According to author Charles Mann, economic trade between China, Europe, and the Americas can be traced back hundreds of years to the summer of 1571. Picturing what happened at that history-changing event, Mann writes, “In the great tropical harbor of Manila Bay, two groups of men warily approach each other, their hands poised above their weapons. Cold-eyed, globe-trotting traders, they are from opposite ends of the earth: Spain and China. The Spaniards have a big cache of silver, mined in the Americas by Indian and African slaves; the Chinese bring a selection of fine silk and porcelain, materials created by advanced processes unknown in Europe. It is the summer of 1571, and this swap of silk for silver — the beginning of an exchange in Manila that would last for almost 250 years — marks the opening salvo in what we now call globalization. It was the first time that Europe, Asia and the Americas were bound together in a single economic network.”[1] Of course, much of the history of trade between China and the rest of the world has been tumultuous. It’s little wonder that trust — or lack of trust — has played a large role in trade relations.

If the past is truly prologue, then trust is poised to play a large role in current and future trade relations with China as well. In a recent opinion piece, Thomas Friedman notes that relations between China and the United States have been souring for years. He writes, “We’re now like two giant gorillas looking at each other through a pinhole. Nothing good will come from this. … The smallest misstep by either side could ignite a U.S.-China war that would make Ukraine look like a neighborhood dust-up.”[2]

The Importance of Trust

Trade has always been about trust. The Spanish and Chinese tradesmen, who Mann depicts as “warily approach[ing] each other [with] their hands poised above their weapons,” didn’t trust each other because they had no prior relationship. Trust must be earned and that normally takes time. Distrust can also be earned over time and the Chinese government has provided plenty of reasons to distrust its motives over time. This growing lack of trust between China and the West isn’t new. Over a dozen years ago, Tim Cummins, President at World Commerce & Contracting, reported that trust has been eroding since the turn of the century. He wrote, “According to a report for the World Economic Forum, levels of trust have fallen by 44% [from 2000 to 2010]. Whether or not we can rely on the precise statistic, the underlying message is important for anyone engaged in the world of contracting and relationship management. Trust is commonly understood to be fundamental to the health and sustainability of relationships. Its erosion therefore has significant consequences, many of which are in fact already evident in our daily work.”[3]

What prompted Friedman to write about the lack of trust between the U.S. and China was his recent attendance at a meeting in Beijing. He explains, “[The meeting] reminded me of some powerful old truths and exposed me to some eye-popping new realities about what’s really eating away at U.S.-China relations. Hint: The new, new thing has a lot to do with the increasingly important role that trust, and its absence, plays in international relations, now that so many goods and services that the United States and China sell to one another are digital, and therefore dual use — meaning they can be both a weapon and a tool. Just when trust has become more important than ever between the U.S. and China, it also has become scarcer than ever. Bad trend.”

Even if armed conflict isn’t the end result of this lack of trust, the effects can be bad. Economic journalist Anthony Rowley explains, “It’s time to end the fiction that the world can be divided into ideological blocs without massive damage to the global economy, and that politics is somehow separate from economics. This is understood by some economists but not by many politicians who control the levers of global power.”[4] Rowley agrees with Friedman that the current trend is bad. He writes, “The global economy is not just splitting into two as a result of cynical political maneuvering; it is in danger of falling apart.”

The Way Ahead

One of current trends gaining strength in the U.S. is a call for complete decoupling from China. As I noted in a previous article, “China’s tacit support for Russia’s invasion of Ukraine hasn’t helped dampen those sentiments.”[5] And this trend has found a home in both of America’s major political parties. Jeffrey Kucik, an associate professor at the University of Arizona, and Rajan Menon, an emeritus professor at the City College of New York, explain, “President Joe Biden has continued his predecessor’s hard line toward Beijing. Biden, like former U.S. President Donald Trump, believes the United States must ‘decouple’ from China by reducing U.S. dependence on Chinese products and supply chains — for both economic and national security reasons.”[6] Although economic and national security concerns are legitimate, a complete decoupling from China is not a good strategy to pursue.

