Beijing joins Washington in decoupling effort

Beijing appears to agree with Washington, at least on the issue of decoupling. President Joe Biden has done his part. Not only did he maintain Trump's original tariffs on Chinese goods, but he also banned the sale of advanced semiconductors to China as well as U.S. investment in Chinese technology. President Xi Jinping kicked off China's contribution with a campaign to ban the use of foreign technologies, mainly American, and replace them with local substitute technologies. The pace of decoupling will clearly accelerate. Without prior interactions, the world, including the United States and China, will likely lose the progress that would have otherwise occurred. China will probably lose more than America.

Chinese authorities have long favored local products. Recently, they codified the process with a program called Delete A. It requires all of the country's dominant public companies in finance, energy and many other important sectors to replace foreign software in their computer systems and that the transition is completed by 2027. Xi has a broader goal: to free China from dependence on Western food, technology, energy, finance and raw materials, in other words, make China self-sufficient in everything from computers to wheat. To facilitate the technological transition, Beijing has increased its spending on science and technology by around 10% this year, to the equivalent of $51 billion, a considerable increase from the 2% increase in last year.

Although Delete A is new, American businesses have been feeling the pressure for some time. Just six years ago, American products won most of the tenders from the Chinese government as well as state-owned companies. Meanwhile, hardware makers, such as Dell, International Business Machines (IBM), and Cisco Systems, have seen much of their equipment replaced with products made in China. Cisco reports a decline in orders in China since 2019. Dell's share of the Chinese market has halved since 2015. A few years ago, Hewlett Packard Enterprise derived up to 14% of its revenue from sales in China. By the latest measurement, this figure had fallen to just 4%. Adobe, Citrix and Salesforce have either pulled out of China completely or significantly reduced their workforces. Hewlett Packard recently announced the sale of its nearly 50% stake in a Chinese joint venture.

Beijing has chosen three companies to fill the void left by the soon-to-be-banned Americans. These are: Tongfang, Alibaba and Huawei. Already, the top brass have ordered all government operations to replace foreign equipment with Tongfang products. Authorities have faced resistance because Chinese software and machines are not always at the same level as American products. But if history is to be believed, Beijing will easily overcome this resistance. There is no doubt that over time the Chinese product will rise to the challenge and eventually offer hardware and software as good as those from Microsoft, Oracle and others like them, but in the meantime China will suffer from delays and inefficiencies with which it would not do so. otherwise I would have had to cope.

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Due to the attitude of Washington and Beijing, both economies will lose opportunities. In the longer term, however, the Chinese government will have done even more damage to its economy. The United States, for security reasons, only wants to limit China's power and influence in particular sectors. It will lose certain efficiencies and opportunities in the name of this security. Otherwise, America seems ready to remain open to the world. But Xi wants self-sufficiency at all levels, that is, a complete break with the West and probably also with Japan. No economy, no matter how dynamic, can do everything better than any other economy. If China's ambition offers security, it will only achieve it at the cost of persistent inefficiencies and diminished economic dynamism. Such a situation ensures that China will lag behind other economies, including the United States. It remains an open question whether Xi and his Forbidden City colleagues realize this reality.