The US-China Economic Relationship Needs ‘Robust De-Risking,’ and a Little Strategic ‘Decoupling’

Introduction

The U.S. needs a coherent, bipartisan policy toward trade and economic interactions with China. The Biden administration’s low-cost containment approach will likely fail against China’s scale. China commands a manufacturing industrial base producing twice what America’s does in value-added terms, trades more goods by value than the U.S. with every country on the planet except Canada and Mexico, and has a world-class science and technology ecosystem.[1]

The other end of the U.S.-China economic policy spectrum, a “MAGA-esque” comprehensive “decoupling,” would fail for different reasons. Chief among them, a virtual commercial divorce between the U.S. and China would come at the cost of American domestic opportunity and international influence. This would be a “Pyrrhic victory,” ceding competitive space to China (especially in Asia), leaving the world economically unbalanced, and tempting American allies and partners to break ranks and accept Chinese investments and trade anyway.

Warning signs are already flashing as China edges forward in its economic competition with the United States. For example, Chinese firms invested about four times as much in Europe’s electric vehicle sector between 2019 and the first half of 2023 as they did in North America’s, according to the Rhodium Group, despite the two regions’ similarly sized vehicle markets.[2] Economic co-option could over time fracture European democracies’ solidarity. This would move the People’s Republic of China (PRC) closer to the Asian primacy it seeks and, by extension, toward global preeminence by dint of a dominant position in the world’s most important economic macro-region.[3]

Against this evolving backdrop, U.S. policy should seek to steer and influence key outward-facing aspects of PRC economic activity rather than opt out through wholesale decoupling. Robust “de-risking” — i.e., loosening China’s grip on global supply chains but not cutting ties entirely — would better serve American and allied strategic objectives.

Decoupling Needed in Sensitive Sectors

PRC investment flows into the United States are generally beneficial.[4] For problem areas, selective exclusion and decoupling makes sense. Influence tools like TikTok should be banned from operating within U.S. territory, and PRC investors who have stakes in U.S. high-tech and life sciences firms that grant access to sensitive intellectual property should be significantly restricted.[5] Likewise, U.S. citizens, companies, and investment firms with a U.S. nexus should be prohibited from investing in PRC enterprises that facilitate military modernization through military-civilian fusion programs, espionage, and influence operations.[6]

In other areas, particularly real estate, security concerns are mostly overwrought. Chinese nationals owning Miami condos, homes in Houston, and farmland in the Midwest — so long as it’s far from military bases — will not harm U.S. national security.

Leveraging Market Power

American policy, and that of American allies, should leverage market power to shape PRC investors’ behavior in ways more congruent with U.S. interests. Only members of the Organisation for Economic Co-operation and Development (OECD) possess the collective depth, liquidity, and asset base diversity to accommodate outbound PRC capital flows that can reach $50 billion per month.[7] As statist policies within China throttle opportunity, the country’s pockets of manufacturing excellence, plus a domestic wealth pool estimated by investment firm UBS to be worth more than $84 trillion, will likely continue driving investment abroad.[8] A meaningful portion of this domestic wealth is tied up in physical assets like real estate, but a substantial portion is nonetheless mobile — as evidenced by the thriving shadow industry that helps wealthier PRC residents smuggle money offshore.[9]

The U.S. and its partners would generally gain more by accepting these capital flows — within more robust guardrails — than they would by rejecting them. Consider energy transition items like wind turbines, solar panels, electric vehicles, and batteries. Chinese firms dominate these supply chains, which are not easy to replicate quickly in the U.S. and OECD countries (at least without Chinese firms’ intellectual property). But PRC firms also need American and European markets. Data from the International Renewable Energy Agency show that in 2022, these two regions combined added about 70% as much wind and solar capacity as the PRC domestic market and almost 1.5 times what the rest of the world installed.[10]

Control system software from Chinese telecommunications giant Huawei and cellular modules from Fibocom or Quectel should have no place in the U.S. power grid. But rather than banning PRC-origin energy products, policymakers could require an “American edition” that runs audited, open-source software with trusted datalink and internet connection hardware. The Chinese Communist Party has for decades leveraged China’s market heft to force many major foreign firms to effectively produce “China editions” of their products, host data locally, and take other measures to safeguard PRC national security.

As the world’s largest collective consumer marketplace, OECD countries could and should condition PRC market access upon reciprocal protections and accommodations. Even better, policymakers could insist that PRC firms seeking market position in North America or the European Union localize their production of key goods.

Tightening Export Controls on Critical Technologies

Other areas, particularly high tech, offer less cooperative space and are critical for national prosperity, and ultimately, national security. Washington and its allies should tighten existing export controls on these apex technologies and the equipment used to produce them.

