Economic decoupling? 3 experts caution what that means for the global economy

As the world grapples with parallel shocks or 'polycrises', there has been a growing sense of geopolitical fragmentation as economies navigate shifting economic headwinds by reducing exposure to vulnerabilities.

The situation, intensified by an increasingly competitive geopolitical and geoeconomic environment, has fuelled various trends related to countries untangling and isolating their economies. But when the G7 met earlier this year, the term 'decoupling' was said to have evolved to 'de-risking', after European Commission President Ursula von der Leyen called for a more nuanced approach to economic integration.

It's a thorny issue that's been around for some time and was also much discussed after the financial crisis of 2008.

Economists say the phenomenon could have significant consequences on economic growth. The International Monetary Fund, for instance, found that the long-term cost of economic fragmentation could be up to 7% of global GDP.

Mirek Dušek, Managing Director of the World Economic Forum, suggests, "The global geopolitical environment is experiencing strong headwinds and demonstrating a tendency towards increased fragmentation and polarization. Ultimately, though, the world needs productive and effective cooperation to allow for the trade, investment and exchange of ideas needed to achieve and sustain growth."

But nervousness around economic interdependence holds fast.

As the World Economic Forum convenes the 14th Annual Meeting of the New Champions in Tianjin, China, three experts from the Forum’s Network of Global Future Councils caution against economic decoupling — especially between China and Western countries.

Here’s what they had to say.

Kellee S. Tsai, Dean and Chair Professor, School of Humanities and Social Science, Hong Kong University of Science & Technology

"Western efforts at localizing production through 'onshoring' or 'friend shoring' are being pursued as risk management strategies to reduce dependence on Chinese inputs. On the face of it, countries such as Mexico, Brazil, India, Malaysia, Thailand and Vietnam may benefit from gaining production capacity previously based in China. Yet those same countries continue to import needed components from China, and much of the Global South prefers a politically neutral approach towards trade and foreign direct investment.

"As such, while pressures for decoupling may be shifting certain parts of the supply chain towards Western allies and geopolitically non-aligned economies, China remains an integral part of global value chains and growth.

"Aside from semi-conductors, where export controls are limiting China’s access to high-end chips, the demise of globalization and decoupling from China has been overstated. Full decoupling from OECD countries is impractical and difficult to implement given China’s deep integration with the global economy. If pursued more intensively, both producers and consumers in the West may be expected to bear a disproportionate share of increased costs, while compromising shared green transition objectives."

Dr. Ning Wang, Digital Society Initiative, University of Zurich

"At a critical moment of heightened global instability, constructive engagement of key players and strategic alignment of collective values become ever more crucial to the prosperity of humanity.

"On the one hand, constructive, effective and substantive engagement of global players contributes to the achievement of public goods on an international level. This highlights the importance of diplomacy, dialogue and cooperation in all spheres, ranging from governance to business and to science. On the other hand, strategic, pragmatic and realistic alignment of shared values of global players contributes to the clarity of a sharpened agenda toward a sustainable and resilient future. This stipulates the need for transparent articulations and mutual understandings of principles, priorities, capacities and resources, including those important ones relevant to both the physical and the digital spaces.

"While separation, alienation and confrontation create fragmentation and distrust, connection, integration and cooperation lead to shared vision and transcendence. The so-called 'wisdom gap' between the increasingly interconnected complexity of global problems and our futile inability to make sense of them can only be bridged when we strive to look out in the same direction – even if we may not see the same scenery."

Jay Lee, Clark Distinguished Professor, University of Maryland

"Trade: decoupling could have significant ramifications. It will reduce trade volumes between China and Western countries. In addition, tariffs and restrictions on investment would further be increased to make it more challenging for businesses to access foreign markets and benefit from international cooperation. The supply chains will be seriously impacted to make affordable products. It will also impact global business and create market crisis.

"Technology: decoupling will further raise technology competition between China and Western countries, and will disrupt the technological ecosystems, limiting research collaboration and knowledge exchange.

"Talents: decoupling will drastically impact the Chinese student enrollment in US institutions and impede the development of innovation for US industry."