I was discussing this question recently with a source, as part of a larger conversation about US-China decoupling. In some ways, it feels like we are on the brink of a hot conflict in the South China Sea, with ramifications we can only begin to imagine. As I explore in my column, the Senate has passed a bill offering $6.5bn in military aid to Taiwan and is threatening new sanctions on China. The president has also directed the Committee on Foreign Investment in the United States (rightly, I think) to more carefully scrutinise inbound high-tech deals from China.
I think a certain amount of decoupling is not only warranted, but welcome. The US and China have fundamentally different political economies, and it’s folly to think that markets will continue to mesh seamlessly when the governments are going different ways geopolitically. The question is how the process will play out. Is there going to be a sharp, sudden break, perhaps provoked by the US getting involved, purposefully or not, in the Taiwan situation? Or will there simply be an understanding between the sides that they are going in different directions, but that there must be some way of communicating in order to avoid unexpected conflict?
In other words, is it 1939, the year the second world war began in earnest for the west, or 1963, the year that the US and the Soviet Union set up a hotline so the White House and the Kremlin could reach each other immediately and communicate if there was trouble? Beijing and Washington don’t seem to have a strong system in place, even as the chances of war in the South China Sea grow. I’m sure the US military has contingency plans in place should this happen. But that doesn’t address the economic and market impact. In fact, the details of the entire US and China supply chain relationship have yet to be understood.
Some would argue they can’t be. But that doesn’t mean we shouldn’t try to get as clear and complete a picture as possible. Certainly, a variety of federal agencies are struggling to create a road map for critical supply chains — what would happen if, say, semiconductor supply in Taiwan or drug inputs from China were abruptly cut off? How much production could be quickly sourced elsewhere? How long would it take to fill spare capacity and at what cost? But as the war in Ukraine has taught us, it’s difficult to predict the basics, let alone the second- and third-tier fallout. The fact is that the American government doesn’t yet have a 360-degree view of even the most crucial supply chains, such as electric vehicles.
That’s not only because these are very complicated systems, but because the private sector itself doesn’t understand its own risk map. Indeed, “efficient” systems aren’t made to tally such risks, only to drive down costs (anyone interested in that topic should read Barry Lynn’s prescient book The End of the Line, which remains the gold standard in thinking about supply chain complexity and how it can go pear-shaped).
The last time we had a bunch of “too big to fail” private sector entities that had no idea what kind of risks they were holding, we got the subprime crisis. Today, as Credit Suisse analyst Zoltan Pozsar (one of the seers of 2008) put it in a recent note to clients, “inventory for supply chains is what liquidity is for banks”. If it dries up quickly, the system will break.
It’s high time for the White House to appoint a resiliency tsar to get a handle on all this and create a risk map — not in order to sound the drums of war, but to create a contingency plan should there be a conflict, and figure out how long and at what cost the system could be reconfigured. I’d love to hear Swampian suggestions for who should hold the job.
We also need more robust communication between Beijing and DC to make sure the decoupling, which will happen slowly if not suddenly, doesn’t morph into something more disturbing.
Ed, do you think it’s 1939? Or 1963? Or do you have another year in mind?
Recommended reading
The always-wonderful Evan Osnos, on someone I’ve always admired for his low-key wisdom and “it’s not about me, it’s about the job” ethos, the retiring Tennessee representative Jim Cooper.
The FT ran a very instructive two-page spread recently about which companies are at particular risk from rising interest rates. Check it out here.
Also, have a listen to my colleague Jemima Kelly’s new podcast here, which looks at how crypto money flooded Washington, and how it’s changing our financial system.
And finally, don’t miss Skandal! Bringing Down Wirecard, which is out on Netflix. The documentary tracks the major FT investigative report that eventually unmasked the fraudulent German online payments giant. The FT review is here.
Edward Luce responds
Rana, when I am feeling pessimistic, I compare the current US-China tensions to 1911, or somewhere not too distant from the outbreak of the Great War. The US, as with Britain then, is the dominant but weakening hegemon. Germany, resembling China today, had grown into a larger-scale manufacturer than the home of the industrial revolution. As with contemporary China, Germany had spent the previous 20 years amassing a formidable modern military and chafing at the century-old dominance of a waning Pax Britannica, which was belatedly modernising its navy.
Thankfully, the analogy is not exact. Germany had in fact overtaken Britain 30 years earlier, whereas China’s economy is still about one-fifth smaller than America’s in dollar terms. Plus, I like to think we are not as naive as early 20th century Europeans who had no idea what modern mass warfare could wreak. Or rather, I pray that we are not as naive: in a nuclear age, we cannot afford to relearn the lessons of history.
Perhaps the better comparison is 1961. I wouldn’t choose 1963, because the post-Cuban missile crisis safeguards put in place by the USSR and the US are almost completely absent between Beijing and Washington today. Communication between the Pentagon and its Chinese counterparts is ad hoc. China refuses to be part of any putative nuclear and missile reduction talks between Russia and the US (now in abeyance, of course) since it is embarking on an ambitious nuclear modernisation and expansion plan before it would even consider negotiations.
In my view, therefore, today’s lack of safeguards is more akin to the eve of the Cuban missile crisis than its aftermath. The US should be mindful of the fact that Taiwan is as close to the Chinese mainland as it is to Cuba. Washington’s rhetorical drift away from a “one China” policy, to halfway towards a two China policy is high-risk and unwise. We should continue to provide Taiwan with the means of self-defence, but also be punctilious in adhering to the original formula of the 1972 Shanghai Communiqué and 1979 Taiwan Relations Act.
As for economic decoupling, we should be careful what we wish for. If America’s ultimate aim is to ask its Asian partners to choose between China and the US, we might be shocked at the answer. Most of them export far more to China than the US.
Source: Economy - ft.com