Huawei’s new Mate60 Pro smartphone’s 7-nanometer chip — roughly equivalent to what Intel ships today — showcases China’s domestic engineering skill. But perhaps even more so, it highlights Western firms’ continued support to PRC chip fabrication plants (fabs). ASML, the world’s premier maker of lithography machines, booked historically high sales revenues from its China business in the third quarter of 2023.[11] Likewise, Applied Materials, a critical equipment supplier to chip fabs worldwide, saw revenues from China rise nearly 23% from the near-term bottom a quarter prior.[12] China would still progress technologically without these companies’ support, but the rate would be slower and help the U.S. and allied economies to “run faster” in what is a “winner take nearly all” technology race.

De-Risking Pharmaceutical Supply Chains

Production of life-critical medications whose manipulation by Beijing would imperil millions of Americans should be urgently “friend-shored” or re-shored. Jackson Healthcare’s penicillin-based antibiotics plant in Tennessee, which produces more than a billion doses per year, offers an example of how targeted support can facilitate de-risking of critical pharmaceutical supply chains.[13] Other high-volume, critically important medications like those for blood pressure and cholesterol control, asthma therapies, insulin, thyroid hormones, acetaminophen, and ibuprofen should also be sourced from supply chains without PRC participation.

Cultivating Manufacturing in North America

Washington should continue using carefully targeted tariffs to cultivate the quiet manufacturing renaissance unfolding across North America — including, notably, in Mexico. Domestic industrial revival supports democracy at home and stabilizes our neighbor to the south. PRC firms will likely substantially increase investments in Mexico to maintain North American market access and flee a worsening political climate within China. Nevertheless, the dynamic should be manageable so long as U.S. policymakers work with their Mexican counterparts to domesticize these new Chinese entrants and attenuate their ties to Beijing. As a concrete example, the enterprises could be prohibited from having more than a certain percentage of shares owned by a PRC parent company or having Communist party cells. Mexico could also restrict foreign parastatal firms’ asset ownership rights.

Facilitating re-shoring into North America that bolsters cross-border value chains and economic opportunity could have knock-on benefits. For instance, a continued North American manufacturing revival could also create political space for strategic trade deals with Asian partners — including a full bilateral free trade agreement with Taiwan — to ensure they have a viable counterbalance to the PRC’s otherwise suffocating economic embrace.

Conclusion

In a time of electoral sloganeering, the idea of “robust de-risking” may not reliably rile up stump speech listeners. But its ultimate effect — the real results of keeping the U.S. and its partners as capital magnets and prosperity hotbeds — may yet find favor across the political spectrum.

Notes

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[1] The World Bank, “Manufacturing, Value Added (Current$),” https://data.worldbank.org/indicator/NV.IND.MANF.CD.   

[2] Eurostat, “Passenger Cars in the EU,” March 2023, https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Passenger_cars_in_the_EU#An_almost_9_.25_increase_in_EU-registered_passenger_cars_since_2016.

[3] Timothy R. Heath, Derek Grossman, and Asha Clark, “China's Quest for Global Primacy: An Analysis of Chinese International and Defense Strategies to Outcompete the United States,” RAND Corporation, 2021, https://www.rand.org/pubs/research_reports/RRA447-1.html.

[4] Decoupling decisions will, in most cases, ultimately be decided at the national political level, which is why this section of the article departs from the typical “U.S. and allies” terminology.

[5] Rolfe Winkler, “Chinese Cash That Powered Silicon Valley Is Suddenly Toxic,” The Wall Street Journal, June 11, 2019, https://www.wsj.com/articles/chinese-cash-is-suddenly-toxic-in-silicon-valley-following-u-s-pressure-campaign-11560263302.

[6] John D. McKinnon and Stu Woo, “The Billionaire Keeping TikTok on Phones in the U.S.,” The Wall Street Journal, September 20, 2023, https://www.wsj.com/politics/policy/jeff-yass-tiktok-bytedance-ban-congress-15a41ec4?mod=article_inline.

[7] Filip De Mott, “Capital is Leaving China at the Fastest Pace in More Than 7 Years, Sending the Yuan Lower,” Business Insider, October 23, 2023, https://markets.businessinsider.com/news/currencies/china-capital-flight-yuan-property-market-economy-growth-foreign-currency-2023-10?op=1.

[8] UBS, “Global Wealth Report 2023,” June 15, 2023, https://www.ubs.com/global/en/family-office-uhnw/reports/global-wealth-report-2023.html.

[9] Lulu Yilun Chen, “China’s Rich Entrust Total Strangers to Sneak Cash Out of the Country,” Bloomberg, October 8, 2023, https://www.bloomberg.com/news/articles/2023-10-08/how-china-s-rich-are-using-underground-networks-to-move-their-money-abroad?leadSource=uverify%20wall.

[10] Spreadsheet model on file with author, available upon request.

[11] Data from ASML Corporation Investor Relations (on file with author), https://www.asml.com/en/investors.

[12] “Third Quarter Fiscal 2023 Earnings Presentation,” Applied Materials Corporation, August 17, 2023, https://ir.appliedmaterials.com/static-files/eba697b2-25c5-4ecd-a194-b08727636faa.   

[13] “USAntibiotics,” Jackson Healthcare, https://jacksonhealthcare.com/companies/usantibiotics/.