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TematicheStati Uniti e Nord AmericaHave China and the US really decoupled? Not so...

Have China and the US really decoupled? Not so fast

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The outbreak of Covid-19 showed the dangers behind overstretched global supply chains largely based into a single country. This prompted the United States to reconsider its trade relations with China, shifting toward a process of reallocation of production in friendly states and in its own territory. However, this process popularly known as “decoupling”, has so far failed to produce effective results.

From irrelevant to pivotal, the American trade with China 

The trade approach between the United States and China in 70s was firstly determined mostly by political necessities. The Nixon Administration was aimed to improve the U.S relations with China in order to prevent the assumption of a more revanchist posture by Beijing and to create a powerful counterbalance against the Soviet Union. After an initial slow increment, the trade between United States and China greatly increased since 1978. The 24 January 1980 represented the turning point in the history of Sino-American trade. That day, the United States conferred China the status of ‘Most Favourite Nation’, which exempted it from the provision of the Smooth-Hawley Act of 1930. However, the effective American normalization of the trade with the People’s Republic of China was forbidden due to the Jackson-Vanik Amendment of the Title IV of the Trade Act of 1974. As a result, the Congress was forced to renew the MNF status of Beijing every year. This period was marked by the intersection between the political reason which prompted the starting of the Sino-American trade and an economic one. China strongly needed American cooperation due to its precarious economic conditions. The visit of the Secretary of Treasure Blumenthal laid the ground for the establishment of a solid economic cooperation. Due to the Chinese need of American technology, the United States eased its restriction on the export of sensible technology to China and in 1980 the Department of Commerce removed China from the Category Y (Warsaw Pact) in order to place it in the new category P (new partners of the United States).

The rise of the Reagan Administration resulted in a closer partnership between the United States and the People’s Republic of China. The trade relations between the parts grew both at economic and military level. On the first hand, in 1983, after a visit of the Secretary of State George Schultz to Beijing, the U.S moved China to the trade Category V, reserved to friendly countries, in order to increase its technological export to the PRC. In the subsequent years the Sino-American trade greatly increased. The U.S exported to China a mixture of high work low capital intensity goods like corns and agricultural product, with high capital intensity goods like technological and industrial products, while importing mostly high work intensity goods like textile products. On the second hand, due to the common Soviet threat, the Reagan Administration issued a policy of military assistance aimed to improve Chinese defense capabilities against a possible soviet invasion. China was subsequent included in the Foreign Military Sales Program (FMS) and enabled to receive technical assistance on the production of munition and torpedoes. In 1985 the United States became the third greatest investor in China, only behind Hong Kong and Macao. So, the Asian Development Bank, mostly controlled by Washington, provided to the PRC a substantial loan of 60 million, starting a high profitable collaboration.

During Administration of George H.W Bush, China was excluded from the Foreign Military Sales Program, but the ending of the military assistance, didn’t result into an ending of the economic relations between the two giants. After the 1994 elections, President Bill Clinton pursued an aggressive policy of markets opening in the Indo-Pacific Region which was enacted through the U.S promotion of multilateral negotiations in the Asia-Pacific Economic Cooperation, the most important forum for economic cooperation between the United States and Asian countries. This process culminated with the Bogor Declaration, through which the APEC members pledged to liberalize trade and investments between them and strengthen the development cooperation. The Clinton Administration aimed to involve China in this system, in order to integrate it in the international community and make it a responsible actor on the international system. During the 90s, the Sino-American trade greatly increased thanks to the Chinese capacity to strengthen the purchase power of the American customers due to its cheaper production of consumer goods. In 2000, the Congress approved the USA-China Relations Act, which allowed China to enter in the WTO and conferred to Beijing the Normal Trade Relations Status. 

The new hostility 

The George Bush Jr. Administration was instead marked by a continuation of the trade growth between the parts as well as the arise of a political hostility caused by Chinese economic practices. During the two mandates of George W. Bush, the semestral reports of the US Department of Commerce constantly requested China to grant a greater flexibility for its currency. But this requested remained unfulfilled. So, in 2006 the United States openly accused China to pursue a “mercantilistic” trade policy, stated that this made impossible for the PRC to become a responsible actor on the international system. The 2008 US Presidential elections were the first ones heavily influenced by the economic consequences of globalization. The progressive relocation of the manufacturing production in Third World countries, particularly China, resulted in a massive de-industrialization in the United States. After those elections, the globalization and the trade relations with China became a fundamental part of the public debate. So, the PRC overcame the US as the greatest manufacturing power. Due to this state of affairs, the Obama administration pursued a policy aimed to counter the Chinese economic practices and revive the American manufacturing sector. This policy was enacted by a combination of trade complaints and multilateral negotiations. President Obama filed more than 20 trade complaints against China in the WTO and negotiated with other Indo-Pacific countries the formation of a trade bloc based on high trade standards aimed to reduce Chinese economic influence in the region, the Trans-Pacific Partnership (TPP).

