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Has the “Great Decoupling” Gone Viral?
By Kevin Rudd

Nowadays, it is common to hear arguments warning of a bifurcation of the global economy into mutually exclusive American and Chinese spheres of influence. But, 18 months after the first shots in the Sino-American trade war were fired, the situation is more complicated than that, owing not just to economic realities and the new coronavirus outbreak, but also each country's political priorities.
China’s President Xi Jinping (L) and US President Donald Trump review Chinese honour guards during a welcome ceremony at the Great Hall of the People in Beijing on November 9, 2017. / AFP PHOTO / JIM WATSON (Photo credit should read JIM WATSON/AFP via Getty Images)

The increasingly nonchalant deployment of the term “decoupling” to describe the long-term trajectory of US-China relations demonstrates anew that in diplomacy, words can be bullets. Of course, for some, “decoupling” simply reflects today’s unfolding reality, whereas for others, it is the desired outcome.

This second camp may be emboldened by the coronavirus outbreak that began in Wuhan. The epidemic has already taken more lives on the Chinese mainland than did the 2002-03 SARS outbreak, and it is also spreading more rapidly. It has reached at least two dozen countries, including the United States, and rattled Asian financial markets. As other countries rush to shield themselves from China, and as the Chinese economy slows as a result of the lockdown in many cities, fears of a global downturn loom large.

Foreigners who clinically calculate the impact of the virus on themselves should spare a thought for the humanitarian impact on millions of Chinese families living in fear and isolation, their small-business livelihoods often stretched to the breaking point, hoping and waiting for the outbreak to peak.

Inevitably, the coronavirus outbreak will further complicate the US-China relationship, which itself plays deeply into both countries’ domestic politics. Politicians in Washington, DC, and Beijing now rage about the bilateral relationship because it is seen as central to so many key interests – from soybeans, the South China Sea, and the Belt and Road Initiative (BRI) to climate change, Huawei, and human rights. In the near term, the economic impact of the virus will slow China’s ability to give full effect to the “phase one” trade agreement it signed with the US in January.

In considering what America’s future approach to China might look like beyond the current health crisis, however, the best place to start is not the trade war or the temporary ceasefire proclaimed with the “phase one” agreement. It’s better to begin with the broader framing of the relationship, as outlined in the December 2017 US National Security Strategy (NSS) and the 2018 US National Defense Strategy (NDS), and recent speeches by Vice President Mike Pence and Secretary of State Mike Pompeo.

Whereas the NDS defined China as a “peer competitor” of the US, the NSS for the first time declared China to be a “strategic competitor.” It argued that 40 years of strategic engagement with China had not caused its government to adhere to the global rules-based order, let alone become a responsible global stakeholder. And those making this argument will now point to China’s sluggish response to the coronavirus outbreak as a case in point.

Ultimately, the NSS concluded that a new period of open strategic Sino-American competition was now inevitable: no more “Mister Nice Guy” on the part of the US. While both documents represent significant departures from the past, their analytical conclusions – reflecting the views of the US national-security establishment – do not rise to the level of a fully outlined policy strategy. Such a strategy has yet to be released or, if it will not be released, is not yet visibly operationalized across all US government departments.

Nonetheless, Pompeo’s remarks to the Hudson Institute on October 30 last year provided some clarification of the administration’s strategic intent. At the heart of his speech was an explicit rejection of China’s ideological system. The Communist Party of China (CPC), he contends, is a Marxist-Leninist party “focused on struggle and international domination.” Such language has not been used by a US administration in relation to China for a very long time.

True, Pompeo stopped short of calling for regime change, and instead claimed that the US wants to see a “liberalized China.” But “regime change” will be the message heard in Beijing. Pompeo said that he is not seeking a confrontation with China. Yet he outlined an administration policy whereby China’s economic practices are now to be confronted, along with Chinese efforts to change the international rules-based system through diplomacy and other means. Pompeo also signaled that China’s domestic human-rights practices would be taken on directly. While the administration is “still figuring out the right tactics and strategy,” he added, formulating and enacting such plans will be America’s central task “for the next 50 or 100 years.”

