Hoover Institution (Washington, DC) — An immediate “hard decoupling” of the US trade relationship with the People’s Republic of China (PRC) in the event of an attack on or blockade of Taiwan is not the most beneficial course of action for American policymakers, according to a new paper released by the China’s Global Sharp Power (CGSP) project at the Hoover Institution.
In On Day One: An Economic Contingency Plan for a Taiwan Crisis, Hoover Fellow Eyck Freymann and Cambridge University’s Hugo Bromley instead prescribe an alternate path, in which the United States pulls away from the PRC slowly and methodically, in a manner that brings along allied, like-minded, and even neutral states.
Freymann and Bromley argue that a “hard decoupling,” including moves to quickly stop noncritical trade with the PRC or to abruptly cut off the PRC economy from international financial arrangements, would be “unviable.”
The authors suggest a strategy of “avalanche decoupling,” where aggressive trade measures, currency market intervention, reshoring, and sanctions sever the economic relationship between the PRC and its trading partners over time.
This strategy gives businesses and US allies and partners room to adjust to the changes and mitigates the impacts (supply chain disruption, inflation etc.) on the American and global economies.
The authors acknowledge that their proposals invite policymakers to think outside of the box and entertain solutions that go beyond their conventional toolkit.
“We propose ideas that differ radically from the current Washington policy conversation,” Freymann and Bromley write.
Freymann and Bromley traveled to Washington, DC, last week to brief policymakers on the recommendations included in the report. Their activities there culminated in a special presentation and discussion of the report at the Hoover Institution’s Washington offices Thursday. The event featured Distinguished Research Fellow Glenn Tiffert, CGSP cochair, and Rozlyn Engel, managing director of the Treasury, Economics, and Commerce division at the MITRE Corporation.
In Washington, Bromley and Freymann also met with several congressional offices and key congressional committees, and with diplomats and government trade policymakers tasked with organizing America’s response to any future aggression against Taiwan by the PRC.
What largely motivates the avalanche decoupling proposal Freymann and Bromley make is the gigantic costs the United States, its allies, and even peripheral nations would endure during a hard-break scenario.
The report outlines the economic costs for various US allies if there were a significant trade disruption with the PRC. Across Germany, Japan, Australia, Saudi Arabia and other nations, annual GDP contraction during such a scenario range from 5 to nearly 10 percent, with South Korea possibly seeing an annual decline in GDP of more than 20 percent.
Meanwhile, there are many reasons to believe that the PRC is increasing its ability to persevere through such harsh economic measures as hard decoupling, the report’s authors contend.
It is growing its reserves of crude oil, food staples, and has more than $6 trillion in foreign exchange and other assets held in US dollar denomination. It also has “an almost entirely indigenous defense industrial supply chain,” according to Freymann and Bromley.
The pair go into rich detail about what the US response to an invasion of Taiwan should entail. For example, they point to the current de minimis US customs exemptions on packages of goods worth less than $800. They say that in a more hostile trade climate with the PRC, this $800 limit on customs inspections would need to be lowered. Otherwise, PRC firms could still bypass restrictions by sneaking considerable amounts of goods valued under that exemption limit into US or allied markets without detection.
The authors also address the often-discussed post-2022 problem of connector countries, or what the authors call “third country transshipping,” where goods from one country that is subject to sanctions or trade barriers launder their goods in a neutral “third” or “connector” country before shipping them into the sanctioning state.
Freymann and Bromley break down their policy prescription for Day One of a Taiwan crisis into four phases, with detailed steps for organizations and actors critical to the response effort, including US Congress, the executive branch, the intelligence community, and financial institutions.
Click here to read the full report, On Day One: An Economic Contingency Plan for a Taiwan Crisis
