By: Franklin D. Kramer, Matthew Kroenig, and Jeffrey Cimmino
What is the kernel of the issue?
The economies of the United States and its allies and China have become highly interdependent, with significant flows of trade and finance across their borders. There is currently a debate about whether the United States should “decouple” from the Chinese economy.
Why is the issue important?
China is a known thief of intellectual property and engagement in sectors vital to national security risks sensitive material being compromised. Excessive dependence on China’s market allows China to exercise leverage over allied countries and employ coercive economic measures. However, a complete decoupling would harm the US and global economy; remove trade as a ballast in the US-China relationship; and hurt allies and partners that are dependent on trade with China.
What is the recommendation?
The United States and its allies should approach decoupling with a scalpel rather than a machete. In areas of economic engagement critical to national security, they should restrict economic exchange with China altogether. Key critical infrastructure supply chains should not include Chinese software, and should require a “China plus one country” diversified approach for materials and components to prevent overdependence. Products made with forced labor should be excluded from trade. In areas where China is engaging in unfair practices, the United States and allies should impose offsetting measures, including tariffs. Countries that have become excessively dependent on China economically should seek to diversify their economic relationships. In non-sensitive domains, the United States and its allies can generally allow free trade so long as intellectual property is protected and reciprocal access to China’s markets is maintained.