Techonomics Talks | 01 Dec 2023

The cost of US-China decoupling

David Schockenhoff

Head of US Macro Consulting

Trade protectionism between the US and China has been intensifying over recent years, and this is increasingly raising concerns of an adverse economic fallout among businesses.

In our latest Techonomics Talks, David Schockenhoff, Head of US Macro Consulting, examines these concerns and the potential economic fallout.

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Trade protectionism between the US and China has been intensifying over recent years, and this is increasingly raising concerns of an adverse economic fallout among businesses, in particular in the United States. So what do the numbers tell us? US imports of Chinese goods affected by the Trump tariffs have dropped 30% since 2018. And assuming trade would have followed its previous trend.

We estimate that in 2023, those sectors are importing around 40 to 50% less from China than they could have been in the absence from tariffs. Investment is another area where US-China decoupling has become evident. With bilateral FDI flows hitting multi-year lows last year, overall, we estimate that Trump tariffs are associated with 245,000 lost jobs and 100 billion US dollar lost output for the US economy during the 2018-19 period.

Now, over the past year, the rhetoric among US policymakers has become even more hawkish. Several semiconductor export bans have been imposed, prohibiting U.S. exports of advanced chips to China. On top of that, the Trump tariffs are up for review this year.

The key question is how could all of this impact the US economy? In a recent study, Oxford Economics estimates the economic impact from one possible scenario where tariffs on imports from China are raised from currently 19% to 61%, followed by a likely retaliation from China.

We find that this could cost the US around 800,000 jobs and 1.6% of its total output by 2025, mostly driven by higher prices and a fall in financial markets, which would push down demand. In general, we find that consumer facing service sectors would be badly hit because higher prices and reduced incomes mean households have to cut back on spending.

However, the worst hit sectors in our scenario would be transport and machinery related manufacturing sectors that are particularly reliant on inputs from China. Given the complexity of global supply chains and the importance of both China and the US for the global economy, decoupling and indeed a potential structural trend towards deglobalization are issues that will surely remain a key risk for the foreseeable future.

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