Decoupling

There's an old saying out of the peace movement of the 1960s—"What if they held a war and no one showed up?" For decades, the Chinese have conducted a one-sided trade war with the United States—one in which the U.S. never showed up. As a consequence, Democrat and Republican administrations allowed the Chinese to manipulate its currency, steal intellectual property and trade secrets, and restrain trade in U.S. exports to China, leading to massive trade imbalances. Both GOP and Dem presidents made noises about the problem, but gladly kicked the can down the road to avoid any unpleasantness. Until Donald Trump.

Like a bull in a china shop, Trump decided to show up—castigating the Chinese for decades of unanswered trade warfare and indicating that he would react in kind. Establishment GOP types gasped, telling anyone who would listen that nothing good ever comes from a trade war. Dems, suffering a never ending case of Trump Derangement Syndrome, told anyone who would listen that Trump would wreck our economy, while at the same time mollifying their big union allies by saying that, yeah, Chinese trade practices are a problem. And Trump? He does what he always does—say nasty things about the Chinese on odd-numbered days, and nice things about Chinese leadership and their desire to settle trade disputes on even-numbered days. With Trump, it's a chaotic negotiating process, but it just might work.

Jake Novak notes that the tone of Chinese comments on the trade war has changed over the past few weeks and suggests that something important is happening:

Given the timing of the change in tone, it seems more likely that what’s making the difference is a realization on both sides that there’s another way this trade war could end – and that possible ending is one the U.S. is very unlikely to lose.

That alternate ending is summed up in one word: decoupling.

The decoupling push is quite different than any U.S. efforts to get China to open up more of its economy to American companies. Instead, it focuses on reducing America’s extremely heavy reliance on China for so much of its manufacturing needs.

Even if China’s economy weren’t so closed off to so many American goods and services, a strong argument has long been made that the U.S. needs to diversify its sources for imports. While finding those new sources wouldn’t necessarily do anything to dent America’s trade imbalances, it would reduce the risks of a major disruption to the U.S. economy based on disputes or other problems connected to a single foreign country.

So what happened between Aug. 23 and this week’s trade optimism-fueled rally?

Thanks to some major news about Google, the world got its clearest notice yet that U.S.-China decoupling has gone from just a theory to something that’s really happening.

Just five days after that trade war flare up, the Nikkei business daily reported on Aug. 28 that Google is shifting its Pixel smartphone production to Vietnam from China starting this year and that the company is also looking to shift some of its smart home speaker assembly to Thailand.

It’s not that Google is the first U.S.-based company to announce some shift away from China; more than 50 other big names have moved out or scaled back. But the timing of Google’s reported plans and how they seem to have affected Beijing can’t be ignored.

It would be a very good thing if the United States began to decouple its dependence on China as a manufacturing hub and diversify to a number of different international sources (e.g., Viet Nam, Mexico, India). In fact, it just might be a matter of national security.

The Chinese, for their part, don't want this to happen, and seeing the early signs of decoupling may have spooked them.

Nothing may come of this, but if Trump can pull off a trade agreement that even begins to remove the existing inequities with China, it will be something that Carter, Reagan, George H.W. Bush, Clinton, George W. Bush, and Obama were unwilling and unable to do. It will also demonstrate yet again that the wise counsel of establishment elites is not as wise as they think it is.