to $300bn when it finishes,” China did not come close to meeting the purchasing targets of the phase one trade agreement in the first year. According to the Peterson Institute, they were “never on track to meet any of the additional commitments” and “ended up buying none of that extra $200bn of US exports it had promised to purchase.”
We need to talk
Reflecting on her marriage in a 2022 article for Vogue, Paltrow writes that the beginning of the end was something more unconscious than conscious, like “the inadvertent release of a helium balloon into the sky.” Not more than a couple of months after the publication of that article, a literal helium balloon was released by China, flying across Alaska and western Canada before appearing in the sky over Montana, home to some of the US’s nuclear missile silos. China maintained it was a meteorological balloon that had been blown off course, while US defense officials claimed it to be a “high-altitude surveillance device.”
If there were not already enough signs that relations between the two countries were strained, this was the clincher. Many had expected a Biden administration to take a tamer stance on the trade war with China, but on the back of his election win in 2020 were numerous pledges: investing in infrastructure, clean energy and manufacturing, and the promise to “create millions of good paying American jobs,” as well as overseeing America’s recovery from Covid-19. In his first speech to Congress, Biden said “there is simply no reason the blades for wind turbines can’t be built in Pittsburgh instead of Beijing.”
Following the alleged spy balloon incident he appeared to step up the rhetoric against China, saying “China is real – has real economic difficulties. And the reason why Xi Jinping got very upset in terms of when I shot that balloon down with two boxcars full of spy equipment in it is he did not know it was there. No, I am serious. That is a great embarrassment for dictators, when they do not even know what happened.”
In light of this statement, it is worth bearing in mind that in 2022 “goods worth $576bn were imported by the US from China and $179bn by China from the US” according to UNCTAD (UN Trade and Development). It can only have been an expression of frustration over China’s antics.
Friends with benefits?
For China, there has been a decoupling strategy in place since 2005, when it introduced its medium- and long-term plan for science and technology development (MLP) with goals to increase domestic content by 30 percent in several sectors by 2020. It then revisited these targets a decade later with the introduction of Made in China 2025 (MIC 2025), aiming for 70 percent by 2025. At the same time, China has turned its trade to developing economies, including Latin America and the ASEAN member states.
Similarly for the US, it has shifted its trade away from China to countries like Mexico, Vietnam and other ASEAN member states. McKinsey recently reported that “in 2023, Mexico became America’s largest goods trade partner” and “between 2017 and 2023, US imports of laptops from Vietnam more than doubled, rising by about $800m.” It might interest you to know that Vietnam sourced its parts for those laptops with another trading partner: China.
From a US perspective, decoupling was about preserving or repatriating American jobs
While this diversification is perhaps the trade equivalent of ‘I think we should see other people,’ for some time now, both the US and China’s strategy has been rooted in the notion of lying back and thinking of economic nationalism. With both of these large economies aiming at trade sovereignty, what has happened seems a logical outcome.
Both countries have taken action to disentangle their economic systems to a degree, but it is still a stretch to start ringing de-globalisation alarm bells.
McKinsey concludes that a deglobalised fragmentation of global trade would be significant, and could see drops of up to 90 percent in trade of critical goods and services between Eastern and Western group economies. If the future of trade is diversification, however, the “global trade map is largely preserved.”
In an article for JP Morgan, Zidong Gao and Joe Seydl posit that the world’s economies are not rapidly deglobalising. Instead they say “supply chains are mostly diversifying – what might be called a slow-moving maturation away from excessive concentration in China.”
And I think this assessment does go some way to ease the anxieties of those monitoring the love lives of global economies.
While I have already seen the light and now take all of my advice concerning matters of the heart from Paltrow, I can’t help but feel that the US and China could take heed of it too. Conscious uncoupling, or an amicable break-up, is the way to go.