Missing from Pompeo’s remarks is any formal embrace of decoupling. As Pence made clear a week earlier, “People sometimes ask whether the Trump administration seeks to ‘decouple’ from China. The answer is a resounding ‘no’.”

The Chinese may have concluded from all this that economic decoupling is not on the administration’s agenda, at least for now. But it is an open question whether China accepts these assurances at face value, given the complete collapse of political and strategic trust. Furthermore, there is a real danger that China, looking at a combination of American policy actions and political rhetoric, will conclude that the US is indeed moving toward decoupling, in which case the best thing it can now do is to implement a strategy of national self-reliance as rapidly as possible.

A similar dynamic is at work in China, where President Xi Jinping’s primary vulnerability is the economy. Growth is slowing, private-sector business confidence remains low, and the coronavirus outbreak will exacerbate these problems. Private entrepreneurs see little reason to invest, owing to uncertain signals about the future of the market economy. It is unclear how big private firms will be allowed to grow, whether they will be able to expatriate profits, what the impact of an ongoing deleveraging campaign will be, and whether an uneven playing field will still favor state-owned enterprises (SOEs) in terms of credit allocation and market share.

Despite some signals of a change of course one year ago, there is little evidence to date that the government’s announced tax and credit policies have restored business confidence, let alone returned it to pre-2015 levels. Sustaining annual economic growth at the officially targeted rate of at least 6% therefore remains a real problem. Xi’s critics no doubt will have noticed that the recent statement from the CPC Fourth Plenum paid scant attention to the economy. That omission will be interpreted (at least by some) as a triumph of politics over economics at a critical time for the country.

It is in this domestic political and economic context that Xi now confronts the rhetoric, if not the reality, of economic decoupling from the US. He has three broad strategic alternatives for the economy. First, he could revisit the message of his November 1, 2018, speech offering encouragement to the private sector, by doubling down on policy measures to boost new private investment and employment.

Alternatively, he could rely even more on fiscal and, to a lesser extent, monetary stimulus to fill the widening growth gap. China has headroom to do so. But if it goes too far in this direction it could generate asset bubbles, financial imbalances, and systemic risks for the overall economy.

Finally, Xi could limit his exposure to externally generated threats to the economy. A new general strategy might seek to prevent the economic rift with the US from widening further, while pursuing diversification of trade, investment, and technology markets beyond America, together with greater economic self-reliance. Here, Europe looms large for China’s leaders.

The evidence so far suggests that we will see a combination of the second and third of these approaches. Xi has learned not to trust what US President Donald Trump says, including statements by administration officials insisting that the US is not pursuing a decoupling strategy. Xi believes US policy toward China has fundamentally changed since 2017. He reportedly told his politburo colleagues in a closed session earlier this year that the CPC should prepare itself for 30 years of sustained struggle with the US, and that this will involve multiple American provocations.

If true, Xi will likely try to insulate China from American coercive action to the greatest extent possible. We are already beginning to see some evidence of this in capital markets and in flows of trade, foreign direct investment (FDI), technology, and talent. But these are early days, and the patterns are far from even, particularly when it comes to capital markets and certain technology markets, where unscrambling the US-China economic omelet would be no easy feat. In fact, if executed badly, it could well enhance the prospects of mutually assured economic destruction.

Ironically, while the Trump administration may be sincere when it says it doesn’t want an economic decoupling, Xi may accelerate that outcome as he prepares for a worst-case scenario. China, after all, has a long and celebrated tradition of zili gengsheng (self-reliance). Those of us who follow the country closely have noted with some alarm that this old slogan from the pre-reform days has reappeared since the start of the trade war some 18 months ago.

