Is it possible to decouple from the world's biggest market and factory?

With China and the US in a new Cold War, the US is ramping up on overall decoupling with China. Some aspects are easy, such as decoupling in terms of human flow - the US can simply expel students from China. But decoupling from China's economy is not easy. China's enormous market and huge production and manufacturing base make it difficult for US companies to cut themselves off from China. China is proud of this fact, and is using it against the US; it is also what US Secretary of State Mike Pompeo has described as being more difficult than going against the Soviet Union.

First, can US companies cut off the China market? These are examples of how US companies are dependent on the China market: there are more than 4,000 Starbucks, 3,000 McDonald's, and 400 Walmart outlets in China. Apple, Intel, and Nike have annual sales of US$40 billion, US$20 billion, and $6 billion respectively in China; the NBA's largest overseas market is China; General Motors produces 3 million cars each year in China; over 20% of Boeing's earnings come from China.

So, can US companies decouple from China? Unless the US government orders them to pull out from China, they will not leave. There is only one market of 1.4 billion people, and with the potential of China's economic growth, its enormous purchasing power will only make these multinational companies want to stay. Of course, it is also possible that these companies will make adjustments and close some stores in China. For instance, between 2012 and 2017, Walmart closed 74 stores in China, and another four in 2018. But this does not indicate that US companies are decoupling from China. (NB: Just before the coronavirus pandemic erupted, Walmart announced that it was planning to open 500 new stores in China over the next five to seven years.)

Besides, who can take China's place as the "world's factory"? China's manufacturing industry is worth the most in the world. It is an important part of the global supply chain, producing many intermediate goods for processing, as well as complete, finished goods.

The US calls for decoupling from China's economy mainly has to do with ending its reliance on China's supply chain. In terms of security and politics, such decoupling is happening. Following the coronavirus, the Western world, including the US, is unavoidably seeking to decouple with China in strategic industries such as medicine and communications, and China has to face the truth.

On 31 August, led by the French Ministry of the Economy and Finance, French investment bank Bpifrance started to accept applications for subsidies to encourage bringing production of key strategic industries back to France. On 2 September, the German government announced its policy on the Indo-Pacific, confirming that it will build and strengthen strategic relations with ASEAN. This means a shift in Germany's China policy: it is reducing reliance on China, while building multipolarity to exert pressure on China. And on 3 September, the EU announced that its sources of raw materials need to be diversified; it added lithium - raw material for batteries - to its list of key materials, and drew up a plan to ensure a supply of materials needed for a "green recovery" that is good for the economy as well as for the environment and our health.

On 4 September, the American Institute in Taiwan, along with the Taiwan Ministry of Foreign Affairs, Taiwan Ministry of Economic Affairs, European Economic and Trade Office, and the Japan-Taiwan Exchange Association held a seminar titled "Forum on Supply Chain Restructuring: Improving Resilience amongst Like-Minded Partners", hoping to find "like-minded" democracies to join the shift in the global supply chain in the post-pandemic era.

On 9 September, the American Chamber of Commerce in Shanghai released a report that said out of 200 manufacturers surveyed, only about 4% were willing to move production to the US. Over 75% of companies said they had no plans to move production out of China, 14% hoped to move part of their operations to other countries, and 7% planned to move their production line to other locations within China, or overseas.

The decoupling between the US and China is happening mostly in the communications sector. But can other sectors also decouple from China? For example, clothing, furniture, and home appliances are also part of the supply chain. If these were to decouple from China, who would take its place? No other country in the world can take China's place as the "world's factory".

Take Vietnam for instance. It seems to be taking China's place as the world's factory, given its advantages in some areas. It has more trade freedom than China, being part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and having signed a free trade agreement with the EU. The China-US trade war and the coronavirus have benefited Vietnam as one of the countries that has taken China's place in manufacturing. In April 2020, Apple started shifting some of its AirPods production to Vietnam, to produce 3 million to 4 million units there, or around 30% of total classic AirPods production this quarter. This signals the company is moving some of its supply chain out of China.

Vietnam's economic growth can support part of the production moving there from China; however, Vietnam cannot take over all of China's production. In 2018, China's manufacturing sector accounted for nearly 28.4% of global production, as compared to less than 0.5% for Vietnam. China has about 200 million manufacturing industry workers, versus only about 11 million in Vietnam. Shanghai's container port can handle 40 million containers annually, while Vietnam's largest port in Ho Chi Minh can only handle 6.5 million. All this shows that Vietnam cannot take China's place in the production and supply chain.

Finally, the fact that China has market scale and its manufacturing sector has status does not mean it is sitting pretty.

First, China's enormous market is an advantage, and also the basis for China's shift in economic strategy to its domestic market. Based on this advantage, China can put up a strong resistance to the US, but it should also cherish this advantage and not use it as a weapon to show off China's power, because China is building a "community of common destiny" with the rest of the world.

Many countries have noticed that China is using its market scale as a diplomatic tool to get back at other countries. In 2010, China and Japan had a row over vessels colliding near the Diaoyu/Senkaku islands, and China announced a quota on exports of rare earth. That same year, the Nobel committee in Norway awarded the Peace Prize to imprisoned Chinese human rights activist Liu Xiaobo; China cut off top-level contact with Norway, and stopped imports of Norwegian salmon.

Around 2013, after the Philippines initiated arbitration with an international court over the South China Sea, its fruit exports to China took a major hit. Then, around 2017, when the US deployed THAAD missiles in South Korea, the Lotte group was boycotted in China and pulled out of the China market. In 2019, after Huawei CFO Meng Wanzhou was arrested in Canada, many Canadian products met with problems when being exported to China. And this year, with tensions between Australia and China, Australian exports to China have become troublesome, while following the visit by Czech Senate Speaker Miloš Vystrčil to Taiwan, established Czech piano maker Petrof had its orders to China cancelled.

The "community of common destiny" has become a central concept in China's diplomacy. The report of the Chinese Communist Party's 18th Party Congress clearly states: "In promoting mutually beneficial cooperation, we should raise awareness about human beings sharing a community of common destiny. A country should accommodate the legitimate concerns of others when pursuing its own interests, and it should promote common development of all countries when advancing its development." From these words, we should see that common growth can only be achieved through inclusiveness. Weaponising relationships will only lead to rifts between countries, and in the context of the new Cold war between China and the US, will only push countries that are on the receiving end of retaliation towards the US.

Second, the fact that nobody can take the place of China's manufacturing industry does not mean that China's global market share in manufactured products cannot be overtaken. Supported by free trade and investments, emerging countries like Vietnam, Mexico, and India are developing their manufacturing industries and expanding exports of manufactured products, which will put pressure on China's global market share. Especially given that the US is encouraging decoupling from China, exports from these countries to the US are increasing.

The position of China's manufacturing sector needs to be supported by the global market, because China's domestic market will not be able to digest all of China's manufactured products. So, the key to China's expansion and opening up is still to seek to integrate into the global economy. When many countries are willing to build a "community of common destiny", then China's manufacturing sector will be as strong as it can be.

Related: Will China and the US fight another wrong war, with the wrong enemy, at the wrong place and time? | Was Nixon's policy of engaging China a failure? | China enters 'pre-decoupling stage' amid Covid-19 outbreak | China wants 'co-opetition' with the US, but can that happen?