Whether the Trump administration has intended to engage in a conscious decoupling of the United States from China is unclear. The effect of the trade wars seems to be pushing the global economy in that direction, however. If the status quo persists, the average U.S. tariffs on Chinese imports will have risen from 3.1 percent in January 2018 to 24.3 percent by the end of 2019. China’s average tariff rate on U.S. imports will have increased from 8 percent to 25.9 percent during the same time period.

The economic effects of this trade war are straightforward and predictable. China has fallen from the United States’ largest trading partner to third-largest. Economists calculate that the dead-weight loss from the tariffs runs to the billions of dollars every month and will escalate over time. Moody’s Analytics estimates that just one year of the trade war shaved an estimated 0.3 percentage point in U.S. real gross domestic product and almost 300,000 jobs off the U.S. economy. The indirect costs of uncertainty have also caused foreign direct investment into the United States to crater and domestic business investment to contract in the second quarter of this year.

Although these effects are appreciable, it should be stressed that this is a small fraction of what a true economic decoupling between the United States and China would generate. Despite the tariffs, U.S. census data suggests that total bilateral trade flows between the two countries increased by more than 10 percent during the first seven months of 2019 compared to the same time in 2018. Multiple spheres of economic activity have been affected only minimally by the trade war. There remains little effort to restrict travel, segment capital markets or limit the use of the dollar in international exchange. More than 360,000 Chinese students still study in U.S. universities at the undergraduate and graduate levels. In other words, the markets for financial and skilled human capital remain relatively globalized. Even the global supply chain seems relatively unaffected by the trade war. According to a survey conducted by the US-China Business Council, 87 percent of its members reported no plans to relocate any of their production activities away from China. Chinese rare earths have not been withheld from the United States; numerous Chinese threats against U.S. companies have not been carried out.

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I raise these points not to minimize the costs to date, but rather to stress that genuine decoupling would have far greater effects on the global political economy than what we have witnessed over the past 18 months. And based on last Friday’s report from Bloomberg News’s Jenny Leonard and Shawn Donnan, the Trump administration wants to go there:

Trump administration officials are discussing ways to limit U.S. investors’ portfolio flows into China in a move that would have repercussions for billions of dollars in investment pegged to major indexes, according to people familiar with the internal deliberations....
Among the options the Trump administration is considering: delisting Chinese companies from U.S. stock exchanges and limiting Americans’ exposure to the Chinese market through government pension funds. Exact mechanisms for how to do so have not yet been worked out and any plan is subject to approval by President Donald Trump, who has given the green light to the discussion, according to one person close to the deliberations.
Trump officials are also examining how the U.S. could put limits on the Chinese companies included in stock indexes managed by U.S. firms, three of the people said, although it’s not clear how that would be done. More Chinese companies in recent years have been added to major indexes that a broad array of investors have access to.

The White House’s Peter Navarro has denied this reporting, but he says a lot of crazy things, so maybe take his denial with a grain of salt. In this case, CNBC and others appear to have seen the paper trail that contradicts Navarro.

Moving toward capital restrictions as global trade slumps and U.S. manufacturing exports fall off a cliff seems like a dubious policy move:

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In U.S. economic history, only two historical examples parallel the decoupling scenario that Trump and Navarro seem to desire. The first is the Embargo Act of 1807, which economic historian Douglas Irwin recently labeled “the most dramatic, self-imposed shock to U.S. trade in its history.” It crippled the U.S. economy at the time, causing the price of all exported goods to crash, the prices of all imported goods to rise, and GDP to shrink by an estimated 5 percent during its first year. The other example would be the imposition of the Smoot-Hawley Tariff of 1930. The resulting escalation of tariffs by U.S. trading partners, combined with the rupture of the gold standard, triggered a collapse in global trade and economic output. Economists estimate that the trade wars triggered by Smoot-Hawley were responsible for half the decline in trade flows.

The Sino-American trade war has been real, but it has not triggered genuine economic decoupling. Yet. But the Trump administration seems quite determined to repeatedly shoot the U.S. economy in the foot.

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