top of page

DECOUPLING, WAR, POWER STRUGGLE - ARE THEY INEVITABLE?

Updated: Oct 16, 2023


The most consequential geopolitical driver today concerns the US-China relationship. Where does Europe sit in this and what are the implications for business?


You cannot explore China’s relations with other states until you’ve understood its key internal dynamics.


So, what’s going on in China?


The sustainability and supremacy of the CCP drives everything. To ensure this, President Xi has to grapple with trade-offs, most notably managing continued economic growth while also hastening China’s pursuit of global greatness.


President Xi has promised that in lieu of freedoms, China’s citizens will grow richer. But such economic growth is getting harder to come by. China has a host of structural challenges including some bad investment choices and a declining demography. Exacerbating this are the economic dislocations caused by the total covid lock-down that was only relaxed earlier this year.


From a security and foreign policy perspective, sentiment in the country is one of a nation rising. President Xi has quite explicitly rejected his predecessor, Deng Xiaoping’s, ‘hide your strength, bide your time’ policy. He’s promised the people reunification with Taiwan will happen on his watch; and to the military, that it must take place before 2027. If he can achieve this without causing domestic and international unrest that would be preferable, but if not, so be it.


Notably for an international audience, the CCP is working to decouple China from the rest of the world, while retaining others’ dependence on it. Xi’s dual circulation strategy is one example of this. While China will never be able to achieve full independence (continued growth will depend on global consumption of its products) in time it will lead to greater Chinese resilience and Western vulnerability.


Meanwhile, the US has a different set of challenges.


Political partisanship is as high as it’s ever been and with election season starting up this is likely to worsen. After four years under President Trump many have started to question the robustness of its institutions. American infrastructure meanwhile is crumbling. Its economy is weak and a recession looks likely. For the first time, the US could well default if the two parties cannot agree to raise the debt ceiling before June.


So, what does this mean for US-China relations?


There is a palpable sense of insecurity and perhaps even decline in the US (worth reading the April 15 Economist briefing entitled ‘From strength to strength’ for a refutation of this). China is seen not just as competition, but as a challenge to US primacy and power. As in 2003 with regards to Iraqi WMD, there is only one acceptable narrative in Washington.


China on the other hand doesn’t necessarily see itself as being ‘against’ the United States. But it does want to step into what it perceives as its rightful place in the region, and perhaps, globally. Thus, whether intentional or not, it directly challenges the US. And so, until the US-China frame moves beyond a fight over power, escalation is the most likely scenario.


Where does Europe fit into this?


Europe’s perspective is different. China doesn’t challenge European identity. As a fragmented market (commercially, every country for itself) European member states feel they need China’s huge market. Where the US is focused on China’s challenge to its power, Europe takes issue with Chinese behaviour. In 2019, the European Union described China as a ‘systemic rival, an economic competitor and a strategic partner’. This diversity allows for a more nuanced policy (and different emphases by various European leaders as we’ve seen recently between Macron and von der Leyen).


At the same time, even as the US and Europe have come together over the Russia-Ukraine war, tensions in US-European relations remain. In part this reflects the ongoing reverberations still echoing from the Trump years and real concern that he might return. Disappointment and frustration over how events played out in Afghanistan continue to echo and leave many Europeans not truly trusting America.


More tangible however, is the return of industrial policy in both the US and Europe. While the US promotes subsidies, most notably with the Inflation Reduction Act (IRA), Europe prioritizes tariffs (eg: the Carbon Border Adjustment Mechanism (CBAM)). With economies tightening, governments on both sides of the Atlantic are putting their fingers back on the scales in ways that reek of protectionism, thus changing the calculus for their corporates, and raising tensions.


All of this is making it harder for the US and Europe to find a common ground on China. So, while rhetorically Europe is clearly on the side of democracy, and thus the US, in policy terms they would prefer a more subtle approach. They feel America isn’t sufficiently collaborative and is moving faster than they are comfortable with. Importantly, European nations are trying hard not to get corralled into US policy, including sanctions.


What does this mean for Western business engagement in China?


Even while neither America nor Europe are going all out for decoupling, as businesses make selective choices towards diversification of their supply chains, this will increasingly come to pass. Already 12% of American businesses (new rather than existing capex) are moving their supply chains out of China and an additional 13% are considering it. In both the financial and the manufacturing sectors, companies are pausing new investment.


Companies are beginning to think in terms of supply networks rather than chains. They are re-shoring and friend-shoring. And many are taking a ‘multi-local’ strategy (ie: one of regionally contained supply chains).

Companies are also looking for a predictability that isn’t forthcoming from their governments. As a result, their costs will mount. Meanwhile, in some areas, not least technology regulation, the Chinese government is moving ahead at pace thus giving it a meaningful advantage over the west in the creation of standards and by providing a stable context for corporate investment.


What could trigger a step-change in policy?


Within this slowly escalatory environment, there are two key triggers that would exacerbate the situation. The first is a Chinese attack on Taiwan. The probability of this coming to pass is defined by China’s capability and their intent. As long as China remains optimistic about its capabilities and feels they are growing stronger relative to the West and Taiwan, then waiting makes sense. However, if they reach a more pessimistic conclusion that it could be ‘now or never’ their likelihood of acting increases measurably.


At the same time, China’s options for such an attack are unappealing. They don’t yet have the amphibious capability to succeed. A lightening strike and decapitation is extremely risky. And while they could manage a blockade that would give the west time to gin up a response leaving them paying a cost but still not having Taiwan in hand.


The second trigger, perhaps more likely in the near term, is Chinese provision of military grade weapons to Russia. While the US has made this a red line, their response were it to be crossed is unclear and thus lacks the deterrence effect it might otherwise have.


Conclusion


Decoupling is not inevitable. Neither is a China-US war. Nor conflict in Taiwan. It’s not in any parties’ interest nor their intent. However, in a context which is defined in terms of power, there is no solution in which both China and the US can be satisfied. If however, the stage of engagement can be redefined – towards, for example, prosperity or growth – the opportunity space expands and solutions present themselves. With a new framing, this does not have to be a zero-sum game.

Recent Posts

See All

Comentarios

Obtuvo 0 de 5 estrellas.
Aún no hay calificaciones

Agrega una calificación
bottom of page