A recent article by Yao Kun published in the China Review Press in Hong Kong, "De-risking" is a precise "decoupling", which does not work and is not popular," explains how tightly the U.S.-China economy is integrated and how complete and efficient is China’s manufacturing chain thus making de-risking, a new name for precision decoupling, unworkable and unpopular. Yao’s article is correct and stands from the Chinese point of view. After reading it, this author felt the resonance and urge to speak. Therefore, as a long-time U.S. resident, I felt like offering an analysis of the same issue from the perspective of the U.S. I will analyze, based on economic principles and the U.S. national status, why it is impossible to decouple with China fully or substantially. Selective and precision de-risking must also consider mutual benefits to avoid harming each other. Starting from economic principles, there is no need for complicated theories and models, one should be able to see that under the current global economic structure and the advances in transportation, communication, and financial facilities (international and regional development banks), a large-scale industrial and commercial decoupling between the U.S. and China will not be possible from a cost-benefit analysis point of view.
Changes in U.S.-China relations are inherently related to politics, but economic competition remains a practical and unavoidable cause. The U.S. is a large country with rich resources. Since its very beneficial victories in the two World Wars, the U.S. has moved towards hegemony., and even dominated the world stage after the disintegration of the Soviet Union. As a result, it has developed a habit of setting rules and regulations for dealing with economic and international affairs and does not allow competitors to challenge its hegemony status. However, whether in political or economic theory, competition among nations is inevitable, oftentimes leading to war. After human beings have experienced nuclear wars and their destructiveness, they hope that rationality will guide them never to use nuclear weapons in wars, and of course, best to compete without wars. But the rise of China has challenged the hegemony of the U.S., and their economic competition has caused today's rift between them. Economic competition is also the reason for the rivalry between the two governments and their military. If China had been still economically backward, the U.S. would not try to suppress China. This is the American point of view. In the following, we will analyze the infeasibility of de-coupling and de-risking between the U.S. and China from the standpoint of economic principles.
The U.S. launched a trade war with China and then a technology war, on the grounds of national security, Today, with allies, they have raised the banner of de-coupling and de-risking. First, the U.S. has selected the semiconductor industry and its manufacturing chain to launch a technology blockade and de-coupling of production and supply chains. Semiconductors are closely related to the lifeblood of U.S. military enterprises. From raw materials, wafers, and chips to communications, computing, and electronic equipment, they have been all controlled and banned for export to China. In addition, high-end chip manufacturing technologies (below 14 nanometers) are completely prohibited from being sold to China, and their manufacturers and enterprises are induced to move their production facilities to the U.S. to decouple from China. However, high-end semiconductor technology requires high-end talents, a large amount of research and development funding, and the support of a mature and sizable market for low-end semiconductor technology products. For decoupling and duplicating a competing industrial chain, the cultivation of a large amount of capital and talent is a challenge for both the U.S. and China. Currently, there are 1484 semiconductor factories (fabs) in the world, absorbing annual investment of $80-100B, and the number of talents required will increase by at least 100,000 annually, from 2 million (2021) to 3 million (2030). The U.S. produces less than 60,000 engineering and computing graduates with bachelor's degrees. The U.S. each year only produces 600,000 college graduates. It can be inferred that from consideration of talent demand alone, decoupling of the semiconductor industry and maintaining two mutually competing production and supply chains between the U.S. and China is not feasible.
The demand (market) for the low-end products of the semiconductor industry in the U.S. is much smaller than that of China, and it must struggle to support high-end semiconductor R&D, manufacturing, and competition. Semiconductor is a high-energy (electric power and human intelligence) industry. Decoupling and breaking up the industrial chain into two competing ones will inevitably increase the pressure on the demand for electric energy and manpower. China announced lately that from the beginning of this August, it would control the export of gallium and germanium to counter the U.S.’s export control to China. It can be said that the measure is intended to teach the U.S. a lesson in economic principles. Gallium is needed in high-end semiconductor industry (including the military). Its production is scarce, China accounts for 80% of the gallium world production. It is obtained as a low-yield byproduct of processing alumina in extracting aluminum, and the manufacturing process requires a lot of electricity. China's gallium export accounts for 29% of world export. The U.S. does not manufacture gallium itself but needs it in its naval and marine radars and high-end semiconductor products. The U.S. imports Gallium from Japan. In addition to obtaining gallium from aluminum production, Japan also imports Chinese low-quality gallium and buys scrap metal equipment for recovering gallium. In 2021, due to the increase in gallium prices, Germany restarted the gallium production plants that had been closed for five years. Although the U.S. stated that it would not be a problem to keep importing gallium from its allies, Japan and Germany would raise prices based on economic principles. This China's countermeasure to U.S. semiconductor sanction will certainly send an effective message to the world.
The de-coupling and de-risking strategy of the U.S. has harmed others economically and not necessarily benefited itself. It has prompted China to be self-reliant. The Chinese market is large enough and its population is sufficient to produce the required technical talents without relying on immigrants. It will only take some time to complete its semiconductor manufacturing chain. If the U.S. continues its current technology-sanction strategy, the result will be worrisome. First, the return on investment cannot be guaranteed, the two industrial chains cannot complement each other, and there may not be enough market for products. Second, there will be a problem of having sufficient sources of talent. Large-scale reliance on immigrants will cause social problems. The U.S. may not be able to attract elite immigrants like the post-WW II period (1950’s and 60’s) when there was a huge economic disparity. Today, the security problem in the U.S. is worrying elite immigrants. The phenomenon of global elites rushing to the U.S. no longer exists, and the current large number of border immigrants are mostly poor people (or criminals running away from foreign governments) presenting a burden to American society. Third, it is even more impossible for multiple industries to fully decouple, which will cause unhealthy competition and negative economic effects such as inflation. There is a shortage of humble and knowledgeable politicians in the U.S. today, but sooner or later economic and social phenomena will wake up the American people. The media only needs to report more and truthfully. Some people predict that the U.S. and China may go to war, as close as 2030, but this author thinks hopefully that such a date may be the time limit for the U.S. to wake up. If China can maintain its rational anti-hegemony policy and behavior, the U.S. will come to its senses!
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