Has ‘deglobalisation’ heightened the risk of a US-China clash?

The crippling effects of a disrupted global supply-chain throughout the course of the COVID-19 pandemic prompted a re-examination of the international economic order, eroding long-held trust in the supposedly stabilising influence of interdependence.

Nations, large and small, were forced to reassess established economic structures, exploring domestic solutions to international problems.

This was particularly true for great powers like the United States and China, which continue to strive for greater self-sufficiency in an era of strategic competition.

The escalation in tensions in the Taiwan Strait has only added to this sense of urgency, with many fearing the ripple effects of a China-Taiwan clash on the global economy.

The global supply of semiconductor technology, for example, would be significantly hindered, given the world’s dependence on Taiwan’s manufacturing base.

According to Dr Michael Green, chief executive officer of the United States Studies Centre, in the event Taiwan’s semiconductor manufacturing base is under China’s thumb, Beijing would have a “stranglehold on global supply chains” and a “boon in the race to master artificial intelligence”.

For this reason, the US Congress recently passed the CHIPS and Science Act of 2022, which authorises US$280 billion (AU$410.6 billion) funding for the local production of semiconductors.

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Richard McGregor, senior fellow, East Asia, at the Lowy Institute, explains: “China and the US and their allies and partners have long been trying to mitigate the economic impact of a conflict through the process known by the buzzword of ‘decoupling’,” he writes.

“By decoupling their economies, both countries and their partners try to make themselves self-sufficient in everything from strategic resources to daily necessities.”

McGregor claims a “comprehensive decoupling” is “all but impossible”, given the world’s interconnectedness, prompting nations to instead pursue self-sufficiency across sectors “essential for a functioning industrial economy”, including high-end semiconductors, rare earths and pharmaceutical chemicals.

He notes that in Washington, this principle is likened to building “a small garden with high walls”.

“In other words, putting prohibitively tight barriers around a limited supply of strategic goods to protect national security,” McGregor continues.

This soft decoupling policy, he adds, “dovetails” with the other measures to contain superpower tensions, including “managed competition” — negotiating “strategic off-ramps and guardrails” to prevent conflict.

“Given the dimensions of the possible conflict between the US and China, some form of managed competition would be a fantastic result,” McGregor observes.

But the Lowy Institute analyst fears these efforts to “deglobalise” “would not cut it” in the event of a conflict with Taiwan.  

“Container ships with cargos to fill Walmarts in the US and Bunnings in Australia would cease. There would be no more iron ore bulk carriers departing from the Pilbara to ports in China,” he observes.

“The interruption of chips from Taiwan Semiconductor Manufacturing, which alone makes about half the world’s semiconductors, would bring the manufacture of everything from the iPhone to other electronics to a rapid halt.

“China, Japan, South Korea, Taiwan and parts of South-East Asia are now locked into a seamless supply chain for all manner of goods. These links would be severed almost overnight.”

But these risks may also deter China, with semiconductors from Taiwan, for example, its biggest import.

“Oil and energy are next. China needs foreign soybeans to feed its population and iron ore to fill demand for steel,” McGregor writes.

“China has been quietly eyeing decoupling for decades. It is now part of official policy, under the name of building a ‘dual circulation’ economy.  

“But the country’s import profile means it is a long way from where it wants to be.”

However, with military conflict over Taiwan “increasingly possible”, McGregor backs an alternative to decoupling — a return to an embrace of interdependence.

“Decoupling was once considered to be the path to stabilising superpower competition,” he claims.

“The less leverage each country felt they had over each other, the more secure they would feel in their own walled gardens.

“In truth, the opposite is the case. The less integrated the global economy, the more likely that each side thinks they could survive a military clash, and the more they might countenance one.”

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