Fatal flaws with the idea of decoupling

A shorter version of this post first appeared in Asia times. Recent issue of Bloomberg/Businessweek said, “Despite the heated national security rhetoric in Washington and talk of “decoupling” in policy circles, the world’s top two economies remain firmly intertwined.” The article goes on the say that the bilateral trade for year ending 2022 is likely to be the highest ever recorded. The failure to decouple is likely good news for China but even better news for the American public. However, anyone with a dollop of common sense would realize that the talk about decoupling was just so much balderdash. For the sake of introducing clarity to what and how decoupling might actually mean, let us recruit a team of Indians to address the many facets of this “elephant” in the room. Decouple would mean the opposite of economic integration. Each would have nothing to do with the other. This means Americans would have to stop buying manufactured goods from China. But this is contrary to actual bilateral trade data, wherein despite the added import tariff to the retail price, the American public can’t buy enough products Made in China. That’s the reality to date. In order for the US not to buy from China, we would have to make these products in America. Former President Donald Trump struck on the brilliant idea of bringing manufacturing back to America. He ordered, cajoled and dangled sweet deals to entice American companies back to the US. Americans don’t know how anymore The idea basically flopped for a host of reasons. The making of widgets left the U.S. decades ago, first to the four tigers such as Taiwan and Hongkong and then to mainland China. The basic skill sets needed on the production line hasn’t been seen in America for many decades and could not be replaced overnight on demand. Some lament that Washington is at fault for not having the vision to craft an industrial policy that would encourage retention of the manufacturing of run of the mill products, such as toys, television, personal computers or mobile phones. Our political leaders, busy getting elected, did not envisiage that making widgets was a necessary precursor step to making increasingly higher valued goods, as China has done. Actually, most the blame belongs to America’s abiding faith in Capitalism as executed by Wall Street. Not for nothing that Corporate America are known as “multinationals.” Multinationals (MNCs) go to where the production costs are the lowest and sell to where the profit is highest. “National interest” does not figure in their board room discussions. As Trump’s successor, President Joe Biden lacked the courage to remove the tariffs on imports from China, which could have only benefitted the American consumer. Washington along with the compliant mainstream media has so thoroughly demonized China in the minds of American public that Biden dare not risk even an appearance of apparently acting soft on China. However, Biden apparently understands that bringing manufacturing back is not quite as simple as a Trumpian clarion call. For one thing, the American wage scale would raise the cost of production, perhaps by as much as 50% according to Morris Chang, founder of Taiwan Semiconductor, for semiconductors. In the case of highend products, production also needs a complete supply chain of parts and components, which would also need to be transplanted from somewhere. Biden wins at the expense of Europeans So, instead of counting on American MNCs to make America great again, Biden is dangling subsidies to appeal to foreign MNCs, any company except from China, to move their plants to the US. European companies find the prospects tempting. Their economy at home faces shortages and inflation thanks to the Ukrainian war and they find America’s stability and market appealing. Just like their American counterparts, European companies owe their allegiance to their shareholders. But enticing European MNCs to the US means taking jobs away from their home country, which is making the European leaders very unhappy, hardly a way to treat America’s allies. Biden’s another approach is to outright hijack Taiwan Semiconductor (TSMC) plant from Taiwan and transplant it to Phoenix Arizona. The first group of TSMC staff came willingly and accompanied the equipment disassembled from Taiwan. They were convinced by their own government that invasion from China was imminent and this was the opportunity to get out. Mere weeks later, some troubling signs are developing. The staff from Taiwan are used to working 10-12 hour shifts and they were promised that they do not have to work night shifts. Well, their American colleagues don’t want to work night shifts either and 8 hours per day is their normal stint. The difference between the Taiwan based wage scale and the US based also creates tension and resentment. Presumably, the difference would eventually be harmonized but the manufacturing cost would go up. The question will be whether the TSMC customers, such as Apple et al., would pay for this higher price chips for the sake of national interest or just keep buying from the TSMC plant remaining in Taiwan. Want to hazard a guess? When the Soviet Union sent aloft the first manmade satellite in 1957, America woke up in shock, and promptly rallied national energy and resources to respond. Twelve years later we sent man to the moon. That was America’s first Sputnik moment. When China showed that they have caught