Although the United States has a mixed history with free trade, following the Second World War, America became the champion of free trade. I. M. Destler, the Saul I. Stern Professor at the School of Public Policy at the University of Maryland, explains:
“After World War II, amid a desire to integrate and rebuild the post-war economy, the U.S. led the creation of the multilateral General Agreement on Tariffs and Trade, known as the GATT. Under its auspices, the major world trading nations concluded a series of negotiating ’rounds’ to further lower trade barriers. The most prominent of these were the Kennedy Round (1963-67), the Tokyo Round (1973-79), and the Uruguay Round (1986-94). As a result of these negotiations, U.S. tariff rates (on imports subject to tariffs) fell from the Smoot-Hawley average of 60% in 1930 to 5.7 percent by 1980 (and down further to 2.7 percent in 2013). Non-tariff barriers (such as quantitative limits on imports and restrictive regulations) were also reduced. Cumulatively, these trade agreements brought about a revolution in U.S. trade policy, opening both the American and foreign markets to an unprecedented degree. This move to free trade wasn’t just about economics. Trade expansion was central to broader U.S. foreign policy during the Cold War. Together with military alliances, trade agreements helped bind together the major free-market democracies, their growing prosperity serving as an effective counter to the centrally planned economies of the Soviet Bloc and the People’s Republic of China.”
After the dissolution of the Soviet Union and the opening of the Chinese economy, there began an era of hyper-globalization.
Hyper-globalization and the rise of China
For nearly four decades, beginning in 1970, trade contributed to a dramatic rise in global GDP. At the same time, millions of impoverished people joined the global middle class. Claire Jones (@senoj_erialc), a global economy reporter for the Financial Times Alphaville, explains, “The advent of hyper-globalization involved three drivers from the political, technological, and policymaking spheres. The demise of the Soviet brand of communism meant that, over a relatively short space of time, about 2 per cent of the world’s population had access to global markets and migration options that did not exist before. This opening up, coupled with the rise of China and India — which accounted for 38 per cent of the global population in 1990 — also gave companies access to ultra cheap labor markets. In the technology space you had the information and communication technology revolution. Combine that with the signing of various multilateral and regional trade accords, and you have a recipe for rampant globalization.”
In the United States, globalization was widely perceived as the destroyer of manufacturing and jobs. As Jones explains, “US inequality has created a backlash against trade as the widening of the gap between rich and poor has arisen at the same time as trade barriers have fallen. Trade might not be the source of that inequality — the increasingly regressive nature of the US tax code looks a more obvious culprit — but the timing has created the perception that it’s a bad thing for less well off people.” With so many jobs heading to China, China quickly became a target for U.S. animus. The return of more a more authoritarian style of Chinese leadership did not help. Aggressive business tactics eventually made China an economic powerhouse whose dominance had significant security ramifications. Calls for decoupling from China were raised on both sides of the U.S. political aisle. Aaron L. Friedberg (@AaronFriedberg), a Professor of Politics and International Affairs at Princeton University, reflected growing sentiment when he wrote, “U.S. strategy needs reglobalization to snatch critical power away from China.”
The Trump administration became an echo chamber amplifying calls to end globalization and decouple from China. China didn’t seem to mind and proved eager to shoulder the mantle as the champion of free trade. On 15 November, China, along with fourteen other countries, signed the world’s largest free trade pact called the Regional Comprehensive Economic Partnership (RCEP). Jon Emont (@JonathanEmont) and Alastair Gale (@AlastairGale) report, “The new bloc stretches across many of the largest and most vibrant economies in the Asia-Pacific region, which set aside geopolitical differences to boost trade and growth during the coronavirus pandemic. Apart from China, it includes Japan, South Korea, Australia, New Zealand and 10 Southeast Asian nations, from Indonesia and Vietnam to Thailand and Singapore. … The population of the countries now part of the deal equals roughly a third of humanity.”
