The Drive to Decouple

By Maxwell Bessler

'New Perspectives on Asia' highlights the research of junior CSIS staff and interns on issues that are quietly shaping the world's most dynamic region.

The U.S. economic strategy on China has changed course over the last two decades, with the latest policy landmark emerging in October 2022. The United States’ push to “engage”—the strategy that sought to welcome China’s rise as “stable, open, and non-aggressive”—has eroded since the presidency of George W. Bush. Over time, competition has pulled U.S. policymakers into “decoupling”, an emerging strategy of policies that partially limit the business flows with China over goods, emerging and foundational technology, finance, and people.

At the end of November 2022, U.S. commerce secretary Gina Raimondo claimed that the United States is “not seeking the decoupling of our economy from that of China’s.” But over the past two decades, competition provoked a desire to decouple which replaced the prior strategy to engage with China. Now, the October export controls mark the latest batch of policies that limit U.S.-China business flows. In the future, competition will likely continue, and more decoupling will follow.

There are four broad camps on “decoupling” that argue how much business with China should be restricted to preserve U.S. national security.

• Cooperationists advocate for the dovish policies of engagement and worry any efforts to decouple will spark more competition. Today, they are hard to find in government.  
• Centrists accept China’s rise and want to build a “small yard, high fence” that curbs the business sensitive to national security while letting U.S. business flourish elsewhere.  
• Restrictionists take China’s rise as a grave threat and view all U.S.-China business flows as zero-sum; if Chinese firms gain, then the United States loses in some way. Their aggressive policies hurt U.S. business amidst trying to make China suffer more.  
• Separationists consider a “full decoupling” that separates the economies into two blocs. Ostracized in policymaking, this group mostly consists of experts analyzing apocalyptic scenarios.

I. The Past

The Obama administration initially inherited a relationship with China of stronger trust and engagement from the Bush administration. But over President Obama’s two terms, the momentum of engagement in Washington slowed as the nature of China’s rise sparked concerns due to several Chinese state-led policies, including: alleged widespread cyber economic espionage on U.S. firms; poor enforcement of intellectual property rights; extensive use of industrial policies; and interventionist policies to devalue the renminbi. 

As the end of President Obama’s second term approached, engagement struggled to remain viable as competition increased. By 2013, the cooperationist hopes of China reforming its behavior faded. The administration grew disillusioned by Chinese president Xi Jinping’s domestic crackdowns on liberalizing. Attempts of writing bilateral economic treaties and fostering strategic and economic dialogues failed to produce cooperationist policies. By 2015, the size of the Chinese economy was second in the world to the United States. Few could ignore the security threats that followed as China increased its military presence in the South China Sea. Arguments to proactively change policy strategies and begin decoupling started to emerge. Six days before the 2016 U.S. presidential election, then U.S. commerce secretary Penny Pritzker addressed the threat of technology sensitive to national security flowing to China. 

Election day brought a confrontational administration—disenchanted with engagement and openly willing to drive decoupling. 

The Trump administration spun China and its state-led policies into the economic rival of the United States. Trade with China peaked in 2017, but it started to decline after decoupling began in two main business flows, certain goods and technologies, both deemed sensitive to national security.

Over trade of goods, President Trump and his closest trade leaders, Peter Navarro, and Robert Lighthizer, waged a restrictionist trade war willing to hurt the U.S. economy. Raising import taxes on goods like aluminum and steel, the administration wielded executive authorities built on national security concerns to punish China for non-market practices and intellectual property theft. For the United States, the tariffs amounted to a total tax increase of almost $80 billion.

Over technologies, key officials within President Trump’s National Security Council (NSC) refocused several agencies on controlling the flow of technologies sensitive to national security. Historian Chris Miller’s inside reporting tells the story of how NSC official Matt Pottinger drove a discreet campaign of tech decoupling, mostly targeting semiconductors and their inputs, to prevent China from use to modernizing its military. The fear was that China could create a competitive military-industrial complex built by staff and intellectual property imported from a cooperationist Silicon Valley. To prevent that, policies arose that range in hawkishness: a revaluation of Pentagon supply chains, to the centrist rise of the Department of Commerce’s Entity List that targeted the trade by certain Chinese firms deemed “contrary” to U.S. interests, and up to the restrictionist bans that barred consumers from purchasing anything from Chinese telecom giants ZTE and Huawei. 

II. The Present

Today, many of the Trump administration policies that began the process of decoupling live on. The restrictionist tariffs on Chinese goods implemented by President Trump continue. Based on 2021 import data, a total of $52.6 billion in tariffs remain in place. One study suggests the tariffs will eliminate an estimated 173,000 jobs by 2024. The Entity List, which bars certain firms from exporting items like U.S. technology, continues to add Chinese names. In the last four years, the centrist use of the Entity List has quadrupled the number of Chinese firms unable to export specific U.S. goods and technology.

With old policies still in place, the Biden administration has unveiled new restrictionist ones that further a kind of “tech decoupling”. The policies limit China’s ability to modernize its military power with key foundational technologies, such as advanced semiconductors and their upstream inputs. 