Kucik and Menon note, “Critics of economic decoupling, notably the U.S. Chamber of Commerce, warn it will disrupt existing supply chains, exacerbate delays in production, and force companies and consumers to pay more — not least because relocating production can’t happen overnight.” Journalist Jacky Wong (@jackycwong) observes, “A full ‘decoupling,’ meaning the breaking of economic links with China, remains unlikely, but supply chains would become less integrated than in the past. That would have significant consequences for both businesses and consumers — and probably for long-run inflation expectations as well.”[7] James Crabtree, Executive Director at the International Institute for Strategic Studies, believes that decoupling is not only bad, it’s delusional. He writes, “So far decoupling has barely begun to happen. Semiconductors are one notable exception, given successful American attempts to stop global chipmakers selling to China. But for all the talk of supply chain de-risking and resilience, similar moves in other sectors are hard to spot.”[8]

Crabtree believes Europe is currently taking a more relevant course. He notes that Ursula von der Leyen, European Commission president, has argued, “Europe should ‘de-risk’ rather than decouple its Chinese ties.” Why? Crabtree explains, “The sight of leaders from the ‘global south’ streaming back to Beijing should alarm the west. … While western leaders are trying to unpick decades of globalization, Asian nations from Bangladesh and Indonesia to Malaysia and Thailand view China as central to their economic future. Rather than decoupling, they seek more trade with Beijing. And, paradoxically, this is an outcome western policies might actually deliver.”

The “de-risk” rather than “decouple” strategy may have a difficult go in the United States. Friedman explains, “There’s something of a competition today between Democrats and Republicans over who can speak most harshly about China.” He adds, “Truth be told, both countries have so demonized the other of late that it is easy to forget how much we have in common as people. I can’t think of any major nation after the United States with more of a Protestant work ethic and naturally capitalist population than China.” Despite the headwinds a de-risk strategy may face, it appears the Biden administration may have a change of heart and is embracing that strategy. In a recent speech, Treasury Secretary Janet Yellen stated, “The United States will assert ourselves when our vital interests are at stake. But we do not seek to decouple our economy from China’s. A full separation of our economies would be disastrous for both countries.”[9] As Yellen underscored, pursuing a “de-risk” strategy doesn’t mean the U.S. will fail call-out Chinese abuses or stand tall against its increasingly militant foreign policy when necessary.

Concluding Thoughts

Although the U.S. must remain vigilant to a rising Chinese threat, finding common ground is just as important as knowing where and when to pushback. Journalist Andrew Duehren notes, “Finding the balance with China between defending national security and encouraging economic growth is a central task for Ms. Yellen and the Biden administration. China is the world’s second largest economy, behind only the U.S., and the globe’s largest exporter. … Beijing has ignored attempts to restart discussions on global-security issues and refused to engage with U.S. defense officials. … [Even so,] a spokesman for the Chinese embassy in Washington said, ‘A healthy and stable China-US relationship is in the fundamental interest of both peoples. … We oppose defining the entire China-US relations by competition, oppose the generalization of the concept of national security, oppose decoupling even at the expense of global industrial and supply chains.'”[10] By toning down the rhetoric, pursuing a de-risk rather than a decouple strategy, I believe the U.S. can successfully compete with China on the world’s stage.

Footnotes
[1] Charles C. Mann, “The Real Story of Globalization,” The Wall Street Journal, 6 August 2011.
[2] Thomas L. Friedman, “America, China and a Crisis of Trust,” The New York Times, 14 April 2023.
[3] Tim Cummins, “Loss Of Trust Carries A Heavy Price – But How Heavy?” Commitment Matters, 16 December 2010.
[4] Anthony Rowley, “US-China decoupling will have a devastating impact on the global economy,” South China Morning Post, 16 April 2023.
[5] Stephen DeAngelis, “Complete Decoupling from China is Not the Answer,” Enterra Insights, 11 January 2023.
[6] Jeffrey Kucik and Rajan Menon, “Can the United States Really Decouple From China?” Foreign Policy, 11 January 2022.
[7] Jacky Wong, “Supply-Chain Decoupling From China Gets Sharper Teeth,” The Wall Street Journal, 19 September 2022.
[8] James Crabtree, “The west is in the grip of a decoupling delusion,” Financial Times, 14 April 2023.
[9] Andrew Duehren, “Janet Yellen Says Security Comes Before Economy in U.S.-China Relationship,” The Wall Street Journal, 20 April 2023.
[10] Ibid.