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The US, China, and the Perils of Post-COVID Decoupling

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Pacific Money | Economy

The US, China, and the Perils of Post-COVID Decoupling

Resorting to economic nationalism is the wrong lesson to take from the pandemic.

The US, China, and the Perils of Post-COVID Decoupling
Credit: Official White House Photo by Shealah Craighead

U.S.-China relations are undergoing a major challenge due to the COVID-19 pandemic. Prior to the outbreak, the United States and China had just ameliorated two years of trade tensions with the inking of the so-called “Phase One” trade deal. But the pandemic has reintensified old strains on the relationship. Instead of working together to fight off the global pandemic, the two countries’ leaders have been playing a blame game, complete with misinformation campaigns. U.S. President Donald Trump blamed China for concealing critical information about COVID-19, deliberately referred to the “Chinese virus” (despite warnings that such rhetoric instigates hatred against East Asian people around the world) and even stepped up support for the conspiracy theory that the virus escaped from a Wuhan lab. On the other hand, the Chinese government accused the U.S. military of spreading the virus in China and complained that the United States’ early travel ban was unnecessary and harmful. Tensions continue to escalate, with Trump administration recently threatening to sue China for billions of dollars in pandemic reparations while Beijing forcefully condemned such charges.

Political battles aside, many Americans believe that COVID-19 revealed the danger of relying on China for manufactured products. Indeed, the United States was incredibly ill-prepared for the global pandemic, which revealed a lack of basic medical supplies and personal protective equipment (PPE) such as face masks, nasal swabs, and ventilators. The disruption of China’s supply chain due to the pandemic and lockdown also sent negative shockwaves to U.S. production and markets. The lesson seems to be that production must be brought back home, while the United States decouples from China. Support is rising for economic nationalism.

However, resorting to economic nationalism is the wrong lesson. It is not only infeasible but undesirable.

To start, it is impossible to decouple the two largest economies in the world. The United States and China are closely connected, not only with regard to the global supply chain but also their supplemental demand structure. It is a myth that China only offers cheap labor and that this cost advantage is quickly eroding. In fact, China occupies an important knot in the global supply chain because it has a 270 million-strong, highly flexible migrant workforce; far more technically trained workers than other countries; integrated infrastructure to ensure logistical efficiency; and vast and complicated industrial clustering and supply chains within the country. There are all advantages that cannot be easily replicated by other countries and regions. It’s true that the U.S.-China trade war has raised uncertainty and costs for the global supply chain, prompting some businesses to move out of China and possibly causing the global value chain to shrink. But what remains in China is production that has relatively limited room to change drastically – the very slow relocation of Apple’s production out of China and the opening of a Tesla factory near Shanghai are both testaments to the significance of China as a critical component of the global supply chain.

More importantly, even if the U.S. government could impose exorbitant tariffs or use executive orders to force U.S. businesses to leave China, that would  be highly undesirable. First, production may simply move elsewhere rather than return to the United States after decades of stagnation in the productive sector and the structural transformation of the country into a service-based economy. Second, some production may return to the United States but increasingly rely on automation, bringing few job or income benefits for the working class, as the Trump administration likes to portray.

Retreating from the global division of value chains is counterproductive. The lesson from COVID-19 is not that the United States needs to produce everything, but that it needs to produce something. China may have an advantage in producing masks and gowns and other relatively low-end PPE, but the U.S. has an advantage in producing more high-tech products such as ventilators and vaccines. The shortage of ventilators in the United States was not due to a lack of national capacity — in fact, four out of the top 10 ventilators manufacturers are U.S. companies. The problem was the lack of a strategic stockpile of ventilators to cope with surging demand — an utter failure on the part of the U.S. government, which had attempted in vain to build the stockpile since 2006.

Diversification of production locations is actually the most effective measure to deal with supply chain disruption in face of a global pandemic. When countries are in different phases of the curve, they are able to open their respective economies at different points in time, which prevents a complete halt in global production. China was the first victim of the pandemic and now is the first to reopen its economy. This allows China to produce some very essential PPE and medical supplies for the rest of the world, and to provide many important parts and components to auto, electronics, and various other makers around the globe.

In addition, the post-pandemic recovery will not be easy. The severity and duration of the COVID-19 crisis suggests that the hope for a quick “V-shaped” recovery in the United States is rapidly fading away. Nationalism is a very costly strategy for rebuilding the economy. The Trump administration is unlikely to reverse course and squander the trade deals achieved so far. China remains an attractive market, especially now with the opening of $45 trillion worth of financial markets.

Finally, to successfully battle the pandemic requires the containment of the virus in the “weakest link.” Helping the most vulnerable countries to cope requires coordinated assistance from the United States and China. For example, to help some of the highly indebted low-income countries, the United States could support the IMF to issue more Special Drawing Rights (SDRs) and China could extend or relieve some of these countries’ loans. A global crisis, be it a pandemic or climate change, requires coordination and cooperation. Pooling resources, sharing knowledge and coordinating policies are the key. It is more urgent than ever to build a global public health system and to rebuild the global economy, and that requires cooperation, rather than confrontation, by the world’s two largest countries.

COVID-19, like any virus, knows no borders. All countries are in this together.  As the world’s two largest economies, which remain closely connected, the United States and China must work together to effectively fight the pandemic and revive the economy.

Yan Liang is a full professor of Economics at Willamette University, United States. She specializes in international trade and finance, modern money theory, and economic development, with a regional focus on China.