Tom Cotton’s Got It: A Targeted Decoupling From China Is Warranted

By Kenneth Rapoza, CPA Industry Analyst

Worried about China and the US policy towards our biggest strategic rival? Then Tom Cotton’s office has the perfect weekend reading. The 84-page Beat China: Targeted Decoupling and the Economic Long War looks in the rearview at China-US policy, and lists some strategies to deal with China going forward. Some companies won’t like this, but we do.

Senator Tom Cotton (R-AK) is shaping up to be the China thought leader in the Senate. His office’s 84-page report on a targeted decoupling puts him on our side when it comes to moving critical supply chains out of there.

We are too dependent on China. The pandemic has made that clear. It wasn’t just surgical masks we relied on China for, but also the very chemicals that went into things like Lysol that flew off grocery store shelves and were not replaced for months due to lockdowns and China trade flow.

Our deficit with China (-$310.8 billion) is greater than our deficit with Mexico (-$112.7 billion) and the European Union (-$182.1 billion), combined. The more we import from China, the less we make at home. The more China makes for us, the faster China gets wealthier. The less we make here, the faster we get poorer. 

“The economy is the primary theater of our conflict with China,” Cotton says.

The report, titled Beat China: Targeted Decoupling and the Economic Long War focuses on economic integration between China, the United States and our allies. Beijing uses this entanglement of big business interests, which far exceeds trade flows between the West and the Soviet Union during the Cold War, to divide allies along corporate interests and reorder the globe according to its own top-down authoritarian ideology. We recognize that some people are fine with that trend of a more authoritarian rule. CPA is not. Neither is Cotton, and most of Congress from what we can tell.

Cotton wants to take an approach to China similar to what we did with the Soviet Union.

Since the 1980s, presidential candidates of both parties have run as tough on China, only to soften their positions once elected. President Trump was the exception.  His administration pursued a campaign to harden our defenses against China’s mercantilism. He made our allies think twice about China, whereas they were only fine with addressing China discrepancies inside the United Nations and World Trade Organization. Both of those institutions have gotten us nowhere on China’s human rights abuses of Uyghurs in Xinjiang, where Disney filmed Mulan, nor has it led to reforms in the WTO.

The previous government’s approach “deserves praise”, Cotton wrote in his Executive Summary, adding that it ought to form the starting point for a long-term, bipartisan national strategy.

“The ultimate objective of that strategy should be…the ‘breakup or the gradual mellowing’ of the Chinese Communist Party’s power. Our strategy must take seriously the critical military, diplomatic, intelligence, and propaganda challenges posed by Beijing,” he wrote. “It must identify and account for the novel characteristics of strategic competition with an adversary such as the CCP in a nuclear and globalized age—especially the role played by economic policy.”

“It’s impossible to a compete with a country that has a workforce the size of the entire US population, can tap forced labor where needed, and exists on subsidies and other non-market incentives that have resulted in global oversupply of all sorts of manufactured goods, including steel and auto parts,” says Michael Stumo, CEO of CPA. “We have advocated for decoupling from China. Cotton’s targeted decoupling is a good start.”

Seeing how multinational corporations have no problem with China, the only way to curtail China’s chokehold on US manufacturing is to get Washington more involved. We cannot assume the better angels of Corporate America will diversify their supply chains out of China, let alone bring some of it back home.

Cotton advocates for a strategic decoupling in the following areas: semiconductors, telecommunications equipment for 5G and beyond, critical medicines and critical rare earth minerals used in defense weaponry such as fighter plane navigational equipment and EV batteries.

Report authors known China will retaliate if such a policy of strategic, targeted decoupling increased. We already have tight restrictions on companies like Intel selling chips to Huawei and ZTE, for example.

American companies could lose access to China’s lucrative market. Even though decoupling would be a gradual process in most—but not all—sectors, disruptions to supply chains could raise prices as firms scramble to move production out of China. Wall Street, heavily exposed to China, could see lower returns and would lobby against any trends to counter China.

Decoupling also could provoke countermeasures from the CCP, such as accelerating its drive for domestic self-sufficiency and innovation, imposing further tariffs on US goods, and expanding efforts to undermine the dollar’s status as the global reserve currency.

From the report:

“China is still reliant on the United States in critical areas. Overcoming its points of dependence would be more difficult and expensive than many assume. While China is racing to develop domestic capabilities in advanced technology, it has yet to achieve this goal in many sectors. For instance, China’s domestic semiconductor industry is significantly behind the world’s most cutting-edge technology. In a decade, China could be in a better position to weather any attempt to decouple, as its homegrown semiconductor sector likely will be more mature and domestic substitutes will be more readily available. America’s window of opportunity is real but not without limit.”

This is a long read, but anyone interested in China needs to have a look at what Cotton’s office has put together here. 

Here are some other takeaways from the report.

On Trade

China is our single largest goods supplier, far surpassing key allies like the United Kingdom, Japan, and Australia. Eighteen percent of all U.S. imports by value came from China in 2019. And although China first entered our market by selling low-cost, low-quality consumer goods, today it occupies a higher position on the value chain, producing both high- and low-value manufactures.

On Capital

Roughly two-thirds—over $170 billion—of American investment in China over the last 30 years funded ‘greenfield’ projects to expand China’s industrial base and productive capacity. By contrast, Chinese entities devoted eight percent of their investment in the United States to building new physical infrastructure. The other 92 percent of Chinese investment funded acquisitions of American companies and intellectual property.  Chinese firms have acquired stakes in American companies in order to obtain cutting-edge technology in strategically important areas. Between 2013 and 2016, Chinese firms spent $37 billion in an attempt to acquire or invest in at least 27 American semiconductor firms. Chinese firms also invested in at least 51 American AI startups between 2010-16. Over the past decade, one Chinese defense contractor has purchased at least seven US general aviation companies.

On Reliance

For over a decade, China has been the world’s largest producer and consumer of machine tools, which are the core components of industrialization. China also installed over 36 percent of the world’s new industrial robots in 2018, which are the machines used in advanced manufacturing. The United States installed just under 10 percent of the world’s industrial robots that year. While many companies eagerly offshored production to China, offshoring was not an entirely free choice for others. The CCP pressures companies to build factories in China and transfer technology as conditions for accessing its vast market. Boeing opened a large plant in China in 2018 partly as a concession to the CCP, which has sought for decades to obtain the technology needed to create a world-class commercial aircraft company.

For Cotton, China influence is everywhere.  It needs to be reckoned with, he points out in the report.

In a one-world, globalist economy, either China becomes more like the West, or the West becomes more like China.

“Every time an American business, cultural institution, or celebrity adopts the CCP party line, it justifiably weakens the American people’s confidence in their leaders and institutions. This in turn undercuts national unity, morale, and resolve in the competition against China,” he writes. “The CCP’s ability to turn powerful American institutions and individuals against the values of the United States is a potent tool of coercion. The United States thought that it could change China by opening China’s market. Recent examples demonstrate that China can change America, as well—and for the worse.”