China is opening to the world again, but the world’s hearts and minds are closing to China. Sino-U.S. “decoupling” will be costly for the U.S., requiring expensive investments and imaginative reforms to offset. The same is true for China—only more so. If other advanced economies also pull away, China’s prospects will darken sharply.
China’s economy and exports have surged back thanks to its successful, early control of the pandemic. But this early success conceals worrying structural shifts in the global political environment. Anti-China sentiment among China’s largest trading partners is up dramatically. A full 71% of Germans, 73% of Americans and 75% of South Koreans surveyed by Pew Research this summer had a negative impression of China. Foreign direct investment has held up so far—but that could shift once the rest of the world is back on its feet. American firms are sharply less optimistic on China’s five-year outlook since 2018, according to the American Chamber of Commerce in Shanghai.
Oxford Economics calculates that significant economic decoupling with the U.S. alone would entail a roughly 8% smaller Chinese economy by 2040 than otherwise expected. If other advanced economies join the bandwagon, that could mean a 17% smaller economy. There is little sign of such a concerted effort now—but that might change with a more multilaterally-minded White House, or if the bilateral investment treaty long under negotiation between Europe and China falls apart.
Beijing’s heavy-handed tactics on its periphery, especially against the Uighur minority in Xinjiang, could also trip up potential areas of cooperation like climate change. An October report from S&P Global highlighted that about a third of global polysilicon, used to make solar panels, came from Xinjiang last year.
Beijing’s new plan to offset all this, memorialized in its obscure-sounding “dual-circulation” strategy, is twofold. First, it is selectively opening up the economy to entice foreign firms to stay put, most notably in automobiles and finance. New rules doing away with some joint-venture requirements have already elicited investments from firms such as Tesla and JPMorgan Chase .