The U.S. Chamber of Commerce’s China Center, in partnership with Rhodium Group, released a new analysis today examining the complexity of the U.S.-China economic relationship. A first-of-its-kind study, “Understanding U.S.-China Decoupling: Macro Trends and Industry Impacts” seeks to better understand the degree to which the U.S. and Chinese economies are intertwined and dependent on each other for stability and growth.

By analyzing the economic impact of complete disengagement in four key sectors, the analysis helps quantify the extent to which our two economies are interconnected, ultimately helping policymakers, businesses, and other stakeholders make better informed decisions as the administration seeks to bolster America’s national security and confront China’s rising Statism.

“China is perhaps the most difficult foreign policy challenge confronting President Biden. We cannot ignore the economic challenges posed by China’s rising Statism, nor the growing national security concerns. Yet, given the interconnectedness of our two economies and importance of the Chinese market for U.S. companies, large and small, it is critical that policy decisions are informed by the best data,” said U.S. Chamber Executive Vice President and Head of International Affairs Myron Brilliant. “That’s why, for more than 25 years, the U.S. Chamber has studied and promoted commercial opportunities and worked to address China’s unfair trade and regulatory practices.”

RECOMMENDATIONS FOR POLICYMAKERS

As U.S. policymakers debate the next phase of U.S.-China engagement, the U.S. Chamber’s China Center and Rhodium Group have outlined four important takeaways that should be taken into consideration: 

• Data analysis is critical to policymaking. China policy requires economic impact assessment, cost-benefit analysis, and a process of public debate and discovery.
• The costs of complete disengagement (full decoupling) are uncomfortably high. Policies that reduce the costs to the U.S. economy while protecting our security—mitigation, diversification, even simple transparency with Beijing—deserve careful consideration.
• Addressing the China challenge requires a broader spectrum of U.S. policies. Promoting domestic innovation and technology, and preserving the rules-based, open market order among like-minded economies are key to U.S. success.  Government has a greater role to play, but one that must have guardrails and ensure the continued vitality of our market-based system.
• Washington must renew its value proposition to our international partners. No nation can address the China challenge alone, especially when it comes to sustaining technology leadership. A plurilateral approach is essential to reducing U.S. economic costs and preventing the erosion of U.S. comparative advantage that would occur if decoupling policies are implemented unilaterally.

KEY ECONOMIC FINDINGS

The analysis identifies the potential costs of a U.S.-China decoupling from two perspectives: the aggregate costs for the U.S. economy across four key channels (trade, investment, people, and ideas) and the industry-level costs in four areas of national importance (civil aviation, semiconductors, chemicals, and medical devices).

The report generally uses a full decoupling scenario—defined as bilateral flows going to zero—because it provides the most complete look at the potential impact of the current trajectory of the U.S.-China economic relationship. 

Rhodium’s Daniel Rosen, principal author of the report, said, “U.S.-China engagement was always contingent on shared liberal economic goals. As Beijing diverges back toward greater state planning, a less permissive stance is necessary. But our self-interest lies in purposeful decoupling, not a gratuitous pulling apart. This study is a step toward re-sizing our engagement rationally.”

Aggregate Costs: If the U.S. and China were to fully decouple, American businesses and our economy would be significantly impacted, resulting in hundreds of billions in foregone GDP and capital gains losses while undermining U.S. productivity and innovation.

• Trade: $190 billion annually in foregone U.S. GDP by 2025 if 25% tariffs are placed on all two-way trade.
• Investment: $25 billion annually in lost capital gains and one-time GDP losses of up to $500 billion if U.S. companies reduce cumulative FDI in China by 50%.
• People: $30 billion annually in lost U.S. services trade exports if Chinese students and tourists coming to the U.S. drop by 100%.
• Ideas: Billions in reduced R&D spending in the U.S.; diminished access to Chinese talent and science; and greater competition with China for global innovators.

“Fully decoupling the U.S. from China would undermine America’s leadership in semiconductors,” said John Neuffer, president and CEO of the Semiconductor Industry Association. “While we need to have smart and targeted restrictions to protect national security, the long-term answer to competition from China is to turbocharge U.S. innovation through robust federal and private investments in research and technology – that’s how we are going to stay on top, keep our economy strong, and power job growth.”

Industry Costs: Full decoupling would lead to tremendous U.S. output losses for strategic U.S. industries, weakening their ability to sustain U.S. jobs, R&D, and global technology leadership.

• U.S. aviation industry: Depending on the extent of decoupling, a loss of access to China’s market for U.S. aircraft and commercial aviation services would create U.S. output losses ranging from $38 billion to $51 billion and cause the U.S. civil aviation manufacturing industry to shed 167,000 to 225,000 jobs. Cumulatively, lost U.S. market share impacts would add up to $875 billion by 2038. 
• U.S. semiconductor industry: Depending on the extent of decoupling, a loss of access to Chinese customers for the U.S. semiconductor industry would cause $54 billion to $124 billion in lost U.S. output, risking more than 100,000 U.S. jobs, $12 billion in R&D spending, and $13 billion in capital spending. 
• U.S. chemicals industry: From the imposition of tariffs alone, the potential cost ranges from $10.2 billion in U.S. payroll and output reductions and 26,000 lost jobs, to $38 billion in output losses and nearly 100,000 lost jobs. 
• U.S. medical devices industry: U.S. lost market share is valued at $23.6 billion in annual revenue, which would compound to cumulative lost revenue exceeding $479 billion over a decade or approximately $48 billion annually. Lost revenue would lead to job losses and translate into a $33.5 billion reduction in R&D spending over the next decade.

“U.S. chemical manufacturers have announced more than $200 billion in new investments over the past decade, accounting for more than 50 percent of U.S. manufacturing plant construction,” said Chris Jahn, president and CEO, American Chemistry Council. “China is one of our largest exporting destinations as well as a key source of inputs. Limiting access to growth markets like China would have a comparatively more adverse effect on U.S. manufacturing than it would on China.”