"De-risking," not decoupling, from China

History shows that trading empires rise and fall. Since the Renaissance, Spain, Portugal, Venice, the Netherlands and the British Empire all developed powerful trading empires that lasted for many decades but ultimately were displaced by other nations with more competitive advantages. (Often with warfare bleeding the resources of the once-leading empire.)

The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000, by Paul Kennedy, first published in 1987, explores the politics and economics of the Great Powers from 1500 to 1980 and the reason for their decline.

Kennedy argues that the strength of a Great Power can be properly measured only relative to other powers, and he provides a straightforward thesis: Great Power ascendancy (over the long term or in specific conflicts) correlates strongly to available resources and economic durability; military overstretch and a concomitant relative decline are the consistent threats facing powers whose ambitions and security requirements are greater than their resource base can provide for. [end quote]

I recommend this excellent book to anyone who wants a historical perspective of current events. Note that it was written in 1987, very early in the process of transforming China from an impoverished communist country into a powerful mercantilist country. In 1979, “The Great Architect” Deng Xiaoping’s government ended China’s Soviet based Five-Year Plan that focused on heavy industry, like steel mills and transformed it into producing consumer goods.

Fast-forward to today…China is the second-largest foreign holder of U.S. Treasury debt which was purchased with their huge trade surplus with the U.S. The supply-chain interruptions caused by Covid exposed how dependent the U.S. and Europe are on China. We can’t afford to decouple from China because we need them.

China is very clear about its long-term strategy to achieve Great Power status. They deeply resent the U.S. strategy of remaining the world’s sole superpower.

How ‘Decoupling’ From China Became ‘De-risking’

The newly fashionable term, reflecting an evolution in the discussion over dealing with a rising, assertive China, has a vexing history in financial policy.

by By Damien Cave, The New York Times, 5/20/2023

The word “de-risking” has suddenly become popular among officials trying to loosen China’s grip on global supply chains but not cut ties entirely, with the joint communiqué from this weekend’s Group of 7 meeting making clear that the world’s largest democratic economies will now focus on “de-risking, not decoupling.”…

German and French diplomats later pressed for the term in international settings. Countries in Asia have also been telling American officials that decoupling would go too far in trying to unravel decades of successful economic integration…

On April 27, the U.S. national security adviser, Jake Sullivan, said, "“We are for de-risking, not for decoupling. De-risking fundamentally means having resilient, effective supply chains and ensuring we cannot be subjected to the coercion of any other country.” [end quote]

Historically, “de-risking” has been a broad-brush exclusion of entire classes of potential partners. The tricky part will be in the details to avoid throwing out the baby with the bathwater. It will also be tricky to start and maintain production of goods we now buy from China without causing price inflation and/or undue government interference in the free market.

Wendy

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The west is just buying time as we ramp up infrastructure spending allowing factory production flourish. Economies of scale quickly follow.

China does not want western factories to use their limited water. The Chinese could careless if we leave right away.

Cutting infrastructure now is like flight controllers union in 1981 asking for a raise.

We do not have to do the wrong thing just because lies have been spread. We might just do the right and honest thing.

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There is a massive amount of work being done on Michigan’s long underfunded roads.

Thing is, if there is regime change in Lansing, or DC, we will probably be back to the usual program of throwing all the money at the “JCs” instead, with more repetition of the mantra “big gummit can’t do anything right, only the rich now how best to use money, so we give all the money to the rich”.

Steve

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That’s most likely because they have a ton of federal funding and they’re afraid it’ll go away if they don’t spend it now. Around here, back when a bunch of federal money arrived (“shovel ready”), they repaved, replaced drainage, and re-landscaped (beautifully!) a bunch of roads. The only thing is … those roads were already in perfect shape, well drained, and nicely landscaped.

Michigan did receive about $7B from the Feds in 21. There would have been movement on the issue without the Fed money, because roads in the state have been an issue for years. The current Gov ran her 2018 campaign on “fix the da#n roads!”.

A number of years ago, the state raised fuel tax and registration fees “for the roads”. That raised about $300M/year. But the (L&Ses) then withdrew $300M that had been coming from general revenue, from the road budget. So there was no net increase in road funding. The extra money that was in the general revenue budget, thanks to the (L&Ses) shell game, was used to cover another tax cut for the “JCs”. Michigan also charges 6% sales tax on fuel, but that money goes into general revenue, not road maintenance. So the net effect is Michigan drivers pay one of the highest fuel tax burdens in the country, with the least amount of money going to maintain the roads they drive on.

This map shows per capita spending on road maintenance in the great lakes region, and Michigan’s rank nationally, in 2012, before the current Gov took office, when the Shiny faction controlled both houses of the legislator, and the Gov’s office, and was most concerned with throwing money at the “JCs”.

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Steve,

That is not going to be a problem. There wont be any regime change.

We are going to default on the debt. The situation as it stands right now is win/lose. The two sides can not agree in time not to default.

The public wont want default. The industrialists do not want default. The banks do not want default.

Austerity plans or offers will get crushed.

Truss in the UK saw this. Get ready for Helter Skelter.

This is an air traffic controllers moment.

Blockquote

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