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Are the US and China really decoupling?

The great powers are moving further apart. Credit: Getty

May 23, 2024 - 4:20pm

The US is no longer buying Chinese electric vehicles and China is no longer buying US Treasury bonds. Is this the start of the great decoupling we keep hearing about, with the two superpowers squaring off into rival camps? As China draws closer to Russia and Iran, the US is “friend-shoring” its overseas economic linkages with global allies.

Perhaps not — it is an election year, after all. President Joe Biden’s announcement of tariffs on Chinese EV imports, which came just a couple of weeks after he imposed tariffs on Chinese steel, has been made with one eye on union votes. After Donald Trump won the support of so many white working-class voters in 2016, Biden pledged to rebuild ties between them and his party. With Trump calling for steep tariffs on Chinese goods, Biden had to take preemptive action if he’s to remain competitive in industrial swing states such as Pennsylvania come November.

His tariffs on EVs have a somewhat different, if still political, purpose. The Biden administration has committed a lot of energy and resources to its industrial policy, with a focus on renewable energy. At the moment, the Chinese produce the cheapest and, by many accounts, best EVs and solar panels in the world. They also produce more of both than they consume domestically, so they are exporting aggressively.

These are industries Biden is trying to develop in America. The US currently imports very few EVs from China, yet Beijing’s rapid expansion of capacity promised to swamp markets with cheap imports, snuffing out the nascent American industry before it even got off the ground. Combining tariffs with subsidies may be controversial, but the strategy is one that has many exponents among economists.

Besides, for now these EV tariffs won’t actually stop Chinese companies from selling into the American market. They can, if they choose, move production to countries which have freer access to the US, such as Mexico. The Biden administration is looking to protect American industries it considers vital to its political interests, but it’s not looking for a trade war with China.

As for China’s reduction of its stock of US Treasury paper, one can make too much of this. Like many central banks, China is adding more gold to its portfolio, while it may also be using some of its dollar reserves to shore up its own currency. That will concern a US Treasury which is selling bonds as fast as it can make them to fund the country’s yawning fiscal deficit, but it may not signal a major change in the financial relations between the two countries.

Nevertheless, precisely because it’s an election year, this is a story to watch with interest. Should Biden win in November, it seems likely his economic team will move quickly to cool tensions with China. At least for now, both countries have too much at stake to want to aim for anything beyond a decoupling of industries that are strategic to them — such as energy for the Chinese or microchips for the Americans.

But were Trump to return to the White House, he would likely install a team of economic nationalists committed to reversing the presence of Chinese industries in the US economy. At that point, we really could start talking about a brewing split between the two powers.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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Paul T
Paul T
1 month ago

No. China needs dollars so sells it stuff to the US and the US needs China to buy its bonds. They both have to dance whether they like it or not.

UnHerd Reader
UnHerd Reader
30 days ago
Reply to  Paul T

So true.

Steve Jolly
Steve Jolly
1 month ago

Oh, the decoupling is happening. It’s just happening very slowly. If it cut off all at once, which it still might if China moves against Taiwan, both countries would feel the economic shock immediately. There would be short term shocks that could fuel long term problems or trigger serious economic collapses. It takes time to disentangle two economies so deeply intertwined without these major shocks, which is why they’re moving cautiously. Make no mistake, the US anti-China sentiment is absolutely serious. It dominates both parties, the military community, the military industrial complex, and the people themselves. No candidate from either party will dare make a statement that could be considered ‘soft on China’ during an election year. As much as globalists like this author don’t want to admit it, this is gonna happen. Biden’s cautious and slow paced approach is undertaken not out of a lack of conviction, but rather from an abundance of caution towards minimizing the economic shock and spreading out the economic sacrifices over years or decades so they’ll be more tolerable. This is, in my view, the correct approach to take until and unless the Chinese do something so provocative that it demands a severe response. Rome wasn’t built in a day.

Martin M
Martin M
30 days ago

One advantage of China “drawing closer” to Russia and Iran is presumably that the Russians and Iranians will get to drive crappy Chinese EVs.

Liam O'Mahony
Liam O'Mahony
30 days ago
Reply to  Martin M

I’m told the Chinese EVs are of excellent quality.. time will tell I guess?

Michael Clarke
Michael Clarke
30 days ago

The Chinese are probably selling Treasuries for two reasons: (a) the threat of a major US financial crisis for reasons that the dogs in the street are aware of and (b) the threat of the seizure of Chinese assets by the US as a foreign policy act. I’m surprised they haven’t completely offloaded their dollar assets already but no doubt they have their reasons.

Will K
Will K
7 days ago

The US and China will continue to decouple, in the sense that they now each regard the other as an enemy. Any seeming cooperation will be because both sides see it to their advantage.