Global decoupling myth

The high degree of integration of global trade today means a low probability of global decoupling. If the lack of savings in the United States is not resolved, and by raising tariffs and increasing other trade barriers to China, it is simply a matter of shifting trade from China to other US trading partners. This bilateral decoupling is merely a trade diversion, not a global decoupling.

The “decoupling theory”, which is used to describe the profound and continuous division of the world order, has become the focus of debate in 2019. This is also a warning sign released by the rising friction between China and the United States. The dispute over tariffs is just the tip of the iceberg.

Historians soon pointed out that the tension in Sino-US relations does not have the ideological factors that many consider to be the decisive role of the “Cold War.” Maybe so, but what about it? Whatever the reason, the possibility of protracted conflict between the world’s two largest economies must not be taken lightly.

Still, even if there is a permanent rift between China and the United States, the 87 trillion US dollar global economy is unlikely to split into two camps by 2020 or later. The reason is simple: bilateral actions alone cannot separate the closely linked multilateral trading system.

Today the global system is more integrated than ever before. After the global financial crisis from 2008 to 2009, the growth of world trade has indeed entered a long period of deceleration, but the share of trade in GDP has remained at a level of about 28%. This is about twice as much as during the Cold War, and between 1947 and 1991, this figure was 13.5%. The closer trade and global commerce are, the more difficult it is to break these links, and the less likely it is to form a generally destructive decoupling.

Moreover, the nature of today’s trade links means that global decoupling is even more unlikely. The import and export of traditional finished products, which are solely responsible for production by individual countries, are increasingly being replaced by decentralized parts and components trade. Their production and assembly are completed in a large global multi-country value chain network. According to a recent study by the International Monetary Fund (IMF), global trade volume soared five-fold between 1993 and 2013, of which a full 73% of the increase was contributed by global value chains. The proliferation of bilateral trade into multinational supply chains has a deterrent effect on bilateral decoupling, no matter how large the two economies are.

These considerations are important in inferring the potential impact of Sino-US trade frictions. American politicians often say that the US trade problem is China. After all, from the six years from 2013 to 2018, trade with China accounted for 47% of the US merchandise trade deficit gap. What U.S. politicians have not acknowledged or understood is that the overall trade deficit is a side effect of the long-term decline in the net domestic savings rate in the United States: In 2018, U.S. net domestic savings accounted for only 2.4% of GDP, well below the 6.3% average of the 30 years after the 20th century Level.

Blocking China through bilateral decoupling will not help the United States to eliminate the overall size of the trade deficit, but only force the structure of the multilateral trade deficit between the United States and other trading partners to change.

The lack of savings but the desire to expand investment and stimulate growth has forced the United States to import surplus savings from abroad and maintain a long-term current account deficit to attract foreign capital. This macroeconomic imbalance has made China a good partner and part of the United States ’multilateral deficit in merchandise trade with 102 countries, but with a larger proportion.

Of course, politicians always end up acknowledging that they are the source of the problem, and they should be responsible for the huge budget deficits that have caused a chronic shortage of domestic savings in the United States. Unfortunately, this key feature of U.S. trade status may be further exacerbated by the worsening US federal deficit budget.

Insufficient savings is the root cause of the US macroeconomic imbalance, which means that trade friction with China must be viewed from different angles, and the decoupling theory should be redefined accordingly. If the lack of savings in the United States is not resolved, and by raising tariffs and increasing other trade barriers to China, it is simply a matter of shifting trade from China to other US trading partners. Bilateral decoupling does not mean global decoupling, it only means trade transfer.

This shift will be complicated by global value chains. Based on OECD and WTO trade value-added data, about 20% of the huge US merchandise trade deficit with China is not made in China. On the contrary, they reflect the integration of parts and supporting products from other countries with China as the center. Of the value chain. This shows that the official data of the US bilateral trade deficit with China has been exaggerated, and the argument that the United States needs to “unlock” the US multilateral trade deficit is even more questionable.

The trade structure has shifted from the traditional trading of manufactured goods produced by a single country to the global value chain-driven multilateral production platform trade, which reflects the fundamental structural restructuring of increasingly integrated pan-Asian factories. The study of the “Global Value Chain Development Report 2019” found that the reason for the sharp increase in the U.S. merchandise trade deficit with China after China’s accession to the WTO in 2001 was mainly the offshoring of other developed countries and regions to mainland China, especially Emerging industrialized economies in Asia such as Japan, South Korea, and Taiwan. This is very different from the “China responsibility theory” advocated by most American politicians.

Therefore, the strengthening of the global value chain linkage means that China’s export tariffs on manufactured goods to the United States will not only be borne by US exporters, but also by third-party countries associated with China-centric supply chains. Therefore, it is not surprising that the tariffs imposed by the United States have already had widespread impact, not only for China, but also for other East Asia trade-sensitive economies.

None of this means that Sino-US relations cannot be decoupled, whether it is trade flows in the actual sense or capital flows in the financial sense. In fact, the author has highlighted this concern in a book published a few years ago on the risks of China-US interdependence. China relies on U.S. consumers as the main source of external support for its export-led growth model, while the United States relies on China as its third largest and fastest-growing export market and the largest external buyer of its national debt. Both countries need and welcome each other’s support . However, as human beings, conflicts arise when interdependent parties change the elements of maintaining relations—just as China shifts from export-led growth to consumption-led growth. The current trade friction is a typical example of interdependence entering a conflict phase.

The trade war initiated by the United States, the world’s largest savings deficit country, is a huge irony. The US fiscal trajectory has shown bad signs, and the trade deficit will further intensify in the next few years. Blocking China through bilateral decoupling will not help the United States to eliminate the overall size of the trade deficit, but only force the structure of the multilateral trade deficit between the United States and other trading partners to change.

This creates a more difficult political issue. The trade diversion caused by bilateral decoupling means that US outsourcing will shift from low-cost Chinese production platforms to other countries with uneven levels. Whether this will push trade to other Asian platforms, or even back to the United States, as President Trump has insisted it will happen. But all in all, this is shifting to higher-cost production platforms. Ironically, this is functionally equivalent to increasing taxes on American companies, workers, and households. The end result will be that the most controversial decoupling between American politicians and the long-struggling middle class in the next many years may lay the foundation for this.

The high degree of integration of global trade today means a low probability of global decoupling. If the lack of savings in the United States is not resolved, and by raising tariffs and increasing other trade barriers to China, it is simply a matter of shifting trade from China to other US trading partners. This bilateral decoupling is merely a trade diversion, not a global decoupling.