How should we prepare for the decoupling of US and China?

An era of cold war where United States and Soviet Union stood as two blocks of power is being revisited but with a change as 'China', another communist regime, replaces Soviet Union as the second block. 

The geopolitical map of the world again starts to shape itself in a cold war formation, where two blocks dominated the world order. While the Soviet-Union is long gone we have another communist regime filling its shoes. China as the biggest trading partner of the United States now believes it has the necessary wherewithal to sit on the high table and stare United States in the eye for global dominance.

In a rapidly De-globalizing world, priorities for nations have changed. While trade has been decelerating prior to the coronavirus pandemic, the confrontational and hostile attitude of nations have waited to come out in the open. It is safe to say US-SINO relations have never been so strained. Once hailed as the godfather of China, US helped China reach to where it is today. In other words, the rise of China is underwritten mainly by US enterprise. While 'Deng Xaioping' was a visionary that China needed, to work in silence, bide, hide and prepare, 'Xi Jinping' is the aggressor who is threatening to reverse the status quo. On the other hand, United States has been seen as a receding force, nowhere near its earlier influence in global geopolitics. Donald Trump's leadership leaves much to be desired. In fact some argue that Donald Trump is the worst US president in history.

The pandemic has accelerated a shift in self-reliance when it comes to strategic industries for most countries. They do not want to be on the mercy of others with their most important strategic projects. This shift has put enormous strain on the global infrastructure as a sectoral preference that Beijing was eyeing, 5G technology being a classic example. United States has taken a lead to disengage other allied nations to move away from Huawei, while US will be putting the infrastructure in place through US enterprises. While this seems to be a win for US, China has gone a step further to not only accuse US of bullying but to put an end to "one country, two systems" in Hong Kong, making a statement.

The bipartisan consensus in US amongst the Democrats and Republicans seems to be putting China in its place, so if businesses in either countries were hoping to see some change or De-escalation after the US presidential elections, it does not seem to be coming through while localization or gated-globalization would be the new theme going forward. Probably "Made in America" can become a rage again. In view of the inevitable decoupling that is going to follow it is best for US companies to start strategizing and making changes for this eventuality.

US companies should look to reduce their dependence on China and rethink their position regarding Hong Kong as well. Hong Kong has been on the radar of the Chinese communist Party (CCP) from some time now and the new Hong Kong national security law is the first step towards a complete Chinafication of the semi-autonomous island. Hong Kong will be stripped off its special status by major foreign countries. A place without its rule of law and free-spirited talent might not suitable to have any regional HQ for foreign companies. While the signals have been coming from some time, companies have been slow to act. A June 2020 survey of the American Chamber of Commerce in Hong Kong indicates that more than half of respondents are 'very concerned' about the national security law and 60% believe that it will harm their business. Almost half are pessimistic about the medium to long-term future of Hong Kong. But two-thirds have not made any contingency plans in response to the law and escalating tensions.

While these tensions has forced some companies to move supply chain to other countries like Vietnam and Thailand but it is not geopolitically stable. When the world polarizes into two blocks of powers the geographic vulnerabilities of smaller countries surface and proximity becomes an important deciding factor for smaller countries like Vietnam and Thailand into deciding which economic block to align with, even against their will. Thus, what is needed is a geopolitically stable location, a big and strong country in the vicinity which can take some pressure in case push comes to shove.

The safety and security of people on either sides might be a concern for companies on both country's sensitive list. Recently China took some legal actions on two Canadian citizens after been provoked by Canada's decision to not free Huawei's CFO. While this is a high-profile case which has been reported there might be many small ones which nobody would even get to know. Economic democracy which we have been used to might not work so well going forward. Thus hiring local workforce in case some operations force companies to have offices in either blocks, would be wise.

This decoupling is a long process. Nothing would happen overnight, it might take years. For starters companies should focus on these basic operational maneuvers and stay flexible to change with upcoming situations as and when they present themselves.  

Conclusion:

While the decoupling of China and the US has been in pipeline from quite some time, COVID-19 seems to have put the last nail into the coffin. The blame game regarding the spread of the virus and subsequent responsibility is in the process of being thrown around. This seems to be heading towards a cold war situation where there would be two geopolitical power centres mainly US and China, other countries based on their interests would join either sides. This decoupling of sorts would force foreign companies to rethink their China strategy and the supply china it mainly operates therein. A geographically and politically stable country might be the correct choice given the polarization usually leads to smaller countries in proximity gravitating towards the neighbouring power centre. They also need to be wary of their obsession with Hong Kong as a safe operating harbour as China is coming with its full force to sweep it. It's just a matter of time, since Hong Kong is surviving on borrowed time since the day it was handed over to China by UK.