A broader decoupling of the US and China might be prevented by APEC, writes Te Herenga Waka—Victoria University of Wellington

After more than two decades of economic alignment that fostered complex interdependence, tensions between the United States and China have risen. The two countries now have an adversarial relationship and no longer view deep interdependence to be in the national interest.

Both countries seek a degree of decoupling and to diversify their global engagement. This shift is especially significant in the area of technological innovation and information technology, but is also evident in other trade areas, as well as financial, health and education services.

Businesses are responding by seeking to limit their economic exposure or are being forced to exit the market. Companies are attempting to restructure and rationalise global value chains to accommodate the new normal.

This partial decoupling is unlikely to be temporary, thereby presenting a series of challenges for organisations like APEC (Asia-Pacific Economic Cooperation), which New Zealand is hosting in 2021.

Leaders of APEC economies do not wish to choose between a China-led technological sphere and an American-led sphere. Such decoupling of complex interdependence is not only economically costly; it makes a deteriorating security environment even more fragile.

If the complex interdependence crafted by deeply enmeshed supply chains is “incompatible with war” (Geoffrey Garrett, 2019), unwinding this interdependence can only weaken the moderating effect of shared interests.

Boxed into a corner

Nonetheless, companies and governments are increasingly forced to make a choice between China and the US. For the companies caught in the middle – for example, with US moves against Huawei – decoupling will not be a neutral process. Firms will need to make decisions regarding on which side of the ‘economic Iron Curtain’ they want to fall, guided by considerations of profitability and political risk. (Darren Lim and Victor Ferguson, 2019).

Large companies are able to promise parallel supply chains; smaller enterprises may be forced to choose a side. Governments are faced with choices about which players they admit to play roles in critical infrastructure development. Even when their decisions are explicitly not grounded in nationality-based security concerns, the current environment means their decisions will be perceived as carrying such connotations.

They will continue to need to make such potentially fraught decisions on issues relating to technical standards, public procurement and digital trade. There may be some potential for APEC and other multilateral groupings to develop standards in sensitive areas. Multilateral rules and standards can insulate countries from allegations of ‘taking sides’ in the US-China conflict when they make unavoidable regulatory decisions.

If APEC can foster consensus on standards and appropriate areas for national discretion, it may prevent a limited decoupling in particularly sensitive technologies from escalating to a broader decoupling that could extend to virtually all industries.

The APEC senior officials’ Steering Committee on Economic and Technical Cooperation has a telecommunications and information working group which could potentially establish agreed-upon guidelines that depoliticise national decisions, away from the limelight of political leaders’ meetings.

Such APEC guidelines cannot resolve the US-China conflict. To the extent either the US or China ultimately aims for decoupling, they will have little interest in developing, applying or even respecting such neutral rules and standards. Nonetheless, for other APEC members, coming to a consensus on appropriate standards or decision rules may limit the potential for secondary fallout from the US-China conflict.

This is the second of two edited extracts from ‘Decoupling Dilemmas: The Economics-Security Nexus in the US-China Trade Conflict’, an article in the latest issue of Policy Quarterly, published by the Institute for Governance and Policy Studies at Te Herenga Waka—Victoria University of Wellington. The issue focuses on New Zealand and the Asia–Pacific and is guest edited by Alan Bollard, the University’s Professor of Pacific Region Business.

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