Would pursuing “zili gengsheng” be in China’s economic interest? Most outside observers, and most Chinese economic reformers, would answer with a resounding no. But a sense of vulnerability does strange things to states, just as it does to people. In any case, China also could try to combine greater self-sufficiency with a radical new and accommodating international posture toward its non-American friends and partners around the world. And it could try to offset its vulnerabilities in exports, technology, talent, FDI, and capital markets by seeking new strategic economic alliances in Europe, Japan, South Korea, India, Southeast Asia, and with some of its more significant BRI partners.

At this stage of its economic development, China’s vulnerability to US trade barriers remains significant. The US has long been China’s largest export market by a massive margin. But China is less significant to overall US exports. Whereas the US accounted for 19% of Chinese exports on average over the last decade, just 8% of total US exports went to China, which was consistently America’s third-largest foreign market, after Canada and Mexico. Furthermore, China in aggregate is a more trade-exposed economy than the US. As of 2019, China’s exports and imports combined represented 36% of its total GDP. By contrast, the US traded sector in 2019 equaled only 26% of GDP. Hence, while trade remains important to both economies, it is much more important to China than to the US.

For these reasons, China’s leadership, in framing its overall policy response to the US, is acutely aware that the US can inflict more economic damage on China through trade than China can inflict on the US. As of 2019, notwithstanding the trade war, the US still represented 17% of total Chinese exports – and thus a significant contribution to China’s overall economic growth. America, at least for the time being, remains the key.

But because of its declining exports-to-GDP ratio over the last decade, China has become less vulnerable. In 2006, that ratio stood at 36%; by 2019, it had dropped to 19%. Meanwhile, Chinese household domestic consumption has been steadily increasing, replacing exports as the principal driver of economic growth. Boosting household consumption will therefore become an even more important part of Xi’s strategy to reduce his country’s overall vulnerability to external economic forces.

Moreover, China is acutely aware that the US is dependent on it for a range of household goods that cannot be readily replaced in the near term without producing an American consumer revolt. For example, 2018 US Census Bureau data showed that 82% of mobile phones and 94% of laptop computers imported to the US were from China. In other words, the US does not hold all the cards in this game, and China knows it.

Xi’s challenge, then, is to manage the US relationship in a manner that prevents a major collapse in growth from declining exports, while also seeking to insulate China, to the greatest extent possible, from further punitive US action in the trade war. This will include taking whatever measures possible to minimize the impact on Chinese manufacturing as third countries seek to reduce their exposure to growing US-China geopolitical risk by moving their global supply chains.

China’s national interest, at least for the decade ahead, is to de-escalate the trade war until such time as China is less dependent on the US export market. This will likely mean yielding to American pressure on intellectual-property (IP) protection, forced technology transfers, and further access to the Chinese market. It will also involve decreeing a major increase in Chinese imports from the US, in order to reduce the bilateral trade deficit, particularly in agricultural products. Nonetheless, Xi is unlikely to accept US demands that China cut state subsidies for its globally active firms. In the CPC’s view, the state is inseparable from the economy, and thus its role cannot be altered without fundamentally changing the nature of the entire Chinese political system.

For these reasons, while a phase-one deal may have been agreed, a phase-two deal is a long way off indeed. The existing deal helped restore some confidence to markets, but that was before the coronavirus. Market confidence remains critical for Trump in an election year, when there has already been some evidence of slowing. It is also a big political year for Xi, leading up the 100th anniversary of the CPC’s founding in 1921. Given the economic weakening caused by non-trade-war factors arising from poor domestic policy settings, and now the virus outbreak, the headwinds facing Xi are still strengthening – but it would have been much worse in the absence of a phase-one deal.

From China’s perspective, the FDI door to the US is now closing. FDI flows are a relatively recent development in the overall bilateral economic relationship, registering significant volumes only over the last 20 years – and only over the last ten in the case of Chinese investment in the US. Negotiations on a draft Bilateral Investment Treaty began “in earnest” in 2009, both to enhance the overall investment relationship and to address China’s historically restrictive approach to investment in economic sectors deemed to be sensitive.

