Decoupling Between Washington and Western Industry

Trustee Chair in Chinese Business and Economics  >  Trustee China Hand
By Scott Kennedy and Shining Tan

Although the Trump administration does not openly embrace the idea of decoupling, its various policies – restrictions on high-tech exports to China, expanded investment limits, and efforts to have American companies move production out of China and on-shore manufacturing in the United States – effectively add up to a decoupling strategy. There are some signs that because of the trade war and other risks, some American companies are diversifying their supply chains; however, it appears that the vast majority of companies from the United States – and the broader West – are not heeding this call. Instead, there is a growing gap – or decoupling – between Trump administration aims and Western business behavior.
The latest evidence comes from the European Union Chamber of Commerce in China, which just issued its 2020 Business Confidence Survey. Conducted in February 2020, the survey shows that the overwhelming proportion of European companies are not planning to leave China (Figure 1). Only 11% of respondents are considering shifting current or planned investments from China to other markets, which is lower than a year ago. For those who are considering moving, 45% are considering somewhere in Asia, followed by 27% looking at Europe, and only 11% North America.

Figure 1: Most European Companies Remain Committed to China

Source: The European Union Chamber of Commerce in China, “Business Confidence Survey 2020,” Reprinted with permission.

The COVID-19 pandemic has harmed their business, but not their overall strategy. The Euro Chamber report cites a March 2020 survey of German companies in China, which shows that a plurality of them are delaying or cancelling investment decisions, but only 4% are considering relocating some or all of their production from China as a result of the crisis (Figure 2).

Figure 2: COVID-19 Has Investors Worried but Not Leaving

Source: The European Union Chamber of Commerce in China, “Business Confidence Survey 2020,” Reprinted with permission. 
Note: Respondents could choose multiple options; hence, total is larger than 100%.

These findings are very similar to the results obtained from surveys conducted by the American Chamber of Commerce in China. In their March 2020 report, which is based on a survey carried out at the end of 2019, only 9% of American businesses have started relocating manufacturing or sourcing outside of China, with another 8% considering the move (Figure 3). In a flash survey by Amcham China conducted in February, only 4% of respondents – the same proportion as in the EU Chamber study – reported that they are considering moving out of China.

Figure 3: American Companies Also Have No Plans to Leave China

Source: American Chamber of Commerce in China, “2020 Business Climate Survey,”

The story is the same with firms from elsewhere in the world, including China’s neighbors. Although there is not the same amount of survey data, overall investment figures and anecdotal evidence support this conclusion. The Japanese government recently designated $2.2 billion of its record economic stimulus package to help Japanese manufacturers relocate from China - $2 billion for shifting back to Japan and $0.2 billion for moving to other countries. However, that is a drop in the bucket compared to total Japanese investment in China. In a sign of the continued strong attraction of the China market, earlier this month Toyota announced that it is setting up a joint venture with five Chinese companies to develop fuel-cell powered commercial vehicles in China. If Toyota were heeding the calls of Washington, it would not be bringing such advanced technology to the People’s Republic.
How will this play out? It’s hard to see either side give in much any time soon. Most Western companies are not leaving China because they are primarily for the China market, not because China is a cog in their long global supply chains. The latter are more adjustable, and that process has long ago commenced, driven not only by diplomatic tensions, but also by rising Chinese labor costs, the emergence of other production locations (such as Vietnam and India), the improvement of 3D printing and other automated manufacturing processes, climate change, and other factors.
Perhaps the central question over the next 2-3 years will be about this tug of war: Can Washington use carrots or sticks to move more companies out of China, or can companies convince Washington (and other capitals) that the commercial benefits to remaining engaged cannot be replaced and that there is a way to enhance the mechanisms needed to effectively mitigate the various commercial, public health and national security risks that come with extensive connectivity with China?

Trustee Chair in Chinese Business and Economics > Trustee China Hand 

Scott Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics. Shining Tan is research associate in the Trustee Chair in Chinese Business and Economics.


Scott Kennedy
Senior Adviser and Trustee Chair in Chinese Business and Economics