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As two U.S. aircraft carrier strike groups conducted round-the-clock exercises in the South China Sea this week, parallel to Chinese military drills elsewhere in the waterway, U.S. Treasury Department officials were putting in place sanctions against a ranking Chinese official over human rights abuses in Xinjiang.
U.S.-China relations are rapidly falling apart. It's gotten so bad that Chinese officials now talk openly about a complete rupture that could leave China outside the U.S. dollar payment system. Could these two economies really "decouple?" What's becoming clear as tensions rise on multiple fronts—China's early mishandling of the coronavirus, its aggressive behavior toward neighboring nations, its civil liberties crackdown on Hong Kong, and most everything about Taiwan—is that the U.S. and China have failed to establish the kind of deep economic engagement that might otherwise hold them together. It may now be too late.  U.S. Navy F/A-18 Super Hornet fighters line the deck of the USS Ronald Reagan as it sails in the South China Sea last year. Photographer: Catherine Lai/AFP This week in the New Economy Mutual antipathy toward the Soviet Union provided the glue in the early years of the relationship between the U.S. and China. Once the Cold War ended, it was often said that commerce became their new connection. The historian (and Bloomberg Opinion contributor) Niall Ferguson coined the term "Chimerica" to describe two economies seemingly joined at the hip. Americans spent, the Chinese saved; America consumed, China produced; America invented, China adapted. Indeed, after China joined the World Trade Organization in 2001, attracting a wave of U.S. investment in Chinese factories, lines of container vessels stretching across the Pacific were the main ties that bound the world's two largest economies. But Chimerica was a chimera. Beyond trade, the economic relationship never fully took off. It may seem as though U.S. businesses are piling into China—Elon Musk's gleaming new Tesla plant taking shape in Shanghai is quite impressive—but the real story is just how little America has invested in the country. No more than 1% of U.S. foreign direct investment has gone into China. One big reason: Fear of intellectual property theft.  Wang Yi, China's foreign minister, leaves the stage during the Munich Security Conference on Feb. 15. Photographer: Michaela Handrek-Rehle/Bloomberg Not a single American bank or brokerage or insurance company has a nationwide footprint there. And while China is opening up its financial sector, domestic players are so well entrenched they likely can't be dislodged. Automobiles are an exception, though: Chinese companies have had difficulty competing with foreign brands at the luxury end of the market. The same is true for commercial aircraft: hence, Boeing's continued success. As for U.S. technology companies, social media giants like Facebook and Twitter are banned. Those that have managed to access the Chinese market live in a state of constant apprehension, worried that once the local competition catches up, they'll be forced to leave. Many have already gone. And trade has become a source of dangerous friction, not friendship. Industrial competition is now a zero-sum game as China rolls out plans to dominate the inventions of the future. Recently, however, China's foreign minister signaled a softer tone. In a speech on Thursday, Wang Yi said "we are still willing to grow China-U.S. relations with goodwill and sincerity." He added: "In the past 40 years and more since the establishment of diplomatic relations, China and the U.S. have made the best use of their complementarity, and their interests have become highly integrated."  Chen Quanguo, Communist Party Secretary in Xinjiang. Photographer: Hu xiaohua/Imaginechina It is certainly true that the interests of these countries are entwined: No global problem can be resolved without them working together, whether it's the climate crisis or the coronavirus pandemic. But their economic integration, so far as it goes, is reversing. A few years ago, Chinese investment in the U.S. started to pick up, but it's since collapsed amid trade and geopolitical rancor. Increasingly, China is focused on self-reliance. America is headed in a similar direction: former Vice President Joe Biden's "Buy American" economic plan shows that populist economic policies may be here to stay, regardless of the election outcome in November. Meanwhile, U.S.-China tensions are coming in waves. Simultaneous war games by the two military superpowers, such as those this week in the South China Sea, have been rare in the past. And the U.S. has never gone after a Chinese official as senior as Chen Quanguo, the Communist Party Secretary of the Xinjiang region who sits on the 25-member ruling Politburo. There's no precedent, either, for the Trump administration visa threat (now being challenged in court) that hangs over the 370,000 or so Chinese students in the U.S. If this latest White House restriction is upheld, they may have to choose between risking Covid-19 infection by attending in-person classes, or going home. But to say that an economic "decoupling" will result from this new, intensifying Cold War would be a mistake. The reality is that the U.S. and China never coupled in the first place. __________________________________________________________ Like Turning Points? Subscribe to Bloomberg All Access and get much, much more. You'll receive our unmatched global news coverage and two in-depth daily newsletters, The Bloomberg Open and The Bloomberg Close. People are increasingly wary of shopping in public places thanks to the coronavirus pandemic, a reality that has accelerated the shift toward contactless payment. On July 14, join Bloomberg's The Future of Data-Driven Digital Commerce, and hear CEOs from companies including Checkout.com, Klarna and The Cambridge Satchel Co. explain why the transaction economy is shifting. Register here. Download the Bloomberg app: It's available for iOS and Android. Before it's here, it's on the Bloomberg Terminal. 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