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The Lose-Lose Consequence: Assessing US-China Trade Decoupling through the Lens of Global Value Chains

Since the inauguration of President Donald J. Trump, the rise of protectionism and economic nationalism has caused tremendous changes in US-China relations. One of the most significant events is the outbreak of the US-China trade war and the associated technology war (Dupont, 2020; Williamson, 2021). The outbreak of COVID-19 has further intensified de-globalization and decoupling trends (Schell, 2020; Williamson, 2021; Witt, 2019; Witt, Li, Välikangas, & Lewin, 2021), weakening the bilateral interdependence between the world’s two largest economies (Li, 2019). As economic decoupling may become the new normal and reshape the global economic landscape, it is instructive to draw a clear picture of the potential scale and economic damage associated with US-China trade decoupling, and thus in turn trigger policy and practical responses for reducing losses at the firm, national, and global levels. This research note focuses on potential trade decoupling and develops a novel exposure index to quantify the shares of GDP (in China, the US, and other economies) that are exposed to the decoupling. We develop the measure from the global value chain perspective (Gereffi, Humphrey, & Sturgeon, 2005; Kano, 2018). The exposure index reflects the extent to which an economy’s value added is at risk if the US-China trade linkage would be cut off. The exposure level of an economy depends on its direct and indirect trade linkages with the US and China. Our exposure index also measures the economic risks of both domestic-owned and foreign-owned enterprises (often multinational enterprises, MNEs) in different economies when faced with decoupling. We construct an exposure index based on a flourishing strand of literature using inter-country input-output (ICIO) tables (see e.g., Koopman, Wang, & Wei, 2014;