Decoupling tech supply chains would do more harm than good

For a technology sector that would much prefer to focus on growth over geopolitics, the push for U.S.-China “decoupling” poses an inescapable threat. The fuzziness of the concept only increases the danger.

U.S. distrust of China, particularly in technology, is nothing new. Indeed, Congress took action to keep Huawei and ZTE out of U.S. telecommunications almost a decade ago, during the Obama administration.

But during the administrations of both George W. Bush and Barack Obama, there was a broad push to engage in dialogue and find common ground between the world’s two biggest economies. As China emerged as a leading global economy and became an increasingly important trading partner to the U.S., (accounting for 2.5% of U.S. imports in 1989 and rising to a peak of 21.6% in 2017), there were moves to incorporate it into the U.S.-led global trading system. In 2005, Deputy Secretary of State Robert Zoellick put forward the idea of China as a “Responsible Stakeholder,” under the assumption that embracing China’s entry into the global trading system would ensure that it helped that system continue to function.

Not long before that, the U.S. had agreed to China’s 2001 accession to the World Trade Organization. But while it was seen by many as a turning point, it was really just a waypoint. That year, China’s share of U.S. imports was already 9.0%. Growth in Chinese imports, moreover, reflected a rebalancing of Asian trade more than anything else; from 1989 to 2017, Asia’s share (including China) of U.S. imports grew from 42.3% to just 45.2%. China’s relative growth instead ate into the share of countries like Japan and Malaysia, reflecting a reordering within Asia. The standard system of trade accounting overplayed this shift, as a good that was finished in China and had 10% Chinese value added would count as 100% Chinese for trade statistics.

Regardless of what was labeled as produced where, the bottom line was that a well-developed Asian supply chain incorporated China as a major player. With increased engagement, however, and very different economic systems, the points of economic disagreement between China and the United States accumulated. During the Trump administration, dialogue took a back seat to new trade barriers. The United States applied tariffs on hundreds of billions of dollars of Chinese imports and China responded with barriers of its own. Although the Trump tariffs were initially cast as temporary measures meant to achieve finite policy objectives, some key policymakers within the Trump administration saw value in diminished interaction between the two countries.

Matthew Pottinger, who served as Deputy National Security Adviser under President Trump, subsequently wrote that “important U.S. institutions, especially in finance and technology, cling to self-destructive habits acquired through decades of ‘engagement,’ an approach to China that led Washington to prioritize economic cooperation and trade above all else.” His solution calls for bold steps “to frustrate Beijing’s aspiration for leadership in … high-tech industries.” The Biden administration recently announced, after a prolonged review, that it was maintaining the Trump tariffs and Congress has pushed to fund initiatives that would subsidize technological independence. These moves for lessening dependence, particularly in technology, have fallen under the broader rubric of “decoupling.”

Amidst all the newfound enthusiasm for U.S. decoupling from China, one might imagine that the term is well-defined. Yet it takes relatively little probing to discover a lack of clarity. Of course, the above-mentioned tariffs have served to discourage trade between the two countries, but how far is this policy meant to go?

Does decoupling mean the U.S. will turn away from inbound and outbound foreign direct investment? What about portfolio investment, such as the purchase of U.S. Treasuries? Does it mean that the U.S. should avoid importing final goods produced by Chinese firms? What about European firms producing in China? What about U.S. firms producing in China? Or European or U.S. firms producing outside China but incorporating Chinese parts? Or companies selling into the Chinese market and thus, presumably, subject to Chinese influence?

The sheer breadth of economic interactions between the two giant economies illustrates the implausibility of a clean divide between them. Instead, the most likely result of an attempt at exclusion would be another reordering, not China’s disappearance as a supply chain power. This is particularly true when other global economic powers, such as the European Union, do not share even the vague objective of decoupling.

The nebulous nature of the decoupling push poses a particular threat to the tech sector. Over decades, the push to take advantage of scale economies and to drive down production costs has resulted in highly-integrated global tech production. Further, in subsectors that have recently emerged as particularly contentious, such as the production of semiconductors, investments have to be made at large scale and well in advance. That leaves the sector especially vulnerable to rapidly-shifting rule changes, as policymakers struggle to give substance to a problematic concept at a time of difficult supply chain disruptions. Policy responses that shower the sector with subsidies, as some bills in Congress have proposed, seem appealing, but lose their effectiveness when countries such as Japan move to match them.

A world in which the United States provides an extreme answer to the above questions and is absolutist in its separation from China is likely to be one in which the United States cripples itself technologically, denying itself access to globally-competitive sourcing and empowering competitors elsewhere. The only politically viable alternative at the moment, a world in which the United States takes a more moderate stance and struggles to find a middle ground, is likely to be an unpredictable one in which rules are constantly evolving.

In either case, proponents of U.S.-China decoupling will find such a move counterproductive. Far from resolving strategic policy concerns, its primary impact may be to challenge U.S. technology leadership instead.