You don’t have to leave your home so you can visit the ultimate battlefront of the coronavirus pandemic. It’s in your closet, on the TV in the living room and on the masks, you now keep in the medicine cabinet. It’s in the building materials, on some pantry shelf and on the children’s toys. It’s in the dozens of objects we use every day and they remind us that China is the factory of the world. A world where there is no other China.
The Far East has long been scattered in the most intimate corners of our lives. You have witnessed its industrial and business revolution in your own neighbourhood. How they went from junk to electronic gadgets and industrial robotics. From typical restaurants to traditional bars, from 24-hour shops to industrial estates. Just in case you had gotten confused, they have told you about it in the newspapers, on TV, in the movies and even at the Comedy Club. Until we come to take it for granted.
Over the past 30 years, China has absorbed millions of jobs around the world, especially in manufacturing and technology. An unwritten contract in which the communist power would fuel perennial Western demand with cheap goods that everyone could consume. The loss of jobs began on an obvious issue of wage competitiveness, but the reasons are – as always – multiple and complex. And they’ve been sophisticated over the years. Steve Jobs explains it much better.
Months before the launch of the first iPhone in 2007, Jobs rebuked his lieutenants that the plastic screen of the prototype that he had carried in his pocket for the past few days was full of scratches. He wanted it with tempered glass and he wanted it now. With just a few weeks to go before launch, only one factory in Shenzen, China seemed capable of achieving it. When the new displays arrived at midnight, the foremen lifted 8,000 workers from the dorms the company built on the same floor, gave each one a cookie and a cup of tea, and put them to work 12-hour shifts to produce 10,000 units daily.
“The speed and flexibility were amazing,” a former Apple executive told the New York Times, explaining with this anecdote why China was the right place to assemble the flagship phone of the United States, a device with a hundred components from a dozen countries. “The entire supply chain is now in China,” said another source. “Do you need a thousand plastic gaskets? They are in the factory across the street. Do you need a million screws? At the next corner. Do you need the screw to be a little different? It will take three hours.”
Years later, during a dinner with Silicon Valley luminaries in February 2011, former President Barack Obama asked Jobs what the Government could do to make the iPhone manufactured in the United States and not in China. “Those jobs are not going to come back,” settled the Californian businessman. Are you sure Steve?
The pandemic has portrayed the great contradiction of western democracies with respect to Beijing. Our economies are addicted to their imports and their global supply chains. A strategic element that we have delivered to an opaque, authoritarian and extremely powerful regime. The battle for the coronavirus narrative is not a mere exercise in diplomatic rhetoric, but the public expression of the hegemonic pulse held by Washington and Beijing. And in this confrontation, a word rings out again these days in the circles of business and political power in the United States: ‘decoupling’.
The idea of ’decoupling’ from China is not new. Many have spent years advocating the repatriation of some of the production chains from strategic sectors to the West and the transfer of others to closer areas of influence to diversify the global supply and distribution chain. But after decades of outsourcing the production of all kinds of goods (and more and more services), is the world ready to divorce China? And you, would you be willing to pay your part of the bill?
Turbo accelerate decoupling
“We could end up cutting off all relationships,” President Donald Trump threatened last week when asked if he could retaliate against China for its management of the pandemic. “Now, if we did this, what would happen? That we would save 500,000 million dollars if we cut all relationships,” said the Republican leader in an interview with Fox.
The number has no real basis and in reality economists have been warning for the opposite for years. A severe decoupling between the two largest world powers would cause a shock wave that would impact global trade, increasing production costs and fueling inflationary pressures.
“The suddenly popular idea of a complete decoupling of the American and Chinese economies is not a political strategy. It’s a tantrum,” wrote David P. Goldman, an Asia Times columnist, who has been defending China’s selective decoupling for years. “Self-sufficiency in strategic assets is expensive, but national security is like JP Morgan’s yacht: if you have to ask how much it costs, you can’t afford it.”
Still, the Trump administration is willing to put $ 25 billion on the table to encourage companies to return to the country. In addition, officials and lawmakers value bans on large numbers of sensitive exports, additional tariffs on Chinese products, or even withdrawing from the World Trade Organization. “We have been working on that for the past few years, but now we are ‘turbo-accelerating’ that initiative,” Keith Krach, deputy secretary of the State Department for economic growth, told Reuters.
This, which with any other president would have sounded like electoral rhetoric to win votes in the American Oxide Belt, with Trump has become a real possibility, as demonstrated by the tariff war that he has been waging with China since 2018.
“China’s relations with the United States have never been worse since President Nixon visited Beijing in 1972. And they will probably worsen in the near future,” explains Shi Yinhong, professor of International Relations at Renmin University and adviser to the State Council Chinese, to Revyuh. “Trump and his team’s ‘super-hawks’ are fighting to get value chains out of China. Decoupling is starting to expand much faster and with much less selectivity.”
The intention is undoubtedly present. And the evidence follows. Just this week, Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest microchip contractor, has halted its deliveries to Huawei over stricter export controls imposed by the United States to smother the Chinese company, according to Nikkei Asian Review.