But these negotiations stalled. As of 2019, the total stock of US FDI in China had reached $269 billion, with annual flows averaging around $15 billion. Meanwhile, Chinese FDI in the US had reached a cumulative $145 billion, but with annual flows dropping by 80% in 2018, reflecting a number of recent political and regulatory changes, both in Beijing and Washington.

To put this into a wider perspective, total US-China bilateral FDI flows in 2018 represented approximately 1.4% of global FDI flows. By contrast, total US-China trade that year represented approximately 3.3% of global trade. In 2018, Chinese FDI represented 1.4% of all foreign investment in America, while US FDI accounted for just over 9% of foreign investment in China. Thus, while US-China trade dictates the global trade in goods and services, as well as representing a major component of each country’s total trade, the same does not apply to the bilateral FDI relationship.

Nonetheless, from China’s perspective, FDI has been an important means of securing access to advanced technology. This has applied both to China’s domestic FDI strategy and to the types of firms it has sought to acquire or invest in abroad, including in the US. In the last several years, however, China has begun to encounter new and significant resistance to its approach to US investments.

For example, the US has imposed new levels of scrutiny and control on inward Chinese investment, as well as limiting the areas in which US firms may collaborate with Chinese partners in China itself. It has done so by tightening the procedures of the Committee on Foreign Investment in the United States (CFIUS), and by introducing the Foreign Investment Risk Review Modernization Act (FIRRMA) and the Export Control Reform Act (ECRA).

All told, the new measures have the potential to reduce not just FDI between the US and China, but also portfolio investments, including venture-capital activity between the two countries. This area is particularly significant, given that, as of 2019, venture-capital investments in both countries had not been affected by the general downturn in bilateral FDI. That may now change.

The struggle for technological primacy over the US has become a central factor in Xi’s approach to the US relationship and to national security and national economic strategy more generally. China’s ambition is to achieve national autonomy in all critical technology areas, followed by technological dominance over its economic and geostrategic competitors. This applies, in particular, to the principal drivers of the artificial intelligence (AI) revolution, next-generation mobile telecommunications, and quantum computing.

This ambition is made clear in the “Made in China 2025” strategy released in April 2015. The strategy identified ten core technologies that China would need to dominate, led by information and communications technology (ICT), but including all other major technology categories. The strategy targets 70% self-sufficiency by 2025, and global dominance in all areas by mid-century. “Made in China 2025” was supplemented in July 2017 with the State Council’s “New Generation Artificial Intelligence Development Plan,” which states explicitly that AI is a major area of international economic and strategic competition, and that China has a “major strategic opportunity” to achieve a significant “first mover advantage.”

China regards ICT and AI not just as the principal technologies that will determine its future global competitiveness, but also as the engines of a much broader “Fourth Industrial Revolution,” following earlier revolutions driven by paradigm-shifting technologies in fossil-fuel combustion, electricity generation, and digital electronics. The next revolution will be driven by profoundly disruptive technologies clustered around new breakthroughs in AI, the convergence of human and machine capabilities, and the Internet of Things. China’s leaders expect new applications in these areas to lead to a fundamental structural transformation of the global economy and the distribution of economic power, and to be instrumental in the ongoing “informationization” of warfare, including the deployment of new forms of autonomous weaponry.

Having lagged far behind the West in the first three industrial revolutions, China is determined not to do so again. Its leaders see new technologies as a way to leapfrog the US and the rest of the West economically and, if possible, militarily. Having concluded that the US and its allies are pursuing a strategy to deny China access to these technologies in the future, China’s leaders have embarked on a centrally coordinated strategy of their own. That strategy includes an unprecedented national scientific research effort, systematic acquisition of key foreign firms, technology transfers from foreign joint ventures in China, the rapid development of national and global product champions, and, according to US authorities, large-scale theft of intellectual property.

