In recent weeks, clear policy pronouncements have been made by the US that it does NOT seek to “decouple” its economy from that of China’s. This is a terribly important development that has geopolitical implications.
The idea of “decoupling” was first articulated by former President Donald Trump in September 2020 when he said:
““We will make America into the manufacturing superpower of the world and will end our reliance on China once and for all. Whether it’s decoupling, or putting in massive tariffs like I’ve been doing already, we will end our reliance in China, because we can’t rely on China.” The statement was made in the heat of the presidential campaign and Trump went on to say: ““We lose billions of dollars and if we didn’t do business with them we wouldn’t lose billions of dollars. It’s called decoupling, so you’ll start thinking about it.”
But soon thereafter, Anthony Blinken, then a close adviser to Biden told a meeting hosted by US Chamber of Commerce that “trying to fully decouple from China, as some have suggested, is both unrealistic and ultimately counterproductive”. It was therefore clear that Biden’s approach to China was not the same (at least on paper) as that of Trump even in 2020.
When friction developed more recently between US and China, exacerbated by the spy balloon incident, again there was some talk that US would seek to “decouple” from China. That notion can now be buried once and for all.
On April 20, Secretary of Treasury Janet Yellen in an address to the School of Advanced International Studies at the Johns Hopkins University stated in unambiguous terms that the US does NOT seek to decouple its economy from that of China’s and that a full separation of the two economies would be disastrous for both countries, apart from being destabilizing to the rest of the world. She went on to emphasize that the health of the Chinese and US economies was closely linked.
If that was not clear enough, the US National Security Adviser Jake Sullivan made detailed remarks at the Brookings Institution on April 27 on “renewing American economic leadership”. It was odd , to put it mildly, for a National Security Adviser to make a long pronouncement on American trade, economic and industrial policy. This is proof, if proof was needed, that economic policy in general and policy towards China in particular is now seen through the prism of national security. Sullivan, importantly, agreed with EU Council President Ursula van der Leyen and said US too was in favour of de-risking and diversifying, and NOT decoupling. Explaining the de-risking strategy further, Sullivan said: “We’ve implemented carefully tailored restrictions on the most advanced semiconductor technology exports to China. Those restrictions are premised on straightforward national security concerns. Key allies and partners have followed suit, consistent with their own security concerns. We’re also enhancing the screening of foreign investments in critical areas relevant to national security. And we’re making progress in addressing outbound investments in sensitive technologies with a core national security nexus. These are tailored measures. They are not, as Beijing says, a technology blockade. They are focused on a narrow slice of technology and a small number of countries intent on challenging us militarily.”
In geopolitical terms the above policy pronouncements have important implications. First, there seems to be some rapprochement between the positions of the US and the EU vis-a-vis China. Jake Sullivan quoted Urusula van der Leyen for a reason. Both the US and the EU now seek to de-risk and diversify away from China when it comes to the strategic sectors of the economy. Sullivan gave a number of examples to prove his point. He pointed out that the US now manufactures only around 10 percent of the world’s semiconductors, and production is geographically concentrated elsewhere. This created a critical economic risk and a national security vulnerability. Sullivan argued that thanks to the bipartisan CHIPS and Science Act, we’ve already seen an orders-of-magnitude increase in investment into America’s semiconductor industry. Sullivan gave another example with regard to critical minerals – the backbone of the clean-energy future. Today, the United States produces only 4 percent of the lithium, 13 percent of the cobalt, 0 percent of the nickel, and 0 percent of the graphite required to meet current demand for electric vehicles. Meanwhile, more than 80 percent of critical minerals are processed by one country, China. Sullivan underlined cooperation not just between US and EU (Joint Statement of Biden and van der Leyen refers) but also with countries such as Japan, South Korea, Taiwan and India to coordinate their approach on semiconductors and things like Hydrogen.
Second, it is possible that this is a message also to China that while trade in “normal” goods and services can continue unimpeded, this will not apply to trade in “strategic” goods and services. China does need the American and European markets for the short term while it struggles to implement its dual circulation strategy. Whether all EU countries agree with van der Leyen is another matter. Also, even the dependence on China created by “normal” trade and investment can be huge: witness the $ 10 billion to be invested by the German firm BASF in a plant in Guangdong province and an equal amount by Volkswagen in the Chinese EV market. It is hard arguing there is no risk in these investments.
Third, a broad coalition of countries such as US, EU, Japan, Korea, Australia and India is taking shape which are pursuing resilient supply chains in strategic sectors, be it semiconductors, hydrogen or rare earths.
For India, it is vitally important to get on to this resilient supply chain in the making, having missed the earlier global/regional value chains altogether. In order for us to do this, India must reform faster, put in place an eco system for attracting investment, finalize the FTA with EU and join the trade pillar of the IPEF (Indo-Pacific Economic Framework) without delay. Tall order but if not now, then when?
Diplomacy and Geopolitics 