America needs a proper risk strategy for its relations with China

The drumbeat of US-China decoupling reached a crescendo last week when President Joe Biden issued an executive order calling on the US Committee on Foreign Investments to step up scrutiny of cross-border deals in sensitive areas such as artificial intelligence and quantum computing and Biotechnology.

The order made no specific mention of China, but was clearly part of the White House’s growing effort to isolate its supply chains and financial markets from Chinese influence.

Whether or not you agree with the move or the decoupling in general, it’s high time America developed a much broader strategy for how to deal with reality. Tensions between the US and China have reached worrying levels, particularly over the Taiwan issue.

Last week, the Senate Foreign Relations Committee approved a bill giving the country $6.5 billion in sovereignty.

The path to actually passing the bill and enforcing the aid money is unclear. But the move, along with talk of new sanctions against China to deter a possible attack on Taiwan, is pressing geopolitical hot buttons at a time when the US has yet to develop a detailed plan of action for the economic fallout of such a conflict or even the continued decoupling of the US and Chinese economies.

Fears are growing in Washington that Beijing is planning a military invasion, and America is at risk of being embroiled in a cross-strait sparring between Beijing and Taipei. But what would happen if supply chains and financial flows between the US and China were cut off tomorrow? What is the plan for the first day?

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Nobody I’ve spoken to, either in the public or private sector, has a clear and complete answer to this question. The government’s approach so far has fallen into two categories: a response to China’s own moves that include tariffs and sanctions, or a comprehensive but still somewhat vague top-down approach to rebuilding the domestic industrial base .

Donald Trump’s administration revolved primarily around the former. The Biden administration has made it clear that it will align the government’s focus on protecting national security and building greater resilience and redundancy at home and regionally with partners (“friend-shoring”) in strategic areas such as semiconductors, green batteries, wants to sharpen key minerals and more medicines. This is important and necessary. But now both politicians and companies need to look closely at what that means in practice.

What would it mean, for example, if China suddenly stopped supplying important active ingredients to the United States? Is there a full list of what the key inputs are, which companies use them, where alternative supplies could be found quickly, what percentage of consumption needs they could fill, and how quickly (and at what cost) the industry in the US or allied nations could make new supplies?

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How would the US (and the world) meet chip demand if China invaded Taiwan? Would there be a military counterattack? Is it conceivable that foundries on the island will be destroyed? Are there any plans as to which parts of the public and private sectors would be prioritized in the event of a major and immediate semiconductor supply shortage?

These are terribly uncomfortable questions, and it’s no surprise that few want to ask them. But they’re exactly the ones we need to ask, especially given that Chinese leader Xi Jinping – who is expected to be re-elected to a third term at the Communist Party convention in mid-October – has made it clear that national security is even more important as this is China’s economic growth is its top priority.

China would have much to lose if trade and capital flows quickly decoupled. 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 key goods and technologies.

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The US has said they want the same thing. But one of the realities of America’s decentralized, privatized economy is that it’s difficult to map risk. The Department of Defense may have an overview of where all the parts on an F-35 fighter jet come from. But I doubt that policy makers understand the whole of the supply chain even in key non-defense areas like 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 US strength when it comes to innovation. But in a decoupling world, it’s not a good idea to up the security ante without having a solid plan for what happens if there’s real or economic war.

The US should appoint a White House-level resilience czar (an impartial figure with a background in logistics or business continuity) – as I have also argued – to ask the right questions and ensure public and private sector preparedness.

We need a much better understanding of the economic impact of decoupling, whether it is slow or sudden. We must not bang the drums of war without understanding what they can bring.

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