In this rapidly unfolding technology war, the stakes have become very high indeed, potentially dwarfing in overall significance the traditional domains of trade, investment, foreign policy, and even classical security policy. In many respects, advanced technology has become the new central terrain in the Sino-American relationship. China is seeking to overcome its natural deficiencies in specific AI technologies and systems by directing a massive state research effort across the industry as a whole. For example, as of 2019, China accounted for 48% of all AI startup funding globally, compared to 38% for the US.

It remains to be seen how many of these Chinese startups represent effective individual claims to new, free-standing technologies, or whether their numbers have been inflated with redundant, near-identical patents. Nonetheless, from a near-zero base only a decade ago, Chinese firms have become, at minimum, significant Big Data and AI innovators. They have also become the leading adapters of emerging technologies developed elsewhere (for example, in digital-payments systems), thereby providing massive cash flow for reinvestment in basic research. In fact, in the commercial adaptation of AI technologies, China now leads the US in many fields on an economy-wide basis.

Parallel to the Chinese AI challenge is the escalating dispute between China and the US on next-generation mobile telecommunications. Fifth-generation, or 5G, data networks can transmit data at 20 times the speed of current 4G networks, drawing on the combination of mid-band and high-band radio frequencies used by those networks. The significance of 5G is that it will be a major new enabling platform for the deployment of future AI applications globally.

China has become the undisputed leader in 5G technologies, infrastructure, and systems, both within China and in a growing number of countries around the world. As the US Defense Innovation Board has stated, “China is on a track to repeat in 5G what happened with the United States in 4G.” China’s subsidy of its domestic 5G program also extends offshore through the rollout of the “Digital Silk Road” across a growing number of BRI-participating countries. These 5G networks – including mobile telephone, Internet, and other digital services – are also likely to be subject to Chinese digital-governance frameworks, including the potential accessibility of local data holdings to China’s security and intelligence services.

China’s leadership resents the US campaign against Huawei’s global 5G network. China argues, credibly, that neither the US nor its allies have developed an alternative 5G technology to match Huawei’s. Moreover, the West has not demonstrated the will or the ability to lay out a global system of undersea cables and mobile terrestrial towers, necessary for supporting such a network. But China has a more limited response to the US counterargument that China, for similar national-security reasons, has never opened its telecommunications market to foreign providers. Moreover, China is unable to provide assurances that US global military, security, or intelligence communications would remain sacrosanct in the context of a Chinese-owned, operated, and regulated 5G network, particularly in the event of a crisis.

In May 2019, the US formally “listed” Huawei as an entity whose activities are contrary to US national-security interests. In the absence of specific, case-by-case approvals by the US commerce secretary, US firms were thenceforth banned from supplying Huawei with microprocessors that are essential for the further rollout of its global 5G network. Other Chinese entities have also been listed. But the Huawei listing has complicated China’s ability to set the global industry standard for 5G, despite the fact that Huawei is the market leader in what remains a limited field of only two Chinese, two Nordic, and zero American firms. In many respects, the May 2019 Entity List represented the formal commencement of hostilities between China and the US in the new technology war.

Given all this, it should be no surprise that a significant degree of technological decoupling between the US and China is underway. Of course, this began nearly two decades ago, when China decided to pursue Internet sovereignty to restrict the free flow of information to its citizens. The same is now likely to occur with 5G, this time for reasons relating to US national-security policies (and those of its allies). And AI, too, will be on a decoupling trajectory, owing to a combination of US national-security requirements and China’s pre-existing strategic goal of national self-reliance.

This decoupling is a source of great despair to US semiconductor manufacturers. The US semiconductor industry relies on China as its single largest market, and it generally channels its profits into next-generation research, guaranteeing continued US technological leadership in the field. While sales of American semiconductors and chips to China are unlikely to be totally banned, regulatory restrictions on the trade will almost certainly tighten. And while US-China collaboration in other fields such as biotechnology may continue for some time, new restrictions are beginning to emerge on those fronts, too.

