Economic decoupling is threatening to bite

Global conflict: US President Donald Trump and Chinese President Xi Jinping. The world’s two largest economies, China and the United States, are in for a long-drawn tit-for-tat counter-action and retaliation.

GLOBAL economic globalisation is at a crossroad. The Covid-19 pandemic is driving the world economy to retreat from global economic integration to de-globalisation.

Since the 2008-2009 global financial crisis, the trade and financial integration have moved at a much slower pace, which saw increased protectionism tendencies and global conflicts among advanced economies.

A notable sign of de-globalisation is a decline in global trade to GDP share since 2010, dropping from 51.6% in 2008 to 46.8% in 2010, and further down to 43.7% in 2019.

The world’s two largest economies, China and the United States, are in for a long-drawn tit-for-tat counter-action and retaliation.

From a trade-centric conflict, the “war” is now in full swing into the technology sector. The US is waging an unrelenting campaign against Chinese tech giants such as Huawei and ByteDance (the owner of the popular video app TikTok). It is now blacklisting China’s giant chip maker SMIC.

The threat of financial decoupling has also begun, with the Trump’s administration threatening to have Chinese firms delisted from the US stock exchanges if they fail to give the US auditors access to their audit records in China.

The US government has also abolished its privileged treatment to Hong Kong, which includes the availability of export license exceptions.

US President Trump has once again raised the idea of decoupling the two economies and vowed to bring jobs back to America – a move seen as shoring up sentiment to woo American voters in a bid to win re-election in the November’s US presidential election.

Facing such rhetoric, Chinese President Xi Jinping has urged his nation to be prepared to take on external challenges on a long haul.

Both China and the US are of equal and great importance to the world economy, and are deeply interdependent and interconnected with global trade and financial system.

SERC executive director Lee Heng Guie

Based on 2019 nominal GDP data, the US’ share of global GDP was 23.6% and China’s was 15.5%.

China was the world’s largest exporter of goods, accounting for 12.8% of total merchandise trade. It was also the second largest importer of merchandise imports (10.8% share).

The US was the largest importer of merchandise imports (13.2% share) and second largest world exporter (8.5%).

With the world economy mired in the worst recession since the 1930s Great Depression and is still battling against the Covid-19 pandemic, the continued hostility displayed by these two economies towards each other does not bode well for the recovery of their and global economies.

The world is witnessing a new Cold War of the two great powers and this confrontational gesture is likely to persist for a long while, as there is little sign of compromise or softening.

The Covid-19 pandemic will accelerate the de-globalisation process. Such a trend will cause decoupling between countries if the US-China relationship stays strained.

The current reality is that no countries can completely decouple or cut off links with one another. The complexity and intensity of connectedness in the global trade and financial world mean that any economic, financial and trade shocks inflicted by China and the US would have negative repercussions and spillover affects on others.

This will mean causing shared losses globally, with the weak economic fundamentals emerging in economies that are more vulnerable to the global shock.

The US-China trade dispute – started in 2018 – has led to a slowdown in these large economies, with adverse spillovers onto other countries because of disruptions to global supply chains.

In its October 2019 World Economic Outlook (WEO), the International Monetary Fund estimated that US-China trade tension would cumulatively reduce the level of global GDP by 0.8% by 2020, before the implosion of the Covid-19 pandemic.

Trade diversion away from US-China bilateral trade could benefit the rest of the world, but this impact is likely to be small compared to the negative impacts from supply chain disruption and slower global growth.

The world still needs interaction between countries, even at the minimum level.

Decoupling or staying permanently in the path of de-globalisation will cause many problems such as the reduction in economic welfare from the trade and services supply competition, reduced transfer of technology and knowledge, lower opportunities to improve income due to restricted workers mobility, and lower economic efficiency and productivity growth.

The by-products of all these would be slower growth and reduction of income.

The large and diversified economies cannot be spared from the de-globalisation effects. The US economy could suffer a decline in economic output and lower income as a result of de-globalisation.

A breakdown in global trade and financial flows would reverse the growth of smaller economies and developing countries that are highly dependent on consumers in developed economies to buy their goods and services. These countries need to reach critical mass in many sectors and need foreign investment, transfer of technology and know-how as well as skills to bridge the gaps in resources.

China is in a new normal of growth trajectory as its GDP growth has already trended lower in recent years as it restructured its growth engines towards more services and quality investment.

China is already preparing strategies to rely on domestic growth drivers as it seeks to insulate the economy from the “slowbalisation” effect and rising hostility of the US.

The decoupling effects arising from ending the flow of trade and technology would dampen the medium and long-term growth potential of China and the US via slowing productivity growth and lower capital spending.

The re-shoring and on-shoring waves are already taking place as the fear of the pandemic and globalisation leads countries to turn inward and rethinking of how to reduce supply-chain over-dependence on great powers such as China and reduce the concentration risk.

A recent Bank of America report stated that 80% of the multinationals investigated plan to repatriate part of their production. And the Covid-19 has accelerated the process by providing a justification for re-shoring production of strategic goods.

Japan, for instance, has set aside US$2.2bil to facilitate re-shoring from China. It was reported by the Japan External Trade Organisation that 15 out of more than 80 Japanese enterprises received support from the government to move factories to Vie nam, a move to improve the gap in the Japanese supply chains and reduce dependence on manufacturing in China.

Europe is also acting to reduce over-dependence on medicine supplies manufactured in China and India.

The global investment scene will alter with all these developments taking place, and countries must be prepared to face new challenges.

Economist Lee Heng Guie is executive director of Socio-Economic Research Center, a private think tank of ACCCIM. Views expressed here are the writer’s own.