#6 It's Time for Avalanche Decoupling

How the Trump administration can restore credibility in trade talks

Beijing’s recent expansion of export controls across the entire rare earth supply chain has exposed a fundamental problem in U.S.-China trade negotiations: Washington lacks a credible framework for graduated economic disengagement.

Last week, President Trump threatened 100% additional tariffs if China goes does not withdraw the measures by November 1. But China held firm, markets took fright, and the administration is already backpedaling. It feels like Liberation Day all over again. This emerging pattern of trade scare —> market panic —> hasty truce is shredding U.S. credibility. In a number of essential products, the United States is so dependent on China that decoupling all at once isn’t an option. But what’s the alternative—leaving things as they are?

There’s a solution to this problem. It’s called avalanche decoupling. This week, we explore how it works—and why it’s needed now.

The Strategic Challenge

China announced its new export control regime just weeks before Trump and Xi were set to meet in Korea. Why is Beijing not negotiating in good faith? Because it believes U.S. decoupling threats are hollow. Beijing has long suspected this, but the April “Liberation Day” fiasco was a key data point that confirmed Beijing’s assessment. The Trump administration came out swinging, briefly imposing tariffs of 145%. But then the bond market revolted, and the administration within days found an excuse for a “pause”—which it converted into a sustained truce through hurried bilateral talks.

China drew the obvious conclusion: America has no way to achieve rapid decoupling. The consequences are to politically and economically painful for Americans to bear. Thus, Beijing has all the leverage. It can weaponize its role in essential supply chains with impunity.

U.S. allies are caught in the middle. Many—including the presumptive next prime minister of Japan, Sanae Takaichi, now recognize that China is no longer a reliable supplier for critical goods. Allies are prepared to join the U.S. in partial decoupling. But these countries are vulnerable to retaliation, and they will not pursue their own ambitious decoupling agendas without credible assurances that the American policy direction will be sustained.

The pattern of dramatic announcements followed by quick reversals provides exactly the wrong message to allies. No country will take on the costs and risks of restructuring supply chains if U.S. policies are likely to reverse with the next market downturn or election cycle.

The solution is to reject the binary between abrupt, total decoupling and continued reliance on China for critical goods. Instead, Washington must demonstrate a proof of concept for graduated, managed disengagement in critical sectors where PRC leverage poses unacceptable risks.

This week’s essay is adapted from our essay “On Day One: An Economic Contingency Plan for a Taiwan Crisis.”

The Avalanche Mechanism

The idea of avalanche decoupling originated in our July 2024 report “On Day One,” about contingency planning for a Taiwan crisis. Originally conceived as a crisis tool, it also works in peacetime, because it can be calibrated to work at any speed and scale.

The idea of avalanche decoupling is simple: decouple in a way that creates minimal disruption on Day One but gains unstoppable momentum over time. Rather than repeatedly taking big tariffs on and off, allied nations should start from zero and raise tariffs gradually and automatically by predictable increments (probably 3–8% monthly, depending on the product). Alternatively, they can use quotas that ratchet down at predetermined rates (say, 2–5% monthly). No arbitrary decisions, no negotiations about the schedule itself. Just set the clock and let it crank until decoupling is achieved.

A more predictable schedule for rising tariffs would transform the risk picture and incentives for businesses that buy goods and components from China. When high tariffs are imposed suddenly, firms’ incentives are not necessarily to move their supply chains. In fact, sometimes they’re the opposite: to ring alarm bells and threaten politicians with production shutdowns and soaring prices unless the tariffs are taken off as soon as possible. But if firms start low and rise gradually, there are no shortages or inflation shock on Day One. Firms will know they are less likely to be taken off in the future. The rational response is to get to work pulling supply chains out of China.

Additionally, creating a predictable pathway for tariffs will help mobilize capital markets to support decoupling. If investors think tariffs may not be sustained, they have little incentive to invest in production outside of China that might not be profitable when tariffs go away. But if they gain confidence that allied nations are on track to decouple in a given product—whether it be over two years, or five, or eight— capital markets will start rewarding firms investing in non-China production right away. The shift of production out of China therefore happens gradually, but market forces help it gain momentum over time—like an avalanche.

How fast tariffs move can be calibrated by sector. We might want to set critical mineral tariffs to rise by 5% monthly given urgent security concerns, while medical devices and pharmaceutical inputs might rise at 2–3% to limit price pressure on consumers. The details are negotiable. The key is that the avalanche is triggered once, and then runs by itslef.

