Breakingviews – Measuring the US and China’s conscious decoupling

TRADE UNTIED

Start with U.S.-China trade, the bedrock of the bilateral relationship. The flow of goods between the two accelerated sharply after the People’s Republic joined the World Trade Organization in 2001, to the benefit of American consumers and Chinese workers. The headline numbers are still robust: U.S. imports of goods from China rose to $536 billion in 2022. However, the figure masks several trends.

First, growth in American imports from China is faster in goods which are not subject to U.S. tariffs. This shows how the trade war launched by former U.S. President Donald Trump in 2018 is biting.

FRAYING FINANCE

In finance, the separation is more pronounced. Western investors have slashed their exposure to the planet’s second-largest economy.

The average allocation of global equity funds to Chinese assets peaked at 3.13% in April 2015. As of September 2023, it was 1.75%, data from fund flow tracker EPFR shows. That partly reflects a broader retreat from emerging markets after the U.S. Federal Reserve raised interest rates. But it seems unlikely that allocations will fully recover even if investors rediscover their appetite for risk.

CLINGY CORPORATIONS

Chilling financial ties might be expected to eventually squeeze companies’ overseas operations but for now the data offers a mixed picture.

Chinese companies never had a huge presence in the United States but their assets are plateauing and revenue is shrinking, Rhodium Group data shows. This trend could accelerate as U.S. authorities grow more suspicious of Chinese firms. For example, U.S. Republican presidential candidates are vowing to ban social media app TikTok, which is owned by China’s ByteDance, citing spyware and antisemitic content.

STUDENT EXCHANGE

The flow of people between two countries is often overlooked but can be a useful indicator of the state of a bilateral relationship. Here, the data suggests the world’s understanding of China is likely to plunge dramatically in coming years.

The number of U.S. students studying in China for academic credit fell to just 211 in 2021/22, the lowest level in over two decades, according to data released this week by Open Doors. Though Covid-era restrictions explain much of the steep decline, the numbers seem unlikely to recover to pre-pandemic levels.

TAIWAN TENSIONS

Strains over Taiwan set the tone for the entire relationship between the U.S. and China. Here there is rising risk of a potentially sudden and harsh decoupling.

The United States’ “One-China” policy acknowledges Chinese claims of sovereignty over Taiwan, a democratically governed island. Yet Washington may impose large-scale sanctions if China invades Taiwan or prompts a major military crisis.

NOT THE POINT

Politicians from the world’s two superpowers will doubtless continue to debate whether they are decoupling or de-risking. The discussion overlooks the more important point: Sino-American ties have deteriorated on many fronts. Links built up over many decades will be difficult to untangle. But the conscious decoupling between the U.S. and China looks set to continue.