But that does not imply that political wishes are going to have a business translation. Total US investments in China rose to $ 14 billion last year, from $ 13 billion a year earlier driven by bets from such iconic companies as Tesla, General Motors or Universal Studios. A survey by the United States Chamber of Commerce in China showed in April that most American companies operating in the country have no intention of moving their production and supply chains.
Crisis in Chimerica?
In February 2007, Professor Niall Ferguson coined the concept ‘Chimerica’ in the pages of the Wall Street Journal to try to summarize in a word the new world order that was shaped after the fall of the Soviet Union. An arrangement based on a China that accepted its second position in the world concert in exchange for growing at dizzying rates through cheap exports and the United States as the only global superpower, charged with consuming Asian overproduction and entrusted to lead a productive transition based on innovation.
But this understanding was born from a serious miscalculation by the West in allowing, in December 2001, China’s accession to the WTO in 2001 without any condition, nor regulations, nor democratic balances. The idea then was that the invisible hand of the market would be in charge of accelerating the internal dynamics that would lead the Asian giant to become “one of our own.” In fact, it was a Trojan horse in the global economy, introducing an unbeatable workforce and enormous savings rates. Result: greater benefit for capital thanks to the massive reduction in global labor costs. The Chinese rise became unstoppable. If at the turn of the millennium the Chinese economy accounted for 13% of the United States’ GDP, by 2016 it was already 60% (and it will reach, in 2023, 88% according to the IMF).
For 15 years, this symbiosis worked perfectly for both of them. Until in 2015, China took some measures to cushion the growing risks of its financial system – including a monetary policy designed to control the value of the yuan and controls to prevent capital flight. Intervened by the State, the Chinese currency lost attractiveness in the markets. Its depreciation against the dollar made the Chinese economy even more competitive, cheaper, and more addictive for the West, further fueling the trade deficit with the United States and much of the world.
The crisis in ‘Chimerica’ soon materialized in the electoral arena. The loss of jobs due to Chinese relocation was one of the workhorses of candidate Trump, who promised a strong hand against Beijing to balance the situation. A problem that exceeds the exchange of merchandise: the theft of patents and industrial property, protectionist measures to access the Chinese market or the injection of public funds into supposedly private companies (thanks to what is known as China Inc) have turned China in a difficult competitor to beat and an ally that is easy to distrust.
Here is the origin of the trade war that had the world economy in suspense in 2018 and 2019. And Trump assures that he is willing to advance on this path, whatever the cost. “A ‘Chimerican’ divorce is unlikely to be amicable,” Professor Ferguson of the Hoover Institution warned in a 2018 article, a decade after the baby was baptized. “And it will not only harm China but also the United States and the world economy,” he added.
Because even Washington, with all its economic, political and technological power, cannot unilaterally reverse globalization. The decoupling will be global or it will not be.
2020 has disappointed us all. Before the pandemic hit the world, Japan’s Prime Minister Shinzo Abe had an agenda packed with good news. In April, a historic Xi Jinping state visit to the country, the first in a decade, to relaunch Sino-Japanese relations. In July, the opening of the second Tokyo Olympics. Instead, on March 5 – precisely the same day he was to be exchanging praise with the Chinese leader – Abe was in a crisis cabinet for the pandemic.
“Due to the coronavirus, fewer products are arriving from China to Japan. People are concerned about supply chains,” said the Japanese leader after the meeting. “We should try to relocate high value-added products to Japan and the rest, diversify it into Asian countries,” he added.
It didn’t take long to get going. On April 7, Tokyo approved a first $ 2.2 billion fund to help Japanese companies return to national lands or move to other destinations in Southeast Asia. It is not a figure that will generate a massive or immediate movement, but it is an active stimulus – economic and political – to move away from China.
The movement has not gone unnoticed in Beijing. The day after approving the fund, the Standing Committee of the Chinese Politburo – the main decision-making body of the Communist Party – held a meeting. His conclusions were cautious. “You have to prepare mentally and work to deal with prolonged changes in the external environment,” said President Xi. “The factors of instability and uncertainty are increasing,” he said, urging the people to prepare for the worst.
The conversation is spreading. Australia, concerned about China’s trade threats after calling for an independent investigation of the Wuhan outbreak, is also seeking to diversify its own export markets and supply chains outside of China. Something similar is happening in Europe, where many countries have already raised objections to Chinese dependency combined with their aggressive investment strategy in infrastructure and key companies on the continent.
“We need to reduce our dependence on abroad in strategic sectors, protect our investments and be more ambitious in attracting or relocating key industries,” French Prime Minister Emmanuel Macron said Monday at a joint press conference with German Chancellor Angela Merkel. “Europe has to be less naive,” the Gallic representative said, stressing the need to push for “economic sovereignty” in order to curb the investments of the “predatory powers,” in clear reference to China.
