We’ve Already Picked Decoupling’s Low-Hanging Fruit

Declines in foreign direct investment in China bolster the thesis that global companies are turning away from the world’s most-important production hub, continuing the trend of decoupling that has policymakers and corporate leaders looking for alternative manufacturing bases. The truth of the nation’s deteriorating importance isn’t so simple.

Inbound FDI dropped 28.2% in the year through May, the 12th straight month of retraction. Other data released this month add weight to the “whither China” argument.

Yet, there’s a risk of overestimating the extent to which deglobalization is occurring. Brad Setser, a fellow at the Council on Foreign Relations, warns policymakers may underestimate the trade and economic impact of conflict, especially in the Taiwan Strait.

Instead, it’s important to recognize that some shift in manufacturing has already occurred, but this rate of change is likely to be stagnant for a little while. Both corporate and political leaders need to accept and adjust to the unsteady pace of decoupling, especially when it comes to planning for supply chain resilience.

Deglobalization is the unraveling of global commerce, while decoupling is the gradual cessation of ties between two parties, in this case the US and China, and their spheres of influence. Fragmentation is the breaking up of previously large, centralized hubs of activity into more numerous, smaller groupings. Each of these is happening, and can be supported by data, but none is yet complete. They likely never will be.

China remains the single largest manufacturing economy and exporter in the world. Large swathes of industry have started to move out, including textiles, power tools, and electronics. But fast development in other sectors, such as electric vehicles and renewable energy, make the country even more crucial to certain parts of the global economy. As a result, you can find a statistic to support your position, whether you believe globalization of trade is continuing, reversing, or stagnant.