The 2014 represented a huge turning point in the history of the world trade. That year saw the Russian Federation attack Ukraine for the first time. The Russian aggression resulted in the imposition of huge economic sanctions by Western countries, the most important trade partners of Russia. Moscow would have experienced a bad economic downturn, due to its economic dependence on the West. This event reintroduced in the international trade the concept of “de-risking”, defined as the reduction of one actor’s economic dependence on a possible hostile actor, event at cost of a less efficient production. In 2015, China launched the Made in China 2025 initiative, with the goal to turn the PRC into the dominant provider of high technological goods. This policy was aimed to reduce the Chinese economic dependence on its exportation to the US. In the same period, the American domestic policy was marked by a huge earthquake, the election of Donald Trump.

The tycoon based a great part of its campaign on the same promise previously made by Obama: countering Chinese trade policies. Donald Trump pursued this goal by abandoning multilateral mechanism like the TPP and focusing instead on the imposition of tariffs and other form of trade barriers. Since 2018, the Trump Administration imposed huge tariffs on Chinese goods under the 301 Section of the Trade Act of 1974. The tycoon also restricted the Chinese firms access to some strategic sector of the American domestic market. The most important example of this policy is represented by the Executive Order 13873 against Huawei. China answered by imposing tariffs against American goods, in particular agricultural products, produced by a specific class of workers very loyal to Donald Trump. This trade war would have continued for two years, at a great cost for both America and China, until the 2020, which saw another earthquake wich should have represented a huge change of the world trade system, the outbreak of Covid-19.

The friendshoring

The epidemic of Coronavirus showed the great fragility of the global “supply chains”, mostly based in China, the world top manufacturing power. Due to this disaster, the formation of more solid supply chains became a top priority for the new US President, Joe Biden. The Biden Administration pursued this policy through a process of “re-shoring” and “friendshoring”. Firstly, President Biden advocated for the approbation of stimulus packages aimed to increase the competitiveness of the American production of semiconductor, a pivotal good in the electronic era, and revive American manufacturing. This process resulted in the approval of the Infrastructure Investment and Jobs Act, the CHIPS Act and the Inflation Reduction Act, which determined a huge growth of the US manufacturing sector after years of failures. At the same time, the Biden Administration shifted toward a strengthening of trade relations with countries aligned with the United States and negotiated with Indo-Pacific countries the formation of a new trade bloc based on shared rules, the Indo-Pacific Framework

The Biden’s policies were followed by concrete results. A recent study indicated worldwide growth of investments in friendly country by analyzing the allocations of Foreign Direct Investments and comparing them with the geopolitical alignment of the nations based on the voting patterns at the UN General Assembly. The results showed a greater propensity of the various actors on the international system to invest in countries with similar voting patterns. This process is particularly strong in the so-called strategic sectors which, according to the definition of the Atlantic Council are the 5G, electronics, telecommunication and pharmaceutical sector. The US imports from China dropped from 23.1% to 21.6% on the total trade volume and from 36.8% to 23.1% on strategic goods. In particular, Chinese export declined mostly on tariffed goods compared to the non tariffed ones. In the same period, the United States experienced an increase of the imports in the same sectors from more diplomatic aligned countries, like Vietnam, Taiwan and Canada. However, there’s more. The countries which increased their export in the sectors in which China declines, increased their imports from Beijing in the same sectors. At the same time, China succeeded in diversifying its imports from the US.

This state of affairs was determined by the intersection of three factors: the type of good traded, the absence of actors able to take China place, and the continuation of Chinese dominance in the export of strategic goods necessary to the United States. Firstly, the PRC exports to the U.S machinery and electronic components, these goods are difficult to produce, and the diversification of their imports is therefore complicated. While the United States mostly exports to China agricultural products, which are much easier to replace. Secondly, there are no actors on the international system which have the Chinese ability to produce labor-intensive goods. If they tried to replace China, they would have to face high cost for training personnel, build infrastructure and afford the production by entering into a market characterized by the presence of a dominant actor with a huge comparative advantage. Finally, the PRC remains the dominant supplier of strategic goods for the United States, like rare earths and active pharmaceuticals ingredient.

The “post Covid” world

The policy of friendshoring pursued by the United States actually resulted into mere diversification of the sources of import of Chinese goods. However, even though China managed to diversify its source of trade better than the United States, it has been equally unable of freeing itself from its economic dependence on export. The Chinese economy remains largely dependent on the export of its production surplus and the lion share of this surplus is directed to the US. The PRC lacks a domestic market able to absorb its production, as well as other actors able to replace the United States as its most important source of export. At the same time, the goals of the project “Made in China 2025” remained largely unfulfilled. In 2022, the Russian Federation invaded again Ukraine, this time strengthened by a quasi self sufficiency in the alimentary production. Moscow tried to exploit its role as the biggest exporter of gas to the EU in order to force Europe out of the conflict, but this didn’t work. Europe managed to diversify its gas imports, while Moscow was unable to find other actors able to absorb its gas offer. Due to this state of affairs, Russian gas export heavily declined and Moscow’s economy, highly dependent on oil and gas sector, was severely hurt. This showed the big risks for an actor dependent on its exports. The coronavirus should have represented a major turning point in the history of trade to such a point of speaking of a “post Covid world”. This pandemic undoubtedly resulted in a relative growth of the importance of the geopolitical alignment as a factor to determine the allocation of the foreign direct investments, as well as a more robust use of platform like zoom on the workplace, but there is no sign of a huge change in the structure of the trade between United States and China. Rebus sic stantibus:Washington and Beijing are still heavily dependent on each other. The “post Covid” world looks actually very similar to the pre Covid one.

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