100% decoupling is not possible. Especially for EU. Every country has its own independent China policy. Supposing this extreme scenario happens, what the world would be like?
My conclusion is: Both China and the west are the victims. But China will be the winner.
For China, Of course there would be short term economic chaos. But I believe Chinese living standard will resume to the level of today in 5 years. In 2021, China’s trade surplus with US is 676 billion USD. With EU the trade surplus is 250 billion USD. China has trade deficit with Japan and S.Korea. Overall China will lose 900 billion USD trade surplus. It won’t hurt China too much in the long run. 1)SE Asian countries, India, Latin American countries, African countries will benefit from the new cold war. And they will have bigger purchasing power for Chinese goods. 2)China’s FX reserve benefit Americans more than Chinese. China used most of its FX reserve to buy US debts. Which improves Americans welfare, instead of Chinese. Just like Chinese economist Wen Tiejun said: “China is like a cow. US stripped its cowhide twice. First by using USD to import cheap goods from China. Second by selling US debts. Most US dollars will come back to US for free .”
For the west, the consequences of cold war 2.0 will be much more serious than arrogant westerners expected. China is not Soviet Union. Who was an armed natural resources exporter. Decoupling with China will hit west’s economy very hard.
From demand aspect to say. Westerners are optimistic because they are the low end and middle end products buyers and they believe China is replaceable. Fact is China is not replaceable. Building an intact no-China supply chain outside China needs huge amount of money. The west doesn’t have that money. Even if the new supply chain, at all odds, is successful built. It can not compete with China’s because only China can make best cost performance. People in the west have to pay more money for lower quality goods. This supply chain will specially serve for the western countries. Other non-west countries will still buy goods produced by China-in supply chain.
From supply aspect to say. The west firstly will lose China market. Which is 25% S.Korea total export, 50% Germany car export, 20% Apple sale. The number would be bigger if take the indirect export to China and investment income from China into account. Secondly, China will have to build its own high end goods industries. Once breakthroughs are made, China will sell them to other non-west countries. Western countries will become poorer for losing business to China in world market. Don’t doubt China has the ability to produce high end goods. It’s already happening in many fields. Semiconductor will be next.
The west will lose big part of money printing privilege. US dollar and Euro will definitely not be used in the China-in supply chain. Countries in this supply chain will not play west’s cow role anymore. Non-west countries will be richer. West will be poorer.
There are two reasons that guarantee China will win cold war 2.0.
1)China has an intelligent, hardworking, disciplined, creative work force. Which the west combined can not compete with in quantity, and in quality in the long run.
2)Average income of Chinese labors is much lower than west’s. Don’t misunderstand me. I’m not going to talk about low cost stuff. After full competition between the two camps, the income levels of the two sides will tend to reflect their real quality. Which means Chinese income will grow while westerners’ salary will drop, sharply. Which side will fall first then?
