Will the trade war lead to US-China decoupling? In an increasingly interconnected world, that would be next to impossible

South China Morning Post Dipublikasikan 00.12, 09/12/2019
Will the trade war lead to US-China decoupling? In an increasingly interconnected world, that would be next to impossible

In a world of rising unilateralism and anti-globalism sentiment, talk of decoupling is occurring more frequently across economic and political spheres, especially in the context of the trade tensions between China and the United States. There is talk of decoupling in the simple trading of goods, across the more complex supply and value chains, and even in the frontiers of innovation and technology.

However, given the complexity of interconnections, even a trade decoupling may not necessarily deliver the expected results. This has been clearly demonstrated since the tariff increases fielded by both the US and China in their trade war.

The shape of a supply chain is determined by the flows of goods and services, but its nature hinges on competitiveness.

In modern trade, comparative advantage allows a company to sell more cheaply than its competitors and achieve better margins. In theory, decoupling from a supply chain would mean replacing, say, one country at a certain point in the chain. But, in essence, it represents a total transfer of manufacturing capabilities.

Cost and efficacy are not the only bottlenecks; a lack of skilled labour or infrastructure can also be big deterrents. In reality, countries in the key nodes of supply chains are irreplaceable, at least in the short to medium term.

This is even more so for a value chain, essentially a matrix that may contain dimensions of multiple supply chains. Any international value chain system, once up and running, involves tightly woven interactions and synchronisation across a wide area.

China's manufacturing supply and value chains are examples of such complex matrices. Minor adjustments and upgrades may be required from time to time, but abandoning key components would be as challenging as redesigning and reconstructing the whole architecture.

The possibility of decoupling diminishes further when it comes to technological innovation in our post-industrial era. Where innovation used to take on a more linear form, with labour divisions in the production process well defined by time, the flow of parts and product forms, data is the new vehicle constructing linkages and interconnections.

Unlike physical goods, digital assets can be produced and delivered at the same time. And, technologies such as 5G, big data analysis and artificial intelligence will only develop faster with breakthroughs in quantum computing. Such innovation cannot be achieved independently; "science without borders" is a reality.

The size, scope and type of China's data collection make it a perfect place for trials and applications of new technologies. It is not just China's market but, really, the astronomical amount of data it possesses on consumer experiences and patterns of behaviour. This burgeoning new economy and nature of cooperation render technological decoupling even less likely.

Besides, cooperation is needed to ensure that technological innovation delivers not just economic benefits but also works for the greater good. In this brave new technological world, there is never any supply-side bottleneck; it is the demand side that really matters.

The so-called fourth industrial revolution - comprising the digital economy, geek economy, sharing economy and more - is a paradigm shift, akin to a genetic mutation to greater heights.

With disruptive technologies such as the internet of things, artificial intelligence, cloud computing and cryptocurrencies, the world economy is becoming more virtual and more digital, rendering economic ties between nations much more endogenous. In this new environment, no matter the dispute, nobody can play the decoupling card.

Liu Jun is a member of the China Finance 40 Forum. The opinions expressed in this article are entirely the author's own

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