Thread by @Noahpinion

Today's @bopinion post is about a scary and little-noticed phenomenon:

The U.S. and Chinese economies are disentangling.

bloomberg.com/opinion/articl…

The idea that mutual economic interdependence prevents countries from going to war has been spectacularly wrong in the past.

But the idea wasn't completely stupid. In fact, it holds an important grain of truth - there isn't much to gain, economically, from modern warfare. And countries that go to war in the modern age generally tend to just wreck themselves.

And in fact, there IS some research suggesting that economic interdependence lowers conflict risk, even if it doesn't make war impossible.

(I'm sure @ProfPaulPoast can point me to a more complete literature review.)

The U.S. and Chinese economies are deeply intertwined.

And China also holds a lot of U.S. bonds.

But the U.S. and Chinese economies are slowly beginning to disentangle.

Exports of goods to China, and imports of goods from China, are both down by double-digit percentages relative to a year earlier:

American companies are scrambling to diversify their supply chains out of China.

bloomberg.com/news/articles/…

China has been systematically excluding American companies from its markets, meaning that American businesses are no longer a reliable pro-China lobby.

reuters.com/article/us-usa…

The U.S. is targeting a large number of Chinese companies for export restrictions, seeking to starve them of essential technology.

bloomberg.com/news/articles/…

And China is threatening massive retaliation against U.S. tech companies.

bloomberg.com/news/articles/…

The U.S. is now heavily restricting Chinese investment in U.S. companies.

bloomberg.com/news/articles/…

And guess what? The restrictions are working.

How's this for a "chilling effect"?

In fact, that graph understates the true drop, since it only shows inflows.

China is also divesting from existing investments in the U.S., leading to a net drop in the stock of FDI.

rhg.com/research/chine…

How about those Chinese holdings of U.S. bonds? How about the "financial balance of terror"?

Well, a few years ago, China sold off a trillion dollars of foreign exchange reserves. Did U.S. interest rates rise? No.

So maybe the "financial balance of terror" is a paper tiger.

Meanwhile, military tensions in the South China Sea, Taiwan, North Korea, and elsewhere remain high.

thediplomat.com/2019/06/the-co…

So if you were counting on economic interdependence to prevent a U.S.-China war, you should be a bit more worried than a year or two years ago.

The buffer of interdependence is eroding rapidly.

(end)

bloomberg.com/opinion/articl…