Whether US, EU or India, decoupling from the world’s second biggest economy is near impossible. De-risking is the new buzzword. But even that’s not easy

Is it divorce or just separation, or an affair gone wrong? The United States is sending mixed signals on its relations with China. On April 20, Janet Yellen, the US secretary of treasury, ended a long list of complaints, warnings and threats aimed at China with a conciliatory message. She was quoted in the media as saying, “The US 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. It would be destabilising for the rest of the world.”

The messaging shift

Her message, said in passing, was quickly reiterated and imparted gravitas by the US national security adviser Jake Sullivan. In a lecture delivered a week later, on April 27, at the influential Washington DC think tank, Brookings Institution, Sullivan ended a long and substantial address on US economic strategy aimed at reviving and revitalising the US economy, re-asserting US global economic leadership, and so on, with the categorical statement: “We are for de-risking and diversifying, not decoupling” from China.

Yellen and Sullivan were not just articulating a new line of thinking on China of President Joe Biden, but also echoing the words of a US corporate leader, Ken Jarret, a former president of the American Chamber of Commerce.

Jarret told Forbes magazine a month earlier that while the US-China relationship is defined by “rivalry, mistrust and suspicion,... The one thing that hasn't changed (after the pandemic) is that the level of economic interdependence between the US and China is still quite deep. US companies want to ‘de-risk’, not decouple.”

Clearly, the Biden administration is reflecting the interests and sentiments of US big business. In a book I co-edited in 2021, on the 50th anniversary of the historic US-China rapprochement, when President Richard Nixon travelled to Beijing to meet up with China’s Great Helmsman, Mao Zedong, [A New Cold War: Henry Kissinger and the Rise of China] we recorded in some detail the role played by US business interests in stitching up the US-China alliance during the ‘Old Cold War’, so to speak. US big business is back shaping the relationship once again.

US and EU have discovered that in the short run they remain dependent on China in many ways and reducing, if not eliminating, these dependencies will take time and is not yet all that easy

But China’s not USSR

The new ‘de-risk’ strategy is not just a departure from Donald Trump’s famous ‘decouple’ plan that had gained so much traction both in the US and around the world, but a definite retreat from the bravado of the “geo-economic containment of China” talk that was in vogue barely a decade ago. In his classic, The Rise of China Vs The Logic of Strategy (Harvard University, 2012), Harvard historian and strategist Edward Luttwak proposed the geo-economic containment of China aimed at preserving “the world’s equilibrium without worse forms of conflict”.

“The only remaining means of resistance (to China) would then be ‘geo-economic’, to apply the logic of strategy in the grammar of commerce,” concluded Luttwak. He suggested that the US restrict trade with China; deny China access to key raw materials; and stop technology transfers that China would still need. All this is aimed at “impeding China’s growth”. Both Trump and Biden took the Luttwak advice.

If during the Old Cold War the former Soviet Union was sought to be geopolitically contained, a New Cold War would entail the geo-economic containment of China. The USSR had spread its ideological and military tentacles around the world. China has spread its economic arms around. It is now clear that battling the Soviet system was easier than overpowering China. What’s the difference? China is the world’s biggest manufacturing and trading nation with almost every country around the world having economic relations with it. There are few economies that can grow without doing business with China.

It’s business silly

The Yellen-Sullivan switch comes days after so many in the US and Europe tore into French President Emmanuel Macron for merely asserting standard French doctrine of strategic autonomy and rejecting arguments about decoupling. Both the German chancellor, Olaf Scholz, and the French president were merely conceding the nature of interdependence between the economies of Europe and China.

While the US and EU may remain focused on the geo-economic containment of China in the long run, they have discovered that in the short run they remain dependent on China in many ways and reducing, if not eliminating, these dependencies will take time and is not yet all that easy. Equally, they have also realised that scores of other countries and industries around the world are deeply integrated into China’s economy, and vice versa. Given complex global supply and value chains, decoupling is a pie in the sky.

Consider India’s own experience. In 2019 the Narendra Modi government opted out of the Regional Comprehensive Economic Partnership agreement to reduce India’s trade dependence on China. Four years later not only is India’s trade deficit with China at an all-time peak of over $85bn, but Indian business is urging GoI that while decoupling is tough, even de-risking would require investments and policy changes at home that are not easily forthcoming. So, quiet affairs have substituted an open marriage.