Thinking Pragmatically About China Decoupling and Industrial Policy

The following is an excerpt from an interview I did with the Asia Experts Forum. Most of it was about my book, Pacific Power Paradox, but there was a chunk that was about how I see the economic dimension of “strategic Asia.” If the prose is kind of funky, it’s because it was an oral interview that was massaged and repackaged as written Q&A. You can read the full interview here.

This idea of economic interdependence comes up a lot in your discussion of China’s rise throughout the 21st century. Can you explain why the US sought economic interdependence with China for nearly four decades, but is now trying hard to decouple from China?

US foreign policy has been remarkably neoliberal toward the rest of the world, which is to say it has been guided by an imperative to force others to open up their markets, to privatize public services, to deregulate their economy…economic interdependence was not sought but rather was a byproduct of the US moving out with globalization. The nature of globalization coupled with the nature of the East Asian development model required that countries with rising economies had to suppress labor in order to have a competitive advantage in the global marketplace. The positive story there is that this stitches together markets, and it creates manufacturing networks that are transnational. That does have a pacifying effect because everyone is getting paid—well, everyone except the workers.

Economic interdependence is the byproduct of that. Military primacy is the guardian of this system. In Asia, when the Asian Financial Crisis happened in 1997-1998, the thumbnail version of that crisis was that the Thai baht, Thailand's currency, crashed because currency speculators had quickly moved out money. That precipitated a crisis that became a regional contagion, and then several countries in East Asia had problems managing balance of payments. As a result, they needed emergency foreign currency. Ultimately, the IMF bailed them out. As part of that, the IMF did what it is notorious for, which is imposing conditions of austerity on these countries. The US ran the IMF at that point in time. It appointed every head of the IMF and had disproportionate voting shares compared to the rest of the members. The US Department of the Treasury is essentially the US agent that decides what the IMF should do, and then it goes to the IMF and tries to get the IMF to do what it wants. It's all very collusive.

In the Asian Financial Crisis, Asian governments, including allies like South Korea, got hit hard by this crisis. In Indonesia, that financial crisis actually caused regime change. It led to the mass protests in the streets, and then ultimately, the overthrow of Suharto. To prevent this, they needed to build up an architecture, a set of arrangements in finance to bolster and secure these economies, and to create measures to never live through this again. The IMF is a proxy for the US in their minds. What you see, starting with the Asian Financial Crisis, is a twenty year period, all the way up until the Biden era, where East Asian governments start setting up institutional mechanisms and arrangements that do not involve the US, because involving the US would be like inviting in the IMF. That is the way the Asian political economy looks now, with a lot of intra-regional interdependence. This came about, starting in the late 1990s, as an allergic reaction to the world America built.

Economic interdependence was never the priority of American foreign policy. It was a byproduct, and then the character of that byproduct shifted from being US-centered to China-centered over time. It is the wager that East Asian governments made. Starting in the 1990s, China looked like an economic super engine. It looked like a safe bet, an obvious bet. It was a no-brainer for Asian governments trying to develop their economies to align themselves with China. They were taking advantage of their position in Asia geographically, but also their position in global manufacturing networks. Consequently, China becomes central to economic interdependence as an alternative to the United States being central to economic interdependence.