In the end, technological decoupling will have a profound impact on global industry standards, regulation, and governance arrangements as a range of unilateral, plurilateral, and multilateral frameworks begin to take shape.

By contrast, capital-market decoupling is less likely. With the current US-China bilateral financial relationship at just over $5 trillion, the current degree of mutual interest and exposure is simply too great, even after the recent investor flight from Chinese exposures following the coronavirus outbreak.

There are, however, two proposals currently before the US Congress that could change all this. The first is the so-called Equitable Act, which threatens to delist from US exchanges any firm that fails to provide regular audited reports to the Public Company Accounting Oversight Board. This would directly affect listed Chinese SOEs that have routinely failed to comply. There are around 230 Chinese firms currently listed on US exchanges, and if the Equitable Act were to pass the House and the Senate and become law, failure to comply would result in delistings.

Yet, given the impact this would have on US firms benefiting from current listing arrangements – not to mention the US stock exchanges themselves – the proposed legislation is unlikely to be enacted. Those who oppose the bill argue that failing to provide the exchange with full audit reports would create its own penalty: lower share prices as investors mark down noncompliant companies. This, it is argued, is a more effective means of dealing with non-compliant firms than the drastic step of compulsory delisting.

A second legislative proposal, being introduced by both Republican and Democratic lawmakers, would restrict US public pension funds, particularly the Federal Retirement Thrift Investment Board (FRTIB), from investing in Chinese firms that are alleged to be complicit in human-rights abuses. At least three Chinese firms are under particular scrutiny by the bill’s sponsors: AviChina Industry and Technology, which is alleged to be associated with the Chinese People’s Liberation Army; Hikvision, which has supplied surveillance equipment for use in China’s crackdown on Uighurs in Xinjiang; and China Mobile, because of its alleged relationship with China’s security services (the firm is already banned from operating in the US). The FRTIB currently manages a fund of $600 billion. Were the legislation to go into effect, it would have a significant impact on US portfolio managers’ investment decisions, and would inevitably generate a Chinese response.

While US legislators consider imposing these new restrictions on Chinese access to US listing opportunities and portfolio investments, China has been moving in the opposite direction: for the last 12 months, it has been opening up its own capital markets even more. In September 2019, China removed all quotas on Qualified Foreign Institutional Investors to purchase domestic A-shares on the Shanghai and Shenzhen exchanges. Currently, foreigners hold only around 2% of Chinese equities. But that share is now likely to grow (industry predictions suggest an increase to 10% by later this decade) as institutional investors seek to increase their China exposure to achieve more balanced global portfolios. China is not acting philanthropically. It wants to attract investment from Europe, Japan, and elsewhere, and will need to begin funding an emerging current-account deficit from this year on.

As for currency relations, three issues are paramount. The first is the longstanding debate between the US and China on the proper valuation of the renminbi. The second concerns the renminbi’s future role as a global reserve currency. And the third is China’s recently announced plan to launch its own international digital currency, in part to reduce its exposure to the risk of dollar weaponization if the bilateral political and diplomatic relationship with the US collapses. The latter is the most recent, and potentially the most controversial of the three.

On the first issue, despite periodic rhetorical fusillades between the two sides – including Trump’s declarations that China is a currency manipulator – China is likely to maintain its current “managed float,” whereby the renminbi is allowed to move within a defined band each trading day. In any case, the renminbi depreciated by 10% after the introduction of tariffs 18 months ago and has since fallen further as a result of the coronavirus outbreak. If the trade war were to re-escalate and drive further economic and political decoupling, another round of exchange-rate battles would be possible. China might be tempted to use the exchange rate to mitigate the impact of future tariff increases. The problem, of course, is that this would result in a currency war between China and all its trading partners, generating political frictions on every front.

