USA, China, decoupling, and the ‘little guy’

Jorge Costa Oliveira

As the years go by, we realize that decoupling does not (and will not) occur in all areas simultaneously; it tends to occur in a fragmented and sector-specific manner. It began with the tariff war initiated by the USA in 2018. It progressed to restrictions in access to high technology, in capital flows, and also in critical metals.

However, China’s rise is inevitable. Even with the current adjustment difficulties (particularly in the real estate sector), the Chinese economy is growing at 5% per year. Its industrial capacity has been diminished with the relocation of numerous companies abroad (due to rising domestic costs and as a preventive reaction to the approaching demographic winter), but it remains formidable, with an export sector that has become the locomotive of Chinese development. Despite the progressive interference of the CCP in the private business sector (80% of the total), companies continue to be competitive and innovative, within a regulatory framework that mixes a still quite liberal capitalism with submission to public policies defined by the State-Party. Nonetheless, from the record creation of intellectual property rights to the production of relevant capital goods (cars, airplanes, advanced industrial equipment), including the production of military equipment, China has never been stronger.

On the other hand, Chinese influence on a global scale continues to increase, especially in developing countries. And foreign trade between the USA and China keeps growing, despite repeated political acts by American authorities aiming to implement decoupling. Furthermore, on a global scale, world flows of goods and capital have stabilized since the global financial crisis, confirming that globalization and multilateralism have created enormous interdependence between the economies of the main blocs.

But what would be the economic effects of a significant decoupling between the USA and China? The IMF has already warned of the dangers of wealth destruction that such a move would generate, estimating that enormous restrictions on international trade could reduce about 7% of global GDP in the long term, a loss equivalent to $7.4 trillion. And who will suffere the most if a significant decoupling occurs?

The IMF predicts that developing economies will be the most affected if Washington and Beijing cut economic ties. Not all (some are even benefiting from the effects of decoupling), but the majority of developing countries – the most fragile component of the international economic system – are destined to be the proverbial little guy who gets hurt when the big guys fight.

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