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US to suffer more if it decouples with China

By He Weiwen | China Daily | Updated: 2020-06-03 07:12


The United States' stigmatization of and hostile actions toward China have, among other things, raised concerns that China might be isolated from the global supply chain and its economy decoupled from that of the US, especially in high-tech and trade.

After the US president threatened on May 14 to cut off all relations with Beijing "to save $500 billion", the US Department of Commerce on May 19 issued new rules to choke off Huawei's access to semiconductor chips, banning chipmakers, mostly in the Republic of Korea and Taiwan, from using US machines and software to manufacture semiconductors for Huawei. One day later, the White House issued a report, "US Strategic Approach to China", and the Senate adopted a bill, "U.S. Senate Foreign Company Accountability Act". On May 22, the US Commerce Department added another 33 Chinese companies and research institutions to its "Entity List".

In a report, "Breaking the China Supply Chain: How the 'Five Eyes Can Decouple from Strategic Dependency", Henry Jackson Society of the United Kingdom echoed the call of White House economic adviser Larry Kudlow, who had earlier proposed to "reshore"-that is, bring back-US businesses from China.

Foreign investment is actually increasing

Yet the actual foreign investment in China is increasing. The Chinese Ministry of Commerce has said foreign direct investment in April hit 70.36 billion yuan ($9.86 billion), up 11.8 percent year-on-year. This shows foreign investors are not leaving China. And a recent American Chamber of Commerce in China survey shows that more than 70 percent of its members have no plans to leave China and instead 40 percent plan to increase their investment.

Exxon-Mobil opened its $10 billion ethylene project in Huizhou, Guangdong province, on April 22. On May 19, Honeywell said it would establish its new emerging economy headquarter in Wuhan. The next day, The Wall Street Journal reported that "Neither COVID-19 nor trade tension could stop American business moving into China". Popeyes opened its first shop in China on May 16 and plans to open 1,500 outlets in the country. Wal-Mart announced it would go ahead with its 2019 plan to add 500 new outlets in China. And Tesla is expanding its Shanghai factory at an amazing speed.

Also, a survey by JETRO Shanghai shows that 90 percent of the Japanese businesses in East China have no plans to leave China; instead they plan to increase investment.

A China-EU Chamber of Commerce and China-German Chamber of Commerce joint survey on Feb 26 showed that 54 percent of their members are not thinking of revising down their business targets for 2020.

GM sold 3.09 million vehicles in China in 2019, which accounted for 40 percent of its total global sales. But if GM moves its factories from China back to the US, it may not find such a huge market. Apple enjoyed a hefty profit of 24.2 percent in the last quarter of 2019, largely due to the performances of its iPhone6(accounting for 60.9 percent of total sales). If Apple leaves China, its cost will increase by 37 percent, according to a Goldman Sachs survey. Apple will also lose a large market share and could face a survival crisis.

Ministry of Commerce data show US businesses in China recorded sales of $700 billion in the country, earning profits of about $50 billion in 2018. Can they afford to lose it all?

The World Bank's "2020 World Development Report: GVC, Trade for Development" says that 50 percent of the current world trade is related to global value chain (GVC), with East Asia/Pacific, Europe/Central Asia and North America as the three centers deeply intertwined.

And a World Trade Organization report shows that in 1995, the US, Germany and Japan served as the trade centers in their respective regions. In 2017, however, China replaced Japan as the regional trade center in Asia, with both the US and Germany having a higher dependency rate on China.

The Henry Jackson Society report shows that among the 831 UN classified categories of products, out of which 260 are essential for national infrastructure, five countries highly depend on supplies from China. Australia depends on supplies from China for 595 general and 167 essential categories, New Zealand for 513 and 144, the US for 424 and 114, Canada for 367 and 83 and the UK for 229 and 57. So how can politicians change the global trade pattern and China's position in the global value chain?

Will China be decoupled or the United States?

The US high-tech ban on China targets 5G technology, cyber communications, semiconductor chips and artificial intelligence, in a bid to prevent China from challenging the US' dominant role in world trade. Such measures, though they will cause difficulties for Huawei and other Chinese companies in the short term, will result in just the opposite in the long run. Huawei has already made alternative arrangements, for example with its own Huawei Mobile Service, and China's investment of $1.4 trillion by 2025 to become self-sufficient in the high-tech sector could shift the global balance in high-tech.

As a matter of fact, the US ban will deal a fatal blow to its own high-tech industry, especially the semiconductor sector. The total world semiconductor chip market was worth $478.4 billion in 2018, with the Chinese market accounting for $158.4 billion, or 33.1 percent of the total, compared with US' $103 billion and Europe's $43 billion. The dependence of the top 10 US chipmakers on China varied from 23 percent for Intel, 52 percent for Broadcom, 63 percent for Qualcomm, to 80 percent for Skyworks Solutions. The loss of the Chinese market will threaten their survival.

A Boston Consulting Group report, "How Restrictions on China Trade will End the American Semiconductor Industry's Leadership", said that the R&D input of the US semiconductor industry amounted to $312 billion over the past 10 years, with $39 billion for 2018 alone, twice that of the rest of the world.

That was the prime reason they had 48 percent of the world market share. Half of the semiconductor demand is for smartphones, PCs and consumer electronics, all with a very short life cycle.

China will become more self-sufficient in high-tech

Therefore, the US semiconductor sector has no choice but to maintain huge R&D input to enjoy its competitive edge. The report also says the restrictions on the export of semiconductor chips to China will prompt the country to enhance its self-sufficiency from 13 percent now to 25-40 percent by 2025. And the Chinese companies will find alternative suppliers from Europe and Asia.

If the US economy is totally decoupled with China, the US semiconductor industry's global market share will fall by 18-30 percent, and its revenue by 37 percent. As a result, the ROK or China will outstrip the US in terms of world market share, and the US will lose the global leadership.

In fact, a recent article in the Economist said the Huawei ban will probably lead to the semiconductor industry leaving the US. And in an article in The Asian Times on May 25, titled "Who de-couples whom? Are we just doing the opposite?", David Goldman, a US economist, said that while the US is pondering decoupling with China, the real scenario looks like Asia decoupling with America.

The US president's threat of totally "cutting off" relations with China to save $500 billion a year is bad economics. Over the past two years of the trade conflict, China has been steadily reducing the US' share in bilateral trade. From January to April of 2020, the US share in China's total trade fell to 10.6 percent, compared with 14.2 percent in 2017.

During the same period, the share of ASEAN increased from 12.5 percent to 14.9 percent and the European Union's share rose from 15.0 percent to 15.2 percent. If this trend continues, the US' share will fall below 10 percent soon.

Washington may believe Beijing cannot survive without it, but the fact is, its share in China's total trade is already one-fifth of Asia's (51.6 percent) and 3 percentage points lower than the EU's.

And the 15 Regional Comprehensive Economic Partnership member countries (not including India) account for 28.9 percent of the world trade, more than the 27.3 percent of the US-Mexico-Canada Agreement.

As such, the process of the US' decoupling with China will in fact be a decoupling of the US.

The author, a former economic and commercial counselor with the Chinese consulate general in San Francisco and New York, is a senior fellow at the Chongyang Institute for Financial Studies, Renmin University of China.

The views don't necessarily reflect those of China Daily.

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