On the second issue, the People’s Bank of China has long wanted to internationalize the renminbi. Yet China’s political leadership, mindful of the lessons of the Asian financial crisis two decades ago, has resisted floating the currency and opening the country’s capital account, fearing that China would be too exposed to international hedge funds and to efforts to destabilize its political system through currency-market manipulation. These decisions, both on the renminbi and the Chinese capital account, have long constrained China’s ability to turn the renminbi into a major international reserve currency.

Still, China did get the renminbi accepted as part of the currency basket underpinning Special Drawing Rights (the International Monetary Fund’s unit of account). It has initiated some 36 separate bilateral currency swaps with its trading partners (although the proportion of global trade settled outside the dollar-denominated system remains small). And it has even initiated (along with Russia) an alternative to the dollar-based international payment system overseen by the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

Nonetheless, the dollar remains dominant, and the renminbi is still a marginal player in the international financial system. Fully 62% of global reserves are held in US dollars. Moreover, the dollar is used in 88% of all foreign-exchange transactions, compared with just 4% for the renminbi. Because of the longstanding depth, liquidity, and reliability of US global debt markets – and because of China’s own reluctance to open its capital accounts and float its currency – China has limited options to reduce its own dollar dependency.

But, having witnessed US weaponization of the dollar against adversaries such as Russia, Iran, and Venezuela, China will remain fearful about becoming a victim and has begun to look at more unconventional ways to address its dollar exposure and expand its overall global financial footprint. The Chinese firms Alipay and WeChat Pay are already two of the world’s largest digital-payment platforms, facilitating – together with other digital payment platforms – some $12.4 trillion in transactions in the first quarter of 2019 alone. China wants to build on this strength by developing its own international digital currency. It also wants to prevent other potential competitors, like Facebook’s Libra, from securing a first-mover advantage in the international marketplace. It remains to be seen how these new fronts in the currency war develop.

After an 18-month trade war, it appears that both sides have paused, stared into the abyss, and concluded that it’s a long way down. That realization means that we are unlikely to witness a complete collapse in the US-China ties in the near term. But in the overall bilateral relationship, the long-term trend line is still pointing south.

It is uncertain what Trump’s re-election in November would mean for US-China relations. China fears that a second-term Trump administration would let loose those officials who yearn for a real decoupling. So far, they have been kept on a short leash. A Democratic administration would also take a hard line on China, arguably more systematically so.

Given the uncertainty, both governments would be wise to look afresh at how they might navigate the difficult decades ahead. Without effective rules of the road, full-scale strategic competition could be dangerously destabilizing.

The alternative, which I advocate, is a form of “managed strategic competition,” the organizing principles of which I have written about elsewhere. This approach might also provide a framework within which third countries could work. If decoupling unfolds over time, and an increasingly binary international system emerges, third countries will come under increasing pressure to make strategic choices. The Huawei matter may be the first of many such choices to come – and not all will concern technology.

It is often assumed that a bipolar world would be a problem primarily for third countries. But that is not necessarily so. After all, it may pose as big a challenge for China and the US themselves. If binary choices are forced on the rest of the world, those choices would not necessarily make anyone happy. That is why some of us have been lifelong advocates of multilateralism: by design, multilateral systems reduce conscious and subconscious binary imperatives.

Beyond the question of US-China relations, we may have already passed “peak globalization” as we move into the 2020s. That is not just because of the unfolding competition between this century’s two great powers, or because competing regulatory systems for the Internet, mobile telephony, and AI are taking shape. It is also because new populist, nationalist, and protectionist forces are gaining ground around the world and moving from the political fringe to the mainstream in many developed countries. We certainly see this in the US. But China, too, is far from immune.

Rather than the “great decoupling,” therefore, perhaps we are seeing something closer to the “great unraveling” of the global rules-based order that was so painstakingly constructed in the decades following World War II. If so, that would be a tragedy for us all. It would mean the start of a new era of the “law of the jungle” – or else a return to the era we thought we left behind in 1945.

Kevin Rudd, a former prime minister of Australia, is President of the Asia Society Policy Institute in New York.
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