OBSERVATION: The Black Swan Effect of U.S.-China Decoupling

An introduction to the new CW column, written by Xu Wu, an associate professor at the Walter Cronkite School of Journalism and Mass Communication in Arizona State University. A seasoned journalist in China and the United States, Wu will share his observations on foreign relations, domestic politics, public opinion and geopolitics.

Author: Xu Wu   

What makes professor Nassim Taleb's black swan theory so popular and so powerful is that the theory itself is almost like a black swan: rare, impactful and unexpected. Highly debatable within the economics community notwithstanding, the concept of "black swan" enters mainstream media, as well as daily conversations, with a big bang. With three defining characteristics, this type of earthshaking events (or, as Taleb called it, "the highly improbable consequential events") not only bury the conventional wisdom that people are so used to and so confident about, but also debunk the logic behind it.

In short, you wouldn't expect to see one of these dark birds in "normal" times, or under "normal" conditions. They only appear when all the factors validating the old system suddenly, totally and unexpectedly, collapse. Want a good example? Well, look no further than the ongoing decoupling of U.S.-China relations.

When China's "old friend," the former U.S. Secretary of State Henry Kissinger, paid a private visit to Beijing in November 2018, he sounded the alarm bell to his hosts. 

"China-U.S. relations will never return to what they were. (Things) must be reoriented," he said.

Although this diagnosis seems more like an afterthought than a forward warning, given what has transpired over the past two years, the decision-makers in China, from both the political arena and the business circle, still couldn't fully understand or appreciate the seriousness of his observations. Granted, most Chinese people have never lived in a world where China has a bull's-eye on its back, posted by the "Beautiful Country" (mei guo) across the Pacific. Before 1979, China was too weak to be taken seriously; after 1979, China has been too great a money-making partner to be viewed as an enemy. 

Even after ZTE and Huawei's near-death sanctions last year, most business executives in China still can't, or won't, awaken to the new reality that the "40-year marriage" (1979-2019) between the two political rivals, cultural counterparts and business partners may come to a sudden end. In fact, the lack of awareness or the inertial way of thinking is the necessary condition for the black swan to get hatched. There is a famous Confucius saying that once people turn 40, they should have no confusion (四十而不惑). Sadly, the relationship between China and the United States came to a vital crossroads at the age of 40, and it now seems that most Chinese and Americans are totally confused.

Lately, these dark birds frequently fly out of the U.S. Commerce Department's entity list, the Department of Homeland Security's intelligence briefings, the SEC's non-compliance warnings, the Treasury Department's currency manipulation monitors and, most often, out of U.S. President Trump's early morning tweets. Although it is a bit superficial to compare the current U.S.-China decoupling to a messy divorce, the ongoing process does bear some shocking resemblances: the escalation of hostilities from the periphery issues to the core values, the inevitable separation and division of shared assets, duties and even children, and if the disputes cannot be solved peacefully, a fight breaks out in front of the whole world.  

Moreover, both parties have huge historic baggage to carry, and many of them haplessly overlap. Any of the following hot button issues may spill over quickly into the business sector: Iran, North Korea, South China Sea, Hong Kong, Taiwan, Xinjiang, Tibet, etc. and this list can go on and on. 

No Business to Be Spared in Crossfire

The Washington Post reported on July 22 that "leaked documents reveal Huawei's secret operations to build North Korea's wireless network," an accusation so serious that it immediately caught the White House's and State Department's attention. Two months ago, a letter to President Trump's top advisers, signed by more than 40 U.S. lawmakers, called for strict sanctions on several Chinese high-tech companies specialized in facial recognition and surveillance equipment. Among them was Hikvision, with a market value of more than $37 billion, is the world's largest video surveillance gear maker; another one, Chinese drone manufacturer Dajiang Technology Co. Ltd. (often known as DJI), provides approximately 80 percent of drones used in the United States. 

On the flip side of the coin, things can get ugly too. A week ago, China's Xinhua News Agency reported that FedEx (NYSE: FDX), the U.S. courier delivery services company, held up more than 100 Huawei packages entering China. This investigation was launched last month in China after Huawei complained that FedEx diverted a large number of parcels addressed to the tech giant. 

Suffice it to say, if this tit-for-tat tactic becomes a normal exchange of frustration and hostility, no company or business will be spared in the crossfire. For those who anxiously wait for the closure of this prolonged trade war, what has happened may very well be the prelude to a bigger showdown. The real outcome of the trade war is not only a lose-lose situation for both parties but is also a hostile social and political environment that will make the unimaginable possible. 

To conclude, people need to constantly look out for the black swans flying out from all directions. The purpose of this column (Black Swan Observer) is like a guard on a watchtower, trying to detect dark signs from all corners early, especially in non-financial or business-related perspectives, such as foreign relations, domestic politics, public opinions and geopolitical situations. All these factors may very well present themselves as an existential threat to those Chinese big-name corporations. 

Of course, some of these observations may turn out to be false alarms or unrelated occurrences; however, I will apply the butterfly effect as my guiding principle, or a convenient excuse: a butterfly flapping its wings in the Amazon forest millions of years ago may cause a devastating tornado in Louisiana after a series of non-linear cascading events. You never know what factor really triggers the domino effect, but you should always have an open, vigilant and sometimes, contrarian, mind. For a shrewd investor, it is better to have a pessimistic leaning and proven wrong than otherwise. 

Back to the Sino-U.S. relations, everybody knows that it is in a turbulent, unstable stage. In an abnormal time, we need an abnormal way of observing and thinking. What has worked in the past, may not work in the future. The conventional wisdom, largely based on inductive reasoning, is "the mother of all problems in life," according to professor Taleb, because "mistaking a naïve observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand the Black Swan." With this in mind, this column will try to watch out those black swan events for you. 

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