Decoupling could hurt the U.S. more than China — economist Yukon Huang

Legislation passed by the U.S. Senate that may bar Chinese companies from U.S. markets, part of a broader push by Republican lawmakers for economic decoupling, could have a “very significant cost in terms of hurting U.S. interests,” said economist Yukon Huang, a senior fellow at the Carnegie Endowment for International Peace and formerly the World Bank’s country director for China.

On Wednesday the U.S. Senate unanimously passed a bill requiring companies seeking to raise funds to undergo an audit and prove they are not under ownership or control by a foreign government. This has followed pressure from the Trump administration to indefinitely delay investment of U.S. federal retirement dollars in Chinese stocks.

At Thursday’s The China Project CEO Webinar, “Post-pandemic financial markets between the U.S. and China,” Huang said:

“Suppose the U.S. proceeds and puts out a general guideline saying that U.S. pension funds, or state and local investment funds, or even capital markets, they shouldn’t be investing in China…What is the long-term impact? If we get back to some kind of normality, and China continues to grow 4 or 5 or 6 percent over the coming five or 10 years, it will be the largest economy a decade from now, and its rate of growth will be two or three times as fast as the West.

China’s equity markets in this sense are potentially undervalued. By prohibiting U.S. companies and households and pension funds from investing in China, you’re basically reducing their returns. You’re also increasing risk. They’re missing out on the biggest market. So this kind of action, targeting China, really has a very significant cost in terms of hurting U.S. interests.”

Huang referred to Republican policies on China as an effort toward “chaotic decoupling,” and said this could have a profound impact on the world. “The global economy is going to take a big hit,” Huang said. “We’re getting back to where we were generations ago, hundreds of years ago, when we didn’t have a connected world.”

Huang pointed to three constituencies in the U.S., each with distinct and contradictory agendas: the White House is focused on trade; the U.S. business community is seeking protection of intellectual property rights and greater market access in China; and the U.S. security establishment is pressing for a decoupling of the two economies. “Beijing has a very hard time figuring out exactly what America really wants,” Huang said.

He argued that economic decoupling will hurt the U.S. as much as, if not more than, China:

“The flow of information across borders, the flow of information within a country, that is what drives growth. So I would say the real casualty of a trade war and this kind of decoupling is to kind of stifle the flow of knowledge. And that flows from trade, foreign investment, exchange of scholars…

China-U.S. research collaboration — by that I mean they have scholars from the U.S. and we have scholars from China — they are the largest link in the world. Much more than any other country. If you break this link, you are also going to reduce the productivity and innovative capacity of America. No one benefits from this.”

To influence China and get it to take U.S. concerns seriously, Huang said the U.S. should instead include China in multilateral institutions. Unlike Russia, Huang said China’s future prosperity depends on having a functioning, multilateral, and rules-based global system:

“What we actually need in Asia is a Trans-Pacific Partnership (TPP) with America back in it, but we also need China in it. If you want China to be bound by rules of the game, which is broadly supported, then you want China to be engaged with the TPP, rather than trying to operate outside of it. So I think this is a significant approach: draw China into legitimate rules-based systems which they need, and address America’s legitimate concerns in the process, rather than move to this decoupling approach.”

Huang spoke with Dorinda Elliott, Senior Vice President at the China Institute.

Other noteworthy comments from Huang

Trade deficits do not matter

“Both sides are losing from the trade war. Trade volumes are down. You are in the middle of a recession. You have a pandemic. The last thing you need are protectionist tariffs and trade restrictions if you want to revive the global economy. They are unnecessary because trade deficits do not matter. If you think about it, America has bilateral trade deficits with 100 countries. Yet America is the world’s most powerful, most innovative, most dynamic economy.

“Trade is not the issue, but the tensions are probably inevitable. You have China’s economic rise challenging America’s dominance of the global economy. Many policymakers on both sides see this relationship as a zero-sum game, rather than something that could be quite beneficial. This is the nature of the problem. It is counterproductive, unnecessary, but probably inevitable.”

How tariffs will damage U.S. tech companies

“The long-term impact of these tariffs hurt America more than they hurt China, and the reason is, the restrictions on trade and high-tech products reduces the profitability of America’s high-tech companies which drive growth in the United States. America’s economy is largely driven by the investment profitability of its high-tech companies.”

Supply chain relocation

“The relocation of the supply chain is going to increasingly involve Chinese companies moving to Mexico, Vietnam, or Southeast Asia, and producing and exporting to America and Europe from outside of China.”

There is not too much American investment in China

“American companies invest $125 billion a year. What percentage of that actually goes to China? When I asked people this question, they would say maybe 5 percent, 10 percent, 20 percent. The answer is 1.5 percent. It’s almost negligible. So this assumption that there is too much foreign investment in China is actually wrong.”