The great decoupling
Anne Hoecker and Shu Li, Bain & Company partners, and Jue Wang, a Bain associate partner, assert, “Escalating tensions between the U.S. and China have accelerated the unraveling of globalization more quickly than many predicted even a year ago. The Covid-19 pandemic, the anti-China sentiment that followed, and the increasingly tense political climate have raised the stakes. Now, it’s clear the world isn’t going back to globalization — it’s headed toward decoupling.” RECP is just the latest sign of this decoupling trend. Hoecker and her colleagues observe, “Decoupling would create two walled gardens in global trade: a China-allied trading bloc and supply chain, and a U.S.-allied one. That has big implications for all businesses, but technology manufacturers would be among those most affected. The mutual dependency between the U.S. and Chinese technology sectors has been a critical factor in the way the industry has evolved, especially over the past decade. The decoupling will also be a watershed.”
Boston Consulting Group (BCG) analysts insist, “[If] the world’s biggest trading relationship [is going] to unwind, US companies would have more to lose than Chinese firms in terms of revenue and access to critical supplies.” The BCG analysts note, “The share of US industrial sectors that would find it hard to replace China as a finished- and intermediate-goods supplier is larger than the share of Chinese sectors that would find it hard to replace US suppliers. And more than half of the 16 US manufacturing sectors we studied, particularly engineering-intensive ones such as aerospace and telecom equipment, rely on China for critical components or raw materials. With the exception of sectors like consumer electronics and telecom equipment, Chinese industries are more self-sufficient in critical inputs.” If the decoupling continues, they write, “Companies in both nations must prepare now to build resilience in their manufacturing and supply networks and explore new markets.”
Decoupling from China won’t be easy. The BCG analysts report, “In terms of supply, decades of trade and investment have fostered a high degree of interdependency between the US and China in many industrial sectors, not only for certain finished goods but also for key intermediate goods and raw materials. Trade tensions therefore affect not only what companies can sell in China or the US but also what they can export from either country to the rest of the world.” To mitigate the effects of decoupling, some companies may develop a two-pronged strategy implementing one supply chain for the China-related market and a separate supply chain for the US-related market. Hoecker and her colleagues suggest, “One option is to partner with a local business in China to gain access to the market with a mandate requiring purchases from indigenous companies.” They go on to predict, “U.S. companies might look to acquire assets or build new business models in segments where China or the Eastern Bloc has a strength that the U.S. lacks, such as 5G equipment. Another key decision: Many companies are considering a ‘China-plus-one’ supply chain model to reduce dependence on Chinese suppliers, add redundancy and increase resilience.”
Hoecker and her colleagues conclude, “Ultimately, the right answer to navigating this new world depends on the company and its industry, and must be graded against what the U.S. and Chinese governments are likely to allow. The complexities are high, but the prize is continued access to a large, global technology market.” BCG analysts note wrenching decisions will have to be made and the way forward won’t be easy. “The deep and complex linkages between US and Chinese markets and industries took decades to build,” they write. “These ties will be costly and disruptive to transform, even in a gradual and phased manner. But companies that begin adapting now will mitigate the risks and be in the strongest position to capture competitive advantage however the US-China commercial relationship plays out.”
 I. M. Destler, “America’s Uneasy History with Free Trade,” Harvard Business Review, 28 April 2016.
 Claire Jones, “Was hyperglobalisation an anomaly?” Financial Times, 16 November 2020.
 Lizzie O’Leary, “The Modern Supply Chain Is Snapping,” The Atlantic, 19 March 2020.
 Jon Emont and Alastair Gale, “Asia-Pacific Countries Sign Major Trade Pact in Test for Biden,” The Wall Street Journal, 15 November 2020.
 Anne Hoecker, Shu Li, and Jue Wang, “Preparing for US-China Decoupling,” IndustryWeek, 9 November 2020.
 Raj Varadarajan, Antonio Varas, Marc Gilbert, Michael McAdoo, Fang Ruan, and Gary Wang, “What’s at Stake If the US and China Really Decouple,” Boston Consulting Group, 20 October 2020.