The high cost of a global economic decoupling

Intensifying geopolitical rivalry and a fragmentation of the global economy is threatening the liberal international order

Updated - June 19, 2024 12:34 am IST

Published - June 19, 2024 12:08 am IST

New tariffs on Chinese imports

New tariffs on Chinese imports | Photo Credit: AP

The announcement by United States President Joe Biden, in May, to slap a fresh round of tariffs on a range of Chinese imports, has refuelled fears of a new phase of decoupling in the world economy. Siding with Washington, policymakers in Europe are also deliberating having a ‘united front’ to counter China’s pursuit of coercive economic practices.

While this may define the trajectory of China-U.S. relations, it is not clear what the long-term costs are going to be. With China, the West’s trade risk calculations have increasingly become a function of national security. Contesting the liberal premise, the new political rhetoric in Washington assumes that since economic interdependence does not benefit China and the U.S. equally, it is likely that Beijing will weaponise vulnerabilities to its ends. In fact, the Biden administration’s decision to resume a tariff war with China, reveals how political, and not economic, considerations become key in deciding what goods would receive tariff increases.

The story in the tariffs

The latest tariff on Chinese electric vehicles (EV) is a case in point. Given that the U.S. imports few EVs from China, the decision reinforces Mr. Biden’s pro-union stance and his support for the ongoing efforts of the United Auto Workers (UAW) to scale up EV manufacturing domestically. Conceived as a pre-emptive measure, the quadrupling of tariffs from 25% also explains the fear that the American auto union has vis-à-vis the fast-growing Chinese car and battery industry and its ability to outcompete traditional domestic automakers in no time.

Editorial | Competition and conflict: On the U.S.-China relationship 

The new tariffs on medical devices, on the other hand, are a straightforward way to grow independent of China. For a decade now, China has been the primary source of medical equipment to the U.S., with imports nearing $640 million in 2023.

Many American health-care businesses have their manufacturing and research laboratories in China, and they have been ramping up their investments owing to China’s growing health-care needs for the elderly and demand for quality health-care services. However, the deepening mistrust between the leaders of China and the U.S. creates pressure on the private sector and is likely to increase the burden of health-care costs on domestic patients in both countries. What protectionist enthusiasts often forget is that the costs of protection are borne through higher prices paid by consumers.

The long-term effects

While continuity with the Trump-era tariffs seems to be the obvious answer to deal with an aggressive China, the world economic situation is at odds with the geopolitical realities. The vicious cycle of tit-for-tat tariffs further exacerbates the dangers arising out of protectionism, encouraging other countries to follow suit. Moreover, the new import restrictions on Chinese clean energy products would delay the green transition targets and the expansion of renewables worldwide. As China faces slowing growth and rising household debts, many western multinationals dependent on China’s vast consumer market will see a dip in their earnings.

For resource-rich countries such as Australia and Brazil, a slowing Chinese economy would not only hurt their exports in various commodities but also create downward pressures on iron-ore prices. For these economies that are heavily dependent on China for their exports, diversifying into other markets is never an easy task.

Similarly, the European Union’s approach to de-risking trade in critical raw minerals with China may entail a greater risk of Beijing tightening its iron grip on the supply chain. As the scramble to control the value chain of rare earths intensifies, one cannot rule out the possibility of a mineral-rich grouping, led by China, trying to dictate the terms of green trade in the years to come.

Southeast Asia has also not been immune to the effects of protectionism and great power competition. While the region is said to benefit from production and investment shifting from China, the dependence on Beijing for technology and investment continues to run high. And the region’s prospects of replacing China as the major supplier of components and manufactured goods could dim if Washington imposes stricter rules of origin and eschew access to goods from third countries that use components either made in China or by Chinese firms located in these countries.

With a burgeoning consumer market, India remains next in line in expecting to benefit from the decoupling dynamics. But, one is not sure of the extent of gains in terms of global market share and the time this transition would take. The reason is that India’s manufacturing continues to be in a catching-up phase despite several initiatives by the government. New Delhi faces tough competition in low-end manufacturing from its South and South-East Asian neighbours, and its deep economic entanglements with China remain.

A potential crisis

One, therefore, sees no end in sight if this cycle of escalation continues. More than its real significance, global investors would deeply feel the psychological effects of decoupling. What makes this strategy worse is its deliberate distancing from the World Trade Organization (WTO). Once a flag bearer of WTO rules, Washington continues to block the appointment of judges to the WTO Appellate Body, rendering the adjudicatory process paralysed. While a direct collision between the two is unlikely, the intensifying geopolitical rivalry along with the fragmentation of the global economy puts the future of the liberal international order at a high risk. And, it would benefit neither the U.S., China or the rest of the world.

Priyanka Pandit is Assistant Professor, Department of International Relations and Governance Studies, School of Humanities and Social Sciences (SHSS), Shiv Nadar University, Delhi-NCR

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