up or even surpassed the US in certain critical 21st century technogies, that was another Sputnik moment. Demonize easier than compete But this time, our leaders in Washington must have decided that rather than compete head on, it was cheaper to allocate a few hundreds of million dollars to the media and ask them to continue to mislead the American public and demonize China as a human rights violator incapable of innovation and technological advances. Of course, Pentagon has yet to explain how an undersea mountain “ran” into the nose of our most advanced nuclear submarine off southern China coast in 2021 and forcing the sub to surface and run to safety. That’s a juicy mystery still waiting for the mainstream media to investigate and report. Unconfirmed rumor is that a Chinese drone sub wreaked havoc on the USS Connecticut. When the US has been going around the world promoting armed conflicts in the name of imposing “rule based, international order,” death and destruction inevitably followed. The world witnessed the repeated scenario in Afghanistan, Iraq, Libya, Syria and Yemen to name a few hot spots set ablazed by Uncle Sam. Rather than feeling secured under the American military umbrella, the rest of the world fear and distrust American rhetoric and intentions. In the meantime, China makes the rounds offering Belt and Road Initiative to underdeveloped and developing countries. The basics of BRI is that the host country will consult with China and select the infrastructure projects that need China’s assistance and financing. Infrastructure projects, such as port, rail, highway, airport, power and others, upon completion would give the host an economic shot in the arm. Raising the gross domestic product could come from increase in export and participation of global trade, improved yield on the farm based on Chinese technical assistance and creation of new jobs in the cities. BRI becomes a form of incoming tide that raises all boats. Over 150 countries around the world have signed BRI deals with China. Over time, we can expect to see increasing number of countries grow in economical strength. As more countries manage to keep their own people employed at home, the world will see fewer refugees and migrants, an overall benefit you will not hear reported by the western media. China has friends, the US fear and loathing The success of BRI has raised alarm from the western media and American diplomats are going around Africa and Latin America warning them of China’s “debt-trap diplomacy.” China’s BRI financing is normally around half of the going rate, sometimes even at zero interest, and some loans were outright forgiven. These third world countries should be offended that the West believes they are too stupid to tell the difference between centuries of colonial exploitation they suffered in the hands of the western imperial powers and China’s straightforward business propositions. If the much talked about decoupling were to suddenly occur tomorrow, the US would pay a much dearer price than would China. China would continue to be the most important trading partner to every country except for perhaps the US. China has long term, yuan based, energy contracts with Saudi, Iran, Qatar and other Gulf states along with Russia. Furthermore, thanks to the US aggressive actions pushing China and Russia into tighter collaboration, they can roll up their sleeves and concentrate on developing and realizing the vast potential of Siberia. On the other hand, the US is suffering from a deep deficit of trust by allies and rest of the world alike. The world has seen American unilateralism at work as the US confiscated the foreign reserve of the Taliban government in Afghanistan and later the Russian holdings, national and personal. The threat of sanctions and actual sanctions imposed has been the US favorite tool of diplomacy. As many have observed, sanctions have unanticipated consequences and blowback. As one recent article concluded, “Western sanctions led Russia to greatly increase trade with Asia, while devastating Europe’s economy. The US tech war against China is damaging its own industry.” Washington can act arbitrarily, capriciously and unilaterally. That’s why Japan, even as an ally, and China being the two largest foreign holders of US debt are in a rush to divest their holdings as quickly as possible. In the case of China, they face the challenge of trade surplus accumulating faster than they can divest their dollars. Indeed, friend and foe alike, most countries’ reserve now include increasing portion of China’s yuan while lessening the portion in dollars. Russia has even announced the ultimate goal of holding 60% renminbi and 40% gold as their foreign exchange reserve. Ironically, in middle of last month, Treasury Secretary Janet Yellen flew to Europe just to intercept China’s vice premier Liu He as he was on his way to the Davos summit. Apparently, the gist of their three-hour meeting was for Yellen to pitch the importance of China holding onto the dollars and continuing to buy US debt as vital to supporting the American economy. Most likely decoupling was not part of their conversation. https://doc-00-9o-docs.googleusercontent.com/docs/securesc/5f9ml6jq1th2msvidbi71cudflhi4v1m/4kgu3qe6nc6r55m44ql0ajlh7q5pla55/1675729950000/04384644368551862567/05668267313738172040/1u-M2RJGzQXM5r4pgfYt7rO4IwdD5SdiQ?e=download&authuser=0&nonce=nt9gju73c533u&user=05668267313738172040&hash=5r60ijh8ehmhro9t3b6iv0aj8hjmic8a