The United States can execute avalanche decoupling unilaterally, but coordination with allies multiplies effectiveness while distributing adjustment costs. When multiple markets join the avalanche, they all reduce the pressure on their own consumers while increasing the pressure on Beijing.

Priority Sectors for Implementation

Four sectors demand immediate avalanche treatment based on security risks and availability of alternative suppliers:

• Refined critical mineral products, especially rare earth magnets. China controls over 90% of processing and magnet production—chokepoints for everything from cars to F-35 fighter jets. Allied countries need to stand up an independent supply chain for these essential inputs as fast as possible, reassuring private investors that they won’t be undercut by cheap PRC minerals in the future.

• Robotics—especially drones and their sensors, batteries, and other components. PRC manufacturers dominate commercial drone markets and increasingly industrial robotics. As the war in Ukraine has shown, these are dual-use technologies with obvious military applications. It is completely unacceptable to let China retain its chokepoints over this supply chain—but decoupling all at once is not viable, either.

• Medical devices and active pharmaceutical ingredients. COVID exposed dangerous dependencies for medical kit like masks and ventilators. China also serves as the dominant global supplier for key active pharmaceutical ingredients. The sooner the U.S. and its allies can decouple from China in medical products, the better.

• Legacy semiconductors. While attention focuses on cutting-edge chips, China is is already flooding the global market with older-generation semiconductors essential for automobiles and industrial equipment. This will become a crucial chokepoint unless allies start decoupling now.

Enforcement Against China’s Countermeasures

China will respond to avalanche decoupling by intensifying transshipment through third countries. Countries like Vietnam, Mexico, Malaysia, and others will face pressure to become conduits for disguised China’s exports.

The solution to this challenge is to partner with third countries to investigate transshipment patterns and publicize accurate supply chain data. One way to do this is to set up a new intergovernmental group, which we might call an Economic Security Cooperation Board (ESCB). The ESCB would provide technical assistance to third countries, helping them verify origin documentation and resist becoming unwitting participants in sanctions evasion. Over time, countries like Mexico and Vietnam could become ESCB partners. If they want preferential access to the U.S. and allied markets, to capture investment and jobs as supply chains pull out of China, they will need to honestly report what they’re buying and transshipping from China.

Establishing the ESCB wouldn’t require unanimous allied participation or enormous funding. It also wouldn’t have to come together right away. Even partial coordination—say, the United States, Japan, and Australia moving together to ensure their critical minerals were entirely clean of transshipped supply from China—Iwould demonstrate resolve while creating competitive advantages for participants. It would also show China that if decoupling has to be broadened or accelerated in the future, the allies have a framework for how oversight and enforcement would work.

Implementation Strategy

The administration should publicly threaten unilateral avalanche decoupling immediately. It should not condition avalanche decoupling on concessions from Beijing. Trump should not go to APEC prepared to trade avalanche decoupling away. The strong move isn’t to walk into the meeting with Xi having made threats Xi knows America won’t implement.

Simultaneously, Washington should convene immediate talks with the Anglosphere allies, Japan, and receptive EU members on sectoral coordination. The goal isn’t unanimous agreement but critical mass—enough participation to ensure effectiveness while demonstrating that decoupling isn’t just an American obsession. Again, we are only talking about a few key products that together represent less than 10% of total trade with China. If allies are uncertain, Washington can and should move ahead unilaterally to prove its resolve.

Meanwhile, ideally, Congress can get involved to back up the president’s position. It could write provisions for avalanche decoupling in critical minerals and defense-related components into the annual defense spending bill, the NDAA. The Senate and House have already passed respective versions, but it is not too late to add new amendments while the two versions are being reconciled.

The Window for Action

The time to trigger sectoral avalanche decoupling is now, not when some future crisis comes. There are three reasons why.

First, China’s egregious export controls provide political and diplomatic cover. Beijing cannot claim America is the aggressor while it proposes a new export control regime that would give it sweeping discretionary power to cut off U.S. and allied supplies of essential products.

Second, markets are already pricing in substantial U.S.–China trade friction. Shifting to a more predictable decoupling strategy would reduce market volatility rather than increase it, reassuring markets.

Third, if Trump is going to meet Xi at APEC, he needs to rebuild all the negotiating leverage possible. Right now, Xi thinks he is entering from a position of tremendous strength.

The White House should announce the framework this week, starting with the four priority sectors. Set the schedules, invite allied participation, and let predictability work its magic. The avalanche, once triggered, builds its own momentum. Beijing will protest, markets will adjust, and allies will see that America finally has a sustainable strategy for economic competition. Then—only then—will it be the right time for a summit.