Before China’s fighter jets roared and its ballistic missiles screamed into the seas off Taiwan last week, analysts had already begun laying out — from incursion to inaction — what investors could expect next.
Consensus among those forecasters was in short supply, and if anything, there is even less of it now. Both the US and China have spent recent days arguing about the definition and condition of the status quo, but the status quo now feels unambiguously in motion. The safest-looking analytical bet, in that context, is on sharply accelerated economic decoupling between the US and China, but how likely is it to move from the current, highly selective form to a broader split?
Beyond the three days of Chinese military exercises due to end on Sunday and the petulantly imposed sanctions on Nancy Pelosi herself, the possible consequences of the US House Speaker’s visit to Taiwan sit on a wide speculative spectrum. China’s abrupt suspension on Friday, of bilateral meetings and co-operative talks on everything from defence policy co-ordination to drug-smuggling, lengthens the list of bad plausible scenarios.
Decoupling has a credible ring. There is already visible political momentum for it on both sides. There is nothing to suggest greater closeness is in prospect, and plenty that foreshadows the divergence expanding well beyond the two central players — including Chinese missiles landing in Japan’s exclusive economic zone for the first time. The decoupling narrative, though, is one with hard limits of both time and scale and they should not be overlooked because of the events of the past week.
Proponents of the more rapid decoupling thesis have a fair stack of evidence on their side. The Made in China 2025 programme is all about technological self-containedness and the Biden administration has so far done little to reduce the tone of hawkishness on China established by its immediate predecessor.
This week, in a decoupling milestone, the US president will sign the Chips and Science Act passed by Congress in late July. This dangles more than $50bn in federal grants to companies building advanced semiconductor manufacturing in the US, while requiring any recipients of that funding not to upgrade any China-based factories for a decade. Non-American companies are included and the decoupling lure for South Korean chipmakers could prove decisive. Japan, which could soon confront efforts by Beijing to force its high-tech companies to design certain products in China, may also feel stronger decoupling pressure building.
The narrative may also be gaining traction outside the US and its closest Asian allies. In a note to clients last week, analysts at Gavekal Dragonomics identified a deepening consensus within the EU to treat China as both an economic and a security threat. Policy could turn increasingly defensive under that understanding, even as the lobbying power of European companies with heavy investments in China remains formidable and a fully fledged debate on decoupling remains some distance away.
For now, at least, there are three significant constraints on the accelerated decoupling story. The first is that the US ability to bring others along with the programme may be more fragile than it looks, even with a close ally such as Japan. As decoupling is increasingly pushed through legislation or regulation, questions over the underlying intention will intensify. Efforts to protect national and economic security are fine; deliberate hobbling of the Chinese economy will win fewer converts.
The second is that, on both the Chinese and US sides, corporate resistance to accelerated decoupling will be quietly substantial, however noisy the politics becomes. The business relationships, investments and supply chains are not trivial ties that can be quickly unwound, and the Chinese market is still the most attractive long-term growth bet. Chinese companies cannot yet afford a cliff-edge exit of foreign technology and a sudden break in their learning curve.
The third issue is time. In late July, the US Senate proposed a new bill that could in theory create tax incentives that would draw the electric vehicle battery production chain out of China (which dominates in all key areas) and into the US. This is logical stuff, given where electric vehicle markets are heading. The bill would superficially fit the rapid decoupling story. The reality, according to analysts at Goldman Sachs, is a rather more sedate process that would involve lead times of between four and seven years for each of the six principal points in the supply chain.
Decoupling is happening, and the past week may raise the political volume on decoupling to unprecedented levels. Any real acceleration, however, may be illusory.
leo.lewis@ft.com