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The Complex Reality of US-China Decoupling

The trade data between the United States and China are at the center of the decoupling discussion. Although bilateral trade as a whole hit a record high of $760.9 billion in 2022, the underlying economic activity cannot be fully understood when expressed in nominal values that have not been adjusted for inflation.

When cross-border commerce is scaled by GDP, a more precise measurement is obtained, showing that, in 2022, bilateral trade in goods and services between the US and China was 3% of US GDP, a 19% decline from its peak of 3.7% in 2014. This represents a significant step in that direction, although not being a total decoupling.

The Trump administration's application of high tariffs on Chinese goods led to a reduction of 75% in the recent decline in China's share of the total US trade imbalance. China's share will probably continue to decline as long as President Biden's government maintains these tariffs and imposes more penalties on cutting-edge technologies.

However, the trade imbalance is not limited to China as the US merchandise trade deficit with 106 nations still reached a new high of $1.18 billion, highlighting the significance of comprehending the macroeconomic variables causing the deficit.

The macroeconomic foundations of America's trade imbalance are the real obstacle. Early 2023 will see the domestic saving rate at 1.2% of GDP, a significant gap that will force the United States to sustain multilateral trade deficits in order to attract foreign capital. The difficult truth for US policymakers is that this systemic trade issue cannot be solved by unilateral measures like tariffs and penalties against China.

Trade diversion is one of the most pernicious effects of decoupling from China. Other nations' shares of the US merchandise trade deficit have increased as a result of the trade war, notably those of Canada, Mexico, India, South Korea, Taiwan, and Ireland. China's part of the deficit has decreased. By shifting the imbalance away from low-cost producers like China and towards higher-cost ones, protectionism becomes, in essence, a tax on domestic businesses and consumers.

The argument has evolved to take "de-risking" into consideration as a workable strategy, even though a total decoupling may not be possible or desired. The Biden administration seeks to address national security issues by lowering reliance on Chinese supply chains. Regardless of nomenclature, the composition of the US trade imbalance is shifting away from China, and China-centric supply chains are being untangled, which has a huge impact on the US economy.


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