Decoupling from China's economy is suicidal for US & EU

Economy Decoupling From China? The Consequences of a Stupid Idea Ricardo Martins, October 10 There are ongoing discussions about the need for the West, especially the United States (US) and the European Union (EU) to de-risk and/or decouple from China. These discussions pervade all spheres, including journalistics, think tanks, academia and politics. Decoupling From China? Holding China more than 30% of the world’s industrial output and a major destination of Western production or Western firms producing in China, how is this proposition plausible and credible in such intertwined economies without disrupting global supply chains and without bringing high inflation to Western nations? In this article, I analyse why decoupling is not a good idea, its dire consequences, and the consequences for the West of being deprived of Chinese high-tech advancements. I emphasise that decoupling is a US agenda for the continuation of its dominance over the globe, and not a European one. Why is Decoupling a Stupid Idea? The Earth is big enough for China and the US to develop respectively and prosper together Chinese Ambassador to the US, Xie Feng According to the World Bank, China holds 31.6% of the total global manufacturing output. The US follows with 15.9%, and Japan is in third place with 6.5%. The leading EU country is Germany, with 4.8%, in fourth position, and the next European is Italy in 8th place, after Russia, with 1.8%. France comes in 10th place, after Mexico, with 1.6%. This data was published in 2024 and refers to the 2023 manufacturing output. Furthermore, according to Reuters, in September 2024, the German manufacturing sector contracted at the fastest pace ever in a year due to “orders drying up at an alarming rate”, and “it is hard to picture any kind of recovery happening soon.” With globalization and the liberalization of trade of goods and services, the world has become interdependent. In the case of the US, its economy is increasingly dependent on China for imports (particularly manufacturing supplies and advanced materials), Foreign Direct Investment (FDI) flows, and even the contributions made by Chinese students in living fees and tuition expenses. An American study has shown that decoupling with China risks all of these value streams, and would constitute losses of over $700 billion in sales and $50 billion in profits for American companies that export to the Chinese market. A similar situation will happen in Europe too. Consequences of Decoupling Decoupling from China, given its massive 31.6% share of global manufacturing output, would be extremely disastrous. Here are a few reasons that come to my mind: Global Supply Chains: China’s integration into global supply chains means it plays a critical role in the production of everything from high-tech electronics to textiles. Western economies rely heavily on components or finished products made in China. For certain products and raw materials, the dependency rate is over 90%, as is the case for certain pharmaceuticals, chemicals, photovoltaic cells, rare earth and others. China is the dominant producer of several rare earths which are crucial for the manufacturing of a wide range of high-tech products, including electronics, wind turbines, and electric vehicle batteries. Decoupling would require either relocating manufacturing to other countries or reshoring industries back to Europe or the US would imply disrupting industries for years and would lead to major supply chain disruptions, causing shortages, higher production costs, and high inflation. Relocation Challenges: Countries like India or Vietnam are often presented as alternatives, but none have the capacity or infrastructure that China has developed over decades. Manufacturing in these regions might help diversify risks but cannot replace China’s dominance in the near term. Additionally, many of these nations already have trade ties with China, complicating decoupling strategies. Cost Implications: China offers lower labour costs, efficient infrastructure, and a vast workforce. Moving manufacturing to other countries with comparable capacity is difficult. The next biggest players—like India, South Korea, and Germany—have much smaller outputs (between 2.7% and 6.5%). They also may lack the same level of infrastructure or workforce to handle the massive volume of production that China does. Market Access: With a population of 1.4 billion, over 500 million of whom are considered middle class, China boasts the largest internal consumer market in the world and is the leading market for luxury products. This market contributes significantly to the revenue of Western companies. Many Western firms, including major technology and luxury brands, depend on sales within China to stay profitable. Should decoupling result in economic or political tensions, access to this market could be jeopardised, potentially harming the revenues of these Western companies. Retaliation: China will retaliate against the US and EU’s decoupling measures by imposing tariffs, restrictions, or boycotts on Western products, further reducing export opportunities for Western firms. Key industries, like automobiles, luxury goods, and agriculture, can face severe downturns. Global Recession Risks: Given the size of China’s economy and its deep integration into the global economy, a sharp decoupling could lead to a slowdown in global trade and investment. If China’s growth slows due to decoupling, it will propagate across the global economy, possibly leading to a global recession, as China is a key driver of global demand. Many emerging markets depend on exporting raw materials to China. A slowdown in Chinese manufacturing could weaken demand for these exports, slowing growth in those countries and leading to economic instability in regions that rely on Chinese-led infrastructure and trade. Geopolitical Consequences: Decoupling certainly will lead to economic fragmentation, where China becomes more self-reliant and allies more closely with emerging markets and other nations willing to maintain ties. China is the number one trade partner with 128 countries, out of 190, including the EU. This will shift further the balance of power, creating separate economic blocs, such as the West and the rest, which could disrupt trade and economic cooperation globally. Western is Losing the Technology Race to China Trump has played the technology restrictions card to contain China. A few days ago, a Chinese told me that Trump is playfully known in China as “The maker”, the one who has made China technologically resilient and surpass the US. Presently, the country leads in 37 out of 44 technologies examined in the Critical Technology Trackers survey by an Australian think tank. According to the same study, Western democracies are increasingly falling behind in the global technological race, including scientific innovation and attracting global talent—key elements essential for developing and mastering the world’s foremost technologies. The Australian findings indicate that China has laid the groundwork to become the preeminent science and technology superpower by securing an impressive lead in high-impact research across most critical and emerging technology fields. China’s leadership position is the result of intentional strategy and long-term policy planning, consistently emphasised by Xi Jinping and his predecessors. My Conclusions on this Discussion 1. If decoupling is to be pursued, the US and Europe are prone to be behind in technology but also will not benefit from a fast-growing economy and the biggest consuming market in the world. It is an act of economic suicide, ideologically rooted in the imperialistic ambitions of the United States to maintain its global dominance. 2. As the US and EU distance themselves from China, they may lose economic leverage and influence in Asia, Africa and Latin America, where China’s Belt and Road Initiative (BRI) is extending its influence. While Western nations discuss strategies and possibilities on how to de-risk and/or how to decouple from China, the country is deepening its ties with emerging economies, thus reducing the geopolitical influence of the US and Europe in key regions of the world. 3. While efforts to de-risk and decouple from China may be seen as necessary for geopolitical and geoeconomic reasons, they come with considerable risks and challenges. The interconnectedness of the global economy means that any significant shift in trade relationships can have wide-reaching effects, not only for the US and EU but also for China and the rest of the world. 4. Balancing these efforts while maintaining economic stability will be a complex challenge for policymakers in the coming years. A more nuanced approach to managing the US and EU-China relationship, prioritising collaboration over confrontation, is a win-win solution. 5. The EU needs to develop its autonomous strategy for navigating the problematic US-China relationship and not cede to US pressure to be its followers, but actively seek its own path to balance its economic interests with its political and security concerns. 6. Finally, the statement of the Chinese Ambassador to the US, Xie Feng, should be the guiding premise: “The Earth is big enough for China and the US to develop respectively and prosper together.” For this, the US needs to learn to share power. Ricardo Martins ‒PhD in Sociology with specialisation in EU policies and international relations. Guest researcher at Utrecht University, the Netherlands, especially for the online magazine “New Eastern Outlook” More on this topic BRICS Summit in Kazan: A Turning Point in Geopolitics and World Economy. 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