The West is in the throes of decoupling delirium

by The Insights

The writer is executive director of the International Institute for Strategic Studies in Asia and author of “The Billionaire Raj.”

Two recent trips to Beijing by world leaders have highlighted the many paradoxes of a future era of economic decoupling.

A visit by Emmanuel Macron, President of France, and Ursula von der Leyen, President of the European Commission, generated waves of controversy in the West last week. Another, from Anwar Ibrahim, Prime Minister of Malaysia, went almost unnoticed, but was in many ways more illuminating on the challenges of decoupling.

Macron traveled to Beijing with von der Leyen to present a united European approach to China. But he also brought in a phalanx of business leaders, opening Paris up to accusations of mercantile foreign policy and leaving Europe divided.

A few days earlier, von der Leyen had given a speech in which she argued that Europe should “de-risk” rather than decouple its ties with China. Complete decoupling is not desirable, she said, so the West should instead reduce risk in strategic sectors such as semiconductors, batteries and critical minerals. This week, G7 finance ministers also spoke of the need for supply chain “diversity” with plans to “empower” emerging economies.

Anwar’s visit to Beijing could hardly have been more different. Here, there was no question of decoupling. On the contrary, the Malaysian leader hailed China’s economic prowess and encouraged greater investment. He also took on a group of Malaysian companies, coming back with deals worth nearly $39 billion, at least on paper.

The sight of leaders from the “global south” returning to Beijing should alarm the west. After previously focusing on resolving China’s Covid-19 crisis and securing his own third term, Xi Jinping is once again flexing his diplomatic muscle – peace deals in Ukraine and the Middle East investment agreements for neighbors in Southeast Asia.

As Western leaders attempt to thwart decades of globalization, Asian nations from Bangladesh and Indonesia to Malaysia and Thailand see China as central to their economic future. Rather than decouple, they seek more trade with Beijing. And, paradoxically, this is a result that Western policies might actually produce.

Global companies are now talking about “friend-shoring”, ie moving production to geopolitical partners such as India, Mexico or Poland. Alternatively, they could establish facilities in Southeast Asia, where most nations are geopolitically neutral between Beijing and Washington. Countries like Malaysia and Vietnam are often predicted to be decoupling winners, able to suck in Western companies as they leave China.

There are issues with this account, however, the first being that so far decoupling has only just begun to happen. Semiconductors are a notable exception, given successful US attempts to block global chipmakers from selling to China. But despite all the rhetoric about risk reduction and supply chain resilience, similar moves in other industries are hard to spot.

Western multinationals speak more often of a “China plus one” strategy, in which they continue to manufacture things in China but also choose another manufacturing base, according to Malaysia, as a cover.

But imagine for a second that geopolitical events got even worse, Western companies got scared, and decoupling started to move faster. Then what ? Here, many in the west assume that moving production will make them less dependent on China, while the decoupling process will likely bring countries like Malaysia and Vietnam closer to the west itself. Both hypotheses are debatable, to say the least.

Take Samsung. Its decision in 2020 to shift production to Vietnam means the South Korean giant now assembles millions of phones in Vietnamese factories every year. Many are then exported west. However, many components that go into these phones are still made in China, so Vietnam also has to import more of them.

Vietnam’s two-way trade with China has exploded in recent years, with similar patterns noticeable across the rest of what is sometimes called “factory Asia”. Upcoming research from World Bank economist Aaditya Mattoo suggests that East Asian countries have recently exported more to the United States, but have also imported significantly more from China.

The result is a double paradox. First, rather than connecting emerging economies more closely to the West, decoupling often leaves countries in regions such as Southeast Asia more economically dependent on China, not less. Second, while shifting supply chains around the world seem to make the West less dependent on China, the continued need for components that are still predominantly sourced from there means that the fundamental vulnerability remains.

Before his recent visit to Beijing, von der Leyen asserted that “it is neither viable – nor in Europe’s interest – to decouple from China”. She’s right. And given the complex and intertwined structure of modern globalization, even the task of partially reducing dependence on the Chinese economy is likely to prove much more difficult than it appears.

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