Why limit these technology flows? The Biden administration wants to avoid a future where China modernizes its military through either buying Western inputs or "indigenizing" its own cutting-edge chip sector to achieve the same outcome. Washington views the Chinese civilian market—which packages products like the iPhone––and military markets—that create advanced bombs and missiles—as inseparable because of the Chinese Communist Party’s Military-Civil Fusion Policy. This doctrine gives the Chinese government sweeping authority to use its domestic industries to advance the capabilities of China’s military. 

Though around for decades, Chinese president Xi Jinping’s recent initiatives in Military-Civil Fusion provoked new concerns among U.S. policymakers about the military end-uses of key technologies. 

In response, the latest landmark in decoupling policies are the “the October Controls,” a series of restrictions levied by the Department of Commerce that prevent major manufacturers from exporting their high-end chips and inputs to China. U.S. national security advisor Jake Sullivan announced the new October controls as proof of the Biden administration implementing the “small yard, high fence” concept. Albeit justified with this centrist rhetoric, the policies themselves look restrictionist because of how much they will impact both economies. 

The controls impact industries in both economies. This suggests the Biden administration is embracing restrictionism. The policies clobber China’s market access to fast chips in a way only possible by also cutting into the future sales of technology firms friendly to the United States. They restrict the revenue streams from the massive Chinese consumer market that flow West and fund cutting edge research and development (R&D) for Western firms. Large chip firms like Applied Materials, Nvidia, and Lam Research all announced they expect to lose out on hundreds of millions, to billions, of dollars in the future. For now, these firms can manage but could struggle if controls widen more (Figure 1). Investors fear the future as the prices of chip stocks continue to plunge. Less concerned by the economics, the administration appears willing to embrace a zero-sum acceptance thanks to raised fears of China’s Military Fusion Doctrine.

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III. The Future

Washington will not abandon the policies driving decoupling anytime soon. Meetings between leaders and planned visits to China gives some hope for possible cooperation, but such efforts are unlikely to address the sources of competition unwinding business ties between the economies. Beyond policies like the tariffs on goods or controls on chips, an executive order is expected that screens outbound investment to protect how finance flows to China. 

Skeptics of more decoupling will suggest that more engagement could return by pointing to recent efforts by the Biden administration to reset and stabilize relations. On the margins of the G20 summit in Bali, presidents Xi and Biden pledged to foster cooperation on issues like debt relief, health safety, and global food security. This January, U.S. treasury secretary Janet Yellen discussed macroeconomic developments with Chinese vice premier Liu He. Next, U.S. secretary of state Anthony Blinken and Secretary Yellen plan successive visits to China as working groups form. It is too early to tell whether this will unwind the decoupling policies. A number of dialogues during the Trump and Obama administrations broke down before cooperationist policies arose. No meeting thus far has addressed the issues that are brewing competition, such as tensions over Taiwan, key technologies, subversion, and economic coercion. 

As competition continues, other factors could fuel future decoupling. 

Domestic politics and industrial policies could clear the way for more decoupling measures. Most Americans already support a tougher U.S. economic strategy on China. Rhetoric alone could stoke a political fear among policymakers for looking “soft on China.” As U.S. Bureau of Industry and Security undersecretary Alan Estevez argued, “letting a foreign adversary use U.S. technology or allied technology… just goes against the grain for me.” Similar words could dominate election cycles to come. 

For tech decoupling, semiconductor industrial policy will help cushion the costs of restrictionist controls on friendly chip makers. This could give way to more decoupling. Passed this August, the CHIPS and Science Act commits over $50 billion in taxpayer money to incentivize chip firms to operate in the United States. Coupled with $200 billion in private capital, this money aims to help the United States lead in three ways: mitigate how shocks elsewhere could disrupt the supply of chips, boost U.S. sectoral competition abroad to create more jobs at home, and prevent chip sabotage throughout the production chain. New chip plants in Arizona are noteworthy—not because they directly deter or deny China from modernizing—but because they could provide a broader platform to untangle these supply chains so sensitive to national security. 

If Moore’s Law ends, more tech decoupling policies could follow. If chips stop shrinking, many believe the United States would split and specialize supply chains into specific end-uses like artificial intelligence (AI). Some think that is already underway. It is possible Chinese firms and the military could catch up entirely. In any of the scenarios that arise, the approach to tech decoupling could shift again. Once treating it like a “sliding scale,” and now seeking to maintain “as large of a lead possible,” the future could hold some sort of offensive approach that tries to set China back.

The controls could spur more Chinese innovation and fuel the very indigenization the controls sought to prevent. If true, Washington might be caught in a double bind. More restrictions will make China more self-reliant, but no controls would mean cutting-edge chip inputs would flow over and modernize the Chinese military. So, Washington might be stuck in gear—with the drive to decouple ending no time soon. 

Max Bessler is a former research intern with the Economics Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. 

'New Perspectives on Asia' is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).