The US, China and the great economic decoupling

Adecoupling of the world’s two largest economies has come to dominate the planning for a post-pandemic world. The resulting global landscape will be unlike anything since the Second World War ended 75 years ago. The world was firmly on the path to some form of realignment before the two biggest economies began irreversibly drifting apart, albeit gradually. But is needed is a gradual shift, not a headlong rush into the unknown as is happening now.

Brussels appears to be settling for a “defensive decoupling” to shore up internal vulnerabilities exposed by the debt crisis, Brexit, COVID-19 and the sudden rise of euroskeptic, right-wing anti-immigrant political groups. The lack of forceful measures to address such weaknesses has emboldened governments in Poland and Hungary to test the EU’s patience, almost daring the bloc to enforce Article

7, or even establish mechanisms to expel non-conforming members.

Externally, the EU is consistently finding Washington an unreliable partner, while the conflict in Libya poses significant challenges in terms of illegal immigration, trafficking, embargo violations and terrorism. Additionally, the bloc is heavily dependent on gas supplies from its biggest adversary, Russia — itself determined to maintain this monopoly by wading into the Syrian and Libyan conflicts to destabilize an ambitious Mediterranean gas coalition aiming to supplant Gazprom as the EU’s principal energy supplier.

Brussels has also sought to defend its economic interests by targeting “market distortions” caused by state-subsidized foreign companies.

Ankara views the EMGF and the growing influence of the GCC as an existential threat, necessitating its intervention in Syria and Libya and a more aggressive stance against Greece and Cyprus. Turkey fears being muscled out of the region and having to rely on energy imports as it vies to become an alternative manufacturing center in the new global supply chain proposed as an alternative to dependence on China.

Escalations at Galwan Valley, stoking tensions in the South China Seas, provocative military exercises off the Taiwanese coast and the situation in Hong Kong signal Xi Jinping’s expansionist ambitions. Beijing appears to have deepened its obsession with consolidating power domestically and projecting it abroad. Where Chinese warplanes, boots and warships cannot go, the yuan does — via either a gradual yuan internationalization that appears to have gained traction in Africa or quietly allowing its value to drop to the lowest level since 2008.

For a while, the widely held belief was that globalization would remain an unstoppable force and no matter what policy or ideological differences lay between the world’s power centers, the expansion of global trade and uninterrupted investment flows were ideals. However, a mix of strategic and economic aims sparked political discourse favoring a gradual decoupling, beginning with protecting sensitive sectors and rejecting technology transfers. The world did not account for nor adequately prepare for COVID-19 exposing globalization’s Achilles’ heel and so easily unraveling what had become the natural order.

With economies stalled, unemployment skyrocketing and supply chains seized up, decoupling has since overtaken globalization as most countries are looking inward or regionally to shock-proof economies and insulate societies from far-off threats. Unfortunately, decoupling is still very much the talk of politicians seeking to renationalize national core competences. Nonetheless, as the pandemic has shown, there is little downside to being well prepared.