America needs a proper risk strategy for its relations with China
The boom in the US-China disconnection rose to a crescendo last week when President Joe Biden issued an executive order instructing the Committee on Foreign Investment in the US to increase oversight of cross-border deals in sensitive areas such as artificial intelligence, quantum computing and biotechnology.
The order did not specifically name China, but was clearly part of a growing White House effort to separate its supply chains and financial markets from Chinese influence.
Whether or not you agree with the move, or the disconnection in general, it’s about time America had a much more complete strategy for dealing with reality. Tensions between the US and China have risen to worrying levels, especially over the Taiwan issue.
Last week, the Senate Foreign Relations Committee approved a bill that would provide $6.5 billion in direct military aid to the country as part of an effort to shut down the island nation — which produces 92 percent of the world’s high-performance semiconductors. to aid his sovereignty.
The road to actually approving the bill and pushing through aid money is unclear. But the move, along with rumors of new sanctions against China to deter a potential attack on Taiwan, puts geopolitical pressure on the button at a time when the US has not yet developed a detailed plan of action for the economic consequences of a such conflict, or even the continued decoupling of the US and Chinese economies.
In Washington, fears mount that Beijing is planning a military invasion and America threatens to become embroiled in a sparring between Beijing and Taipei in the Taiwan Strait. But what would happen if supply chains and financial flows between the US and China were cut off tomorrow? What is the day-one plan?
No one I’ve spoken to in the public or private sector has a clear and complete answer to that question. The government’s approach so far has fallen into two categories: a head-to-head response to China’s own moves, with tariffs and sanctions, or a global but still vague top-down approach on how to make the industrial base at home. recovered. .
Donald Trump’s administration was mainly about the former. The Biden administration has made it clear that it wants to sharpen the government’s focus on protecting national security and building greater resilience and redundancy domestically and regionally with partners (“friend-shoring”), in strategic areas such as semiconductors, green batteries, important minerals and pharmaceuticals. That is important and necessary. But now both policymakers and companies really need to understand what that means in practice.
For example, what would it mean if China suddenly stopped shipping key drug ingredients to the US? Is there a complete list of what the main inputs are, which companies use them, where alternative supplies can be found quickly, what percentage of consumption needs they can meet and how quickly (and at what cost) the industry in the US or allied nations could produce new stock?
Likewise, how would the US (and the world) meet the demand for chips if China invaded Taiwan? Would there be a military counterattack? Is it conceivable that foundries on the island would be destroyed? Are there plans for which parts of the public and private sectors would be prioritized in the event of a major and immediate shortage of semiconductors?
These are terribly awkward questions, and it’s no surprise that few want to ask them. But they are exactly the ones we should ask, especially given that Chinese leader Xi Jinping — who is likely to be reappointed for a third term at the Communist Party Congress in mid-October — has made it clear that national security, even more than Chinese economic growth, is his top priority.
China would have a lot to lose if trade and capital flows decoupled quickly. But the US has just as much to lose, if not more, and is less prepared for that possibility.
Beijing is already actively implementing a “Fortress China” strategy to become self-sufficient in the most essential goods and technologies.
The US has said it wants the same. But one of the realities of America’s decentralized, privatized economy is that risk mapping is difficult. The Department of Defense may have an idea where all the parts of an F-35 fighter jet come from. But I doubt that policymakers understand the whole supply chain, even in key non-defense areas, such as electric vehicles or electronic components.
This is not to say that the US should copy Beijing’s top-down approach to economic development – as I have argued in previous columns, decentralization is a force for the US in terms of innovation. But in a world that is decoupled, it’s not a good idea to increase the security stakes without having a solid plan for what happens when there is war, real or economic.
The US should appoint a White House resilience czar (an impartial figure with a background in logistics or business continuity) – as I have also argued before – to ask the right questions and ensure public and private sector preparedness.
We need a much better understanding of the economic implications of decoupling, whether it happens slowly or suddenly. We must not let the war drums sound without understanding what they can bring.