A rather remarkable number of the posts I’ve seen today have looked to me like free flights of fancy. This post by Eyck Freymann and Hugo Bromley at Foreign Affairs is one of them. It opens:
As tensions rise in the Taiwan Strait and the South China Sea, U.S. efforts to deter Chinese aggression suffer from a fundamental credibility problem. The United States has conventional and strategic tools to deter Beijing, including the threat of punishing economic sanctions. But China is much too big and integrated into the global trading system to expel it from the world economy overnight. A sudden economic break between Beijing and Washington would be devastating for the United States and catastrophic for the rest of the world. Financial panic and supply chain disruptions would fracture the international economic order and undermine U.S. leadership. China might calculate that the United States would be unwilling to take such risks—or that even if it tried, the rest of the world would resist U.S. pressure to choose between the two powers.
Punishing Beijing for unprovoked aggression would be essential to maintaining U.S. credibility and leverage, but it would have to be balanced with U.S. interests. These include preserving macroeconomic and financial stability, dollar hegemony, and a functional and rules-based international trading system, as well as breaking U.S. and allied dependence on the Chinese market. Even in an extreme crisis scenario—for example, if Beijing attacked U.S. bases in East Asia during an invasion of Taiwan—attempting a total and immediate economic decoupling from China would be a costly and dangerous gamble. It would subordinate all other U.S. interests to a punishment strategy that might not even work.
The only real prospect for “decoupling” from China was abandoned more than 20 years ago when China was granted Most Favored Nation trading status and membership in the World Trade Organization. Since then the United States’s imports from China have grown enormously:
Find more statistics at Statista
and deindustrialized considerably. To decouple from China we would need billions if not trillions in additional capital investment in reindustrializing and at least a decade to do it in. The actions we have taken most recently, e.g. blocking Nippon Steel from acquiring U. S. Steel have not been targeted at reshoring our industrial capacity but at further deindustrializing.
They go on to advocate something they call “avalanche decoupling”:
If Beijing crossed one of Washington’s redlines, the United States could work with its allies to manage the resulting global financial crisis, reshore critical supply chains away from China as fast as possible, and trigger a ratcheting trade policy to unlink noncritical supply chains over the longer term. The plan would also initiate the creation of an Economic Security Cooperation Board, a new institution with membership open to all countries except rogue states such as Iran, North Korea, Russia, and of course China. The ESCB would ensure that the decoupling process was rules-based, driven by market forces rather than command and control, and protective of its members’ national and economic security interests, while acknowledging that most countries would continue to trade with both the United States and China. A credible U.S. commitment to this kind of economic leadership during a crisis would not only help stabilize the international economic system but also potentially transform it in a way that benefited most of the world at China’s expense.
With what? At this point we can’t even build our own military systems without components from China. How will we “reshore supply chains away from China”?
Look. We can either declare defeat, or get moving.
I recall when the former Guv of IN took over leadership at Purdue. The cornerstone of his efforts was to stop building Taj Mahals (his #2 was a RE guy) and he brought the cost hammer. He was told it wouldn’t work. It did.
Purdue didn’t raise tuitions for years, maybe still hasn’t. But they did it by using the existing footprint. I think people here know what I do. We have always been told we can’t do this or that. But we do. It all starts with organizational development, attitude and energy. Oh, and we have an incentive. The pursuit of filthy lucre.
If incentives change, the US can reindustrialize. And capital flows faster than anyone imagines. But yes, it will take time. If you are focused on DEI blah, blah, blah. Forget about it. Nothing happens.
I’d rather get on with it. When you have the CBS’s, CNN’s, Reuters, NYT’s (and dare I say, the OTB’s) and Schumer’s or Schiffs of the world screeching like stuck pigs you know there is a new sheriff in town. Onward.
I don’t advocate “declaring defeat”. I advocate changing the incentives so investors make capital investments and we reindustrialize. I’ve already suggested one strategy (zero taxation on capital gains on assets held five years or more; tax capital gains on assets held less than 5 years as ordinary income).
However, I think that any notion that we can decouple from China tomorrow without the U. S. economy collapsing is a fantasy. As I wrote more than 20 years ago, reindustrializing is going to be a lot less fun than deindustrializing has been.
Take good look at that curve. US-China trade peaked a decade ago.
In recent years, China has been shifting its trade away from the US and EU and towards the Global Majority. It is slowly liquidating its Treasury holdings.
Hong Kong, after decades of decline, is suddenly in a rapid growth phase. It is becoming the financial center of the BRICS world. It can offer financial services outside the US and EU control, especially banking, and outside the SWIFT payment system. It has access to the immense resources of the Chinese economy, and China is rapidly becoming the world’s only superpower, a hyperpower as one French president once bemoaned.
Freymann and Bromley are so typically ignorant of what is transpiring right before their eyes. China has escaped the surly bonds of the West, and is driving the world economy.