The truth about decoupling | Financial Times

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Last week, the House of Representatives Select Committee on the Chinese Communist party notified the world’s largest asset manager, BlackRock, as well as MSCI, which selects the securities that make up many index funds Americans invest in, that they were being investigated for putting money into Chinese companies that the US government has accused of working with the Chinese military and violating human rights.

This is the latest beat in a trend that I first wrote about two years ago, which is the evolution of trade wars into capital wars. It’s entirely predictable that we’ve reached such a place. Capital flows and trade flows are interlinked, and increasing examination of global supply chains and financial flows in the wake of “de-risking” has shown that the US and China are tightly linked in more problematic ways than anyone had ever imagined. 

It is quite common, for example, to find evidence of Chinese companies under American sanctions partnering with US firms, or blacklisted companies controlling multiple non-blacklisted affiliates, meaning that they could legally import goods and services for their sanctioned investor or parent.

In my column today, for example, I look at how crucial slave labour and coal-fired power are to Chinese clean energy technology, which dominates the global market. The US government may be able to outlaw Chinese-made solar modules, but the raw polysilicon mined in Xinjiang isn’t tracked, which means that the White House may be putting a nice wrapper on a problem that hasn’t been fixed. As these inconvenient truths are teased out by global companies attempting to meet the letter of the law around decoupling, it’s becoming clear that there are some hard choices to be made by both western countries and China.

Inconvenient truths of decoupling abound. The Biden administration is trying to protect domestic jobs from unfair trade practices, but American retirement money is being funnelled through Chinese companies to a state that has guns pointed at the US. Countries like America and Australia have the raw materials necessary to mine things like rare earth minerals and the quartz-based polysilicon needed for the clean energy transition. But doing so is costly and time-consuming, and at the end of the process, paying fair wages and using low-carbon power mean inputs will cost double what they would in Xinjiang.

All these inconvenient truths apply to Europe as well. I’ve often wondered, for example, how European companies doing digital trade with China can hope to enforce EU rules around privacy. Given that these things go to the heart of the differences in political economies around the world (western finance companies expect to invest anywhere they like, for example, even as the Chinese state has massive capital controls on its private sector), I don’t know how all this gets resolved.

Gideon, any bright ideas on that score? And what inconvenient truths have you noticed over the past few years of deglobalisation, decoupling or de-risking, depending on your term of art?

Recommended reading

• This New Yorker profile of star art dealer Larry Gagosian, by Patrick Radden Keefe (the author of Empire of Pain, about the Sackler opioid fortune) is one of the best magazine features I’ve read in some time. Keefe shows us how Gagosian essentially became the market maker for art in the modern era — and what it has meant for the art industry (hint: it’s not all good). Some of the reporting details here are incredible.

• I’m betting that like me, other Swampians sometimes suffer from the “second-hand stress” of being around difficult people. This Harvard Business Review article had some nice tips on how to deal with it.

• I’d agree with Daniel Blake who writes in the FT that a multipolar world need not be a bad thing for investors, but I also think Mohamed El-Erian is right that we may be too sanguine, particularly in the US, about markets at the moment.

Gideon Rachman responds

Indeed — there are many “inconvenient truths” (ITs) around decoupling. Some of the biggest involve the green transition:

1. IT one is that we can strive for net zero in the west — but if China doesn’t control its emissions then most of our efforts are likely to be in vain. China accounts for about 30 per cent of world’s carbon emissions, compared with 14 per cent for the US and less than 9 per cent for the EU.

2. But — inconvenient truth two — before we get on our moral high-horse about China, remember that on a per-capita basis it emits about half of what the US does. And, of course, greenhouse gases are mainly a problem of stocks, rather than flows. And most of the carbon dioxide that’s in the atmosphere was put there by western countries.

3. IT three is that China is both doing impressively well and impressively badly on the green transition. On the one hand, they dominate the global market for solar panels and 30 per cent of Chinese car purchases are now EVs or hybrids, compared with about 10 per cent in the US. On the other hand, China is increasing the opening of new coal-fired power stations — with more already approved this year than in all of 2021.

4. And, finally, I really don’t see how we do our own green transition without China. As you know, the Chinese dominate the production of the critical minerals that are crucial for battery production. Of course, the west is trying to free itself of this reliance. That is de-risking, if anything is. But most experts I know think that process will take decades. And we have to accelerate the green transition right now.

Your feedback

And now a word from our Swampians . . .

In response to “Should Biden pardon Trump?”:
“I find myself coming down more on Rana’s side than Gideon’s where next November’s election is concerned. The 30 per cent who support Trump will continue to do so regardless. Meanwhile Dobbs is not losing its potency as a motivating factor in US elections, the realignment of moderate college-educated suburban voters to Team Blue continues apace, the 2024 electorate will comprise fewer Silent Gen / Boomer voters and more Gen Z voters than the 2020 electorate, and the kids lean left. Trump is shedding voters and it’s not at all clear where he might make up that deficit.” — Steven Robinson