China decoupling

I frequently disagree with Noah Smith but at least he deals in data unlike many of journalistic kin.  And occasionally he arrives at the same conclusion I do and when that happens, he certainly expresses it better.  

From At least five interesting things for the middle of your week (#5) by Noah Smith.  The subheading is The world loves America, Twitter's self-destruction, the "richcession" continues, more decoupling, permitting reform in California, and backtracking on patent reform. 

On decoupling.

As regular readers of this blog know, I view some degree of economic decoupling between China and the developed democracies to simply be inevitable. A lot of people think that decoupling is being driven entirely or mostly by U.S. policy choices, but this was never really true, even in the Trump era. The truth is that Chinese policy choices are a major driver of decoupling.

For example, China is now lashing out at other countries with export controls. It recently announced curbs on the export of the minerals germanium and gallium, which are important for making chips. China is responsible for most of the world supply of both minerals, and while they’re not that hard to replace, doing so will require building up processing capacity in other countries — a capital-intensive, low-margin business that most nations had been happy to outsource to China. This move will probably do more to speed the rapid reshoring of critical supply chain bottlenecks than any Biden administration incentives.

The controls on gallium and germanium are in reaction to the U.S.’ own chip export controls. But in a less well-publicized move, China is also restricting graphite exports to Sweden. Graphite is important for building batteries. China dominates the global battery industry, but Sweden’s Northvolt is one of the best battery makers outside China. So China is restricting the sale of battery minerals to Sweden in order to strangle a potential competitor and retain its dominance in batteries.

What this shows is that unlike the U.S., Xi’s China uses export controls not just to maintain or gain a military edge, but to gain a purely commercial edge for domestic companies. No one had tried to kill the Chinese battery industry, but China is trying to kill the Swedish battery industry nonetheless. This isn’t geostrategic competition; this is pure mercantilism.

In other words, companies around the world now have to realize that whenever they compete with Chinese industry, even if there’s no military angle at all, they can expect China to leverage the power of the state against them. That understanding will speed decoupling, as companies everywhere look to protect themselves from this kind of mercantilist supply chain attack.

In any case, this is far from the only thing China is doing to speed decoupling along. It has onshored the manufacturing of intermediate goods (chips, displays, industrial machinery, auto parts, and so on) to such a degree that South Korea, which boomed in the 2000s and 2010s from selling these goods to China, now exports more to America. The less that companies from advanced economies like South Korea can sell to China, the less reason they have to stay invested in China.

Anyway, what all this means is that Chinese policy is driving a flood of investment out of China. 

China has unenviable challenges - Demographic problems (population aging and a still large rural base, twenty years of capital mal-investment, a more aggressive foreign policy, a more mercantilist trade policy and finally, the mismatch between the expectations created in a somewhat free market (in some sectors) versus the autocratic controls which are being reasserted.  The only good thing about these challenges is that the greater part of them are a consequence of policy choices, not exogenous conditions.