The European Commission last year listed the Asian giant as a “systemic rival” that promotes different models of governance, the bloc’s position is far from common. And nothing better than Germany, the bloc’s economic and political hub, to illustrate how opinions on China are rapidly turning on the continent.
A historical oversight
On the one hand, the political class is beginning to speak out against Beijing, although for the moment they reject any kind of economic disconnection. “I have always been against the decoupling theory. China is not just an adversary or competitor,” says Norbert Röttgen, one of the three German conservative candidates to succeed Merkel and chairman of the Bundestag Foreign Commission. “We have to deal with them knowing that in some areas, like climate change, they are partners. And we have to cooperate with them.”
On the other hand, some entrepreneurs see decoupling as more than an economic strategy, a moral imperative. “(Europe) has to draw a clear line in the sand,” wrote Mathias Döpfner, CEO of the German media conglomerate Axel Springer, in a letter calling on the EU to join the US in decoupling China. “If we are not able to assert ourselves, Europe could suffer a fate similar to that of Africa: a gradual decline to end up becoming a Chinese colony,” he said.
Europe’s position is delicate. In a scenario of rapid and profound ‘decoupling’, it could be caught again in a new sort of Cold War between the two superpowers. On the one hand, the EU is China’s largest trading partner, the key to its markets and economies. On the other hand, the United States is its main political ally, essential for its security and related to its principles.
But Europe is hardly going to get into this adventure with Trump as a travelling companion. The transatlantic alliance has fallen to lows during the four years of Trump’s tenure, which has neglected, offended, and attacked several of his historic allies. The Huawei case and its controversial 5G infrastructures – which the White House considers a threat to international security – show the growing gap between the two banks. Washington feels abandoned and has reason. As Javier Solana, former NATO Secretary-General (1995-1999) and former EU diplomat (1999-2009) recently wrote, Trump’s famous ‘America First’ could have ended, ironies of life, in an ‘America Alone’.
“The key to everything that comes, of the new world order, is what happens on November 3 in the United States presidential elections,” says Juan Verde, former deputy assistant secretary of commerce for Europe during the Obama administration. “Decoupling” between two allied economies such as the US and Europe allows more room for manoeuvre and much flexibility. If it becomes an extreme ‘decoupling’ by country, then it will be unfeasible,” warns the Canary businessman.
Welcome to glocalization
“They are quite slow. They have big toes and you have to keep training them.” This is how the manager of a Chinese car glass factory based in the United States described their local workers during a visit by the company’s president. Americans, the man continues to lament, like to work eight hours and take weekends off.
This conversation – captured in the Oscar-winning documentary ‘American Factory’ – is a good reflection for those who believe that ‘decoupling’ is a mere exercise of political will. The tape shows the 2016 installation process for Chinese firm Fuyao in a former plant that General Motors closed in Dayton, Ohio eight years earlier. A privileged look at a dilemma that transcends wages.
“Partly it is because of the culture in which they have grown up. They have lifted millions and millions out of poverty in a generation and a half. But that has resulted in an intense working life. Chinese workers are proud of their country, proud of their company and really how China is flourishing in the world. The American workers we meet cannot say that they are proud of their company or they feel that America is really helping them grow in the world,” Julia Reichert, co-director of the documentary, said in an interview with American public radio.
So despite the headlines and statements, not even the coronavirus will be that dramatic script twist that takes the Chinese off their pedestal of power and influence overnight. Steve Jobs was right and those jobs will probably never return. The political intention must be followed by economic logic. And it is not at all clear that the consumer is willing to pay more to ‘get out’ of China, or that the companies are going to give up the combination of advantages that the country continues to offer.
The experts consulted for this report believe that what we can expect is a ‘glocalization’, in which we will see more industrial investment in certain strategic sectors accompanied by greater diversification of supply chains towards closer and more reliable production centres.
“Different production points are being considered: Turkey for Europe, Mexico for the USA. Even Spain can try to play that trick. But no one is thinking of replicating a second China. It makes you too dependent on that market. It is giving too much power and that lesson has been learned ”, explains Alicia García Herrero, Chief Economist for the Asia Pacific at Natixis, in an interview.
Because that money that the West injected for decades into the Asian coffers has materialized in the China of Xi Jinping, a country in full nationalist, diplomatic and commercial boil. A country is very different from that of the beginning of the century, which has embraced many western patrons.
Not only has it become the second largest creditor in the United States, but its economic and diplomatic influence extends beyond Southeast Asia, through Africa and Latin America – former areas operated by Washington. His pharaonic international projects such as the new Silk Road or Global China show that the eternal aspirant is willing to stand up for the geopolitical throne.
“Given that China will be the world’s largest economy by 2030, how the US and Europe handle their relations with China after the crisis will be as crucial as they faced in 1945 with the Soviet Union. In the following years, the Soviets became a military, but not an economic, superpower. The containment strategy was feasible, correct, and ultimately successful,” reflected Robin Niblett, director of the Chatham House Institute for International Relations. “Now, we don’t have the same options available. And there will be no winners in a new Cold War with China.”