Is the Global Economy Being Destabilized by Decoupling?

Jake Sullivan and Janet Yellen both make significant statements that reinforce Biden’s approach of tying American national security to economic development.

Mr. Matt Kroenig Dear Emma: I finished teaching my final Georgetown class of the semester this week, and I am looking ahead to having one less obligation this summer.

Ms. Emma Ashford Next week, I’ll be camping with the kids in the Shenandoah Mountains. I’m not naturally outdoorsy, so if I don’t appear for this queue in two weeks, you should presumably just think a bear got me.

Today, I’d like to talk about the political economy. We’re not economists, but two significant addresses in recent weeks—from Treasury Secretary Janet Yellen and National Security Advisor Jake Sullivan—have continued the Biden administration’s strategy of integrating economic and national security policy.

And by chance, I believe I saw you being criticized on Twitter for voicing opinions on a related topic. What did you say exactly? China’s recent economic progress should be credited to the United States, right?

MK: As part of my approach to include China as a player in the rules-based system, I tweeted that the United States wanted China’s economy to grow over the years. 

The free world is knocking the system down now that China is rebelling against it. I don’t think “dragged” is the correct word to describe the amount of attention the tweet received, but let’s start with Sullivan and Yellen as their statements have far more impact than mine.

Okay, but the reason I brought it up is that I believe the messages of your tweet and the two lectures were unexpectedly similar: China should be appreciative of the United States’ economic leadership and can continue to grow as long as it doesn’t enrage the country too much. Simply put, you made your point in significantly fewer words than they did and more directly.

MK : Yes. My 240 characters were definitely frank and driven by the same set of discussions! I would have chosen my words more carefully if I had realized that the tweet would be seen by more than 500,000 people!

But it is true that over the years, China has reaped significant benefits from the U.S.-led economic order. Washington was aware that China was violating the rules of the international economic system by stealing intellectual property, requiring Western businesses to relinquish technology to conduct business there, and other ways. 

To engage China in the hopes that it would become a “responsible stakeholder” in a rules-based system, however, it was prepared to turn a blind eye.

EA: I find that to be surprisingly incongruent. How can you make the case that decoupling will delay and impair Chinese economic growth while also asserting that the U.S. objective isn’t to keep China down?

I felt that the same issue was magnified in Yellen’s remarks. It doesn’t contradict itself, MK. It has that impact.

The goal is to defend American national security and address China’s unethical trade practices. As Yellen noted, there would be a financial penalty to all parties, but I believe China will be worse off. The Chinese Community Party may stop threatening its neighbors, manipulating the international trading system, and carrying out genocide in Xinjiang if it doesn’t like it.

MK: In general, I enjoyed Yellen’s speech. She offered a de-risking strategy and spelled out the Biden administration’s economic strategy toward China.

In essence, she made four important points. The first is that in matters of national security and human rights, the United States and its supporters should immerse in a rigorous decoupling from China.

Second, she advised them to take offsetting actions where China is breaking the law, such as with its forced tech transfers and IP theft.

However, I found her fourth argument to be more troubling. She thinks that China and the United States can work together to address common issues like climate change and debt relief for developing nations. The Biden administration still hopes to work with China, but it doesn’t appear like they are both that interested. Beijing’s greenhouse gas emissions are the highest in the world and are still rising, yet it is unwilling to accept losses on its debt.

EA: Look, I liked the administration’s effort to actually explain the security policies and economics it has been implementing for the past three years through these speeches. The general outline was also well known: domestic industrial policy, preferential trade with friends, export curbs, and penalties that limit Chinese growth in particular industries.

Both speeches simultaneously misrepresented the truth regarding the effectiveness of those policies. Consider Yellen’s remarks. She used de-risking instead of decoupling, as you may have noticed, but there isn’t much of a disparity between the two. It’s merely an effort to make the idea sound less menacing so that markets aren’t as alarmed.

MK: Allow me to stress a few things. First and foremost, I don’t think that taking national security into account when developing economic policy is bad or in any way protectionist. Almost usually, and for good reason, nations do this. 

Later, the United States might make money by selling nuclear weapons to other nations, but for very good reasons, it does not. In the same vein, advanced technology having military applications should not be exported to Beijing by Washington and its allies.

Second, I concur that the main goal of decoupling to de-risking is rebranding, and I find it to be a good thing. Many incorrectly believed that decoupling entailed cutting all economic connections with China. That has always been irrational and foolish.

But selective decoupling—stopping only some of China’s sensitive economic activities while allowing the rest to continue—was, in my opinion, always a smart concept, despite its dubious reputation. The meaning of the term “de-risking” is less connotative.

places we might concur I’m not sure how specific this risk will or has to be. Helping China’s People’s Liberation Army produce weapons is obviously not a good idea. It is evidently acceptable for China to import USA soybeans and for Americans to purchase baseball caps made in China. However, there is a lot of ambiguity between them.

Where should the line be drawn? Some people contend that additional items that aren’t obviously tied to national security, like medical supplies, airplanes, and other items, should be included on the list.

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