As fate would have it, the coronavirus crisis has provided a live experiment of the consequences of a massive, if perhaps short-term, involuntary decoupling. The interruption of global value chains leads to the sudden stoppage of factories far away from China – tourism and the travel industry, the auto industry, pharmaceuticals where China is a leading provider of ingredients, smartphone production, and a dive in prices for energy and raw materials. Financial consequences are less easy to ascertain as we write, simply because the direction of China’s foreign trade and the current account has become unpredictable over the next few weeks or months. It also has implications for future preventive measures against such an event: overdependence on any single supplier is obviously a hazard. Regardless of geopolitical trends, the virus crisis will lead many companies to further diversify their choices of location for production capacities and sourcing.

In the name of national security

François Godement
Godement, an expert on Chinese and East Asian strategic and international affairs, is a nonresident senior fellow in the Asia Program at the Carnegie Endowment for International Peace.
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"Decoupling" has been the keyword lurking in the shadow of the US-China trade conflict since the election of Donald Trump. It is not recognized as a policy by his administration, even as it restricts some exports and exchanges with China in the name of national security. Yet, it is often cited by Chinese commentators and by partners alike, especially in East Asia. The measures taken – and to some degree contemplated or partially enacted by the European Union and Japan – are much more narrowly focused on a few key areas: a reinforcement of oversight over foreign direct investment, placement on an "entity list" of companies suspected with acquiring items related to national security and critical technologies, a reinforced law enforcement effort against technological espionage, including illegal tech transfers.

At its most extensive, the administration has owned up to the word decoupling by explaining that this had been China’s actual policy for years, through restrictions on foreign investment and public markets, a largely closed internet, the drive for self-reliance and domestic technologies. Requiring "reciprocity" from China may indeed lead to asymmetrical decoupling from the Chinese economy.

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This article was originally published by Institut Montaigne.