‘Decoupling’ U.S. economy from China would bring huge costs, new report says

Fracturing trade, investment and other economic ties between the United States and China would have significant costs for the American economy and for industry, and could ultimately lead to the United States being less competitive, according to a report published today by a consultancy, the Rhodium Group, and the U.S. Chamber of Commerce China Center.

The report attempts to quantify the economic costs of “decoupling” the American and Chinese economies through the fuller pursuit of policies like those adopted by the Trump administration, including tariffs and higher barriers to investment and immigration.

The report’s authors estimate that American economic output would fall by $190 billion annually if all U.S.-China trade was subject to the kind of 25% tariff that Trump put on more than half of Chinese exports.

On the investment front, the U.S. economy could face a one-time loss of up to $500 billion if policies led to the sale of half of U.S. foreign direct investments in China. And the United States could lose between $15 billion and $30 billion in service sector exports if Chinese tourism and education spending fell by half from its pre-pandemic levels, according to the report.

Daniel Rosen, a founding partner at Rhodium Group, said in a news conference today that China had initiated the conflict by adopting practices that have raised national security concerns and violated economic norms. But as the United States responds to those challenges, he said policymakers needed to carefully analyze the cost of their own actions, which could be substantial.

Cutting off the “preponderance of our engagement with China would be so expensive that it would make everyone, even the most hawkish Americans and national security professionals, very uncomfortable. We’re going to have to pay for this stuff. Our choices are not going to be cheap,” Rosen said.

“It doesn’t mean we don’t act, but it does mean we need to do the accounting carefully so we understand the implications,” he said.

The report found significant costs from decoupling for several U.S. sectors, including aviation, chemicals, semiconductors and medical devices. Restrictions on American sales to the Chinese market would lead to lower revenue for American firms, less investment in factories, jobs and research in the United States, boosting foreign competitors and diminishing U.S. industry, the report said. In the case of semiconductors, it could also push foreign firms to cut American companies out of their supply chains.

In the aviation sector, where the United States records huge sales to China and faces no close Chinese competitor, decoupling would be “insane,” Scott Kennedy, a China expert at the Center for Strategic and International Studies, said during the news conference.

“The Trump administration did essentially no math on this,” he said. “It’s critical that we do the math and not make choices based on faith or ideology.”

The Trump administration embraced the perspective of the business community on some issues, like regulation and taxes, but it was often at odds over trade policy. In particular, trade officials in the Trump administration often derided officials from the U.S. Chamber of Commerce as corporate lobbyists, saying that the chamber’s pro-China policies had led to outsourcing and the loss of American manufacturing jobs.

The Biden administration has promised to take a more strategic approach to advancing American competitiveness, but it may also be under pressure from unions and progressive Democrats not to be seen as putting the concerns of corporations over economic or national security.