The Growth Of US-China Trade Under Pressure Of Decoupling – Analysis

By He Jun

The political and diplomatic relations between the United States and China are currently at their lowest point since the establishment of bilateral diplomatic relations between the two countries, and the current period can perhaps be described as a period of “cold winter”. Not only is there a serious lack of strategic mutual trust between the two, but geopolitical differences and antagonisms are still on the rise. To cite a recent example, the incident of China’s “stray balloon” has aroused great repercussions in the U.S., and was considered by it a new “China threat”.

On the other hand, U.S.-China trade seems to be in a completely different season than political relations in this cold winter. According to the U.S. Department of Commerce, total trade in goods between the U.S. and China increased to USD 690.6 billion in 2022, surpassing the 2018 record. Meanwhile, the U.S. merchandise trade deficit with China saw a rise of 8% to USD 382.9 billion, second only to the record high of USD 419.4 billion in 2018.

The huge contrast in the political and economic fields seems to echo the old Chinese saying “cold politics, warm economy” of the two countries. Indeed, public opinion in both the U.S. and China has noticed this difference and offered several explanations.

Bloomberg quoted trade expert William Reinsch as saying, “it shows that consumers have minds of their own”. “At the market level, we’re still doing a lot of business, despite the efforts of both governments. The macro relationship hasn’t changed that much; we’re still trading a lot”, he added. Nick Marro, a lead analyst for global trade at the Economist Intelligence Unit, told CNN that “the U.S. government is working to reduce its supply chain reliance on China, but at the end of the day, most companies care more about getting their products to consumers on time, and in ways that are the most cost effective for their operations”.

In China, some analysts believe that the “cold politics, warm economy” phenomenon of the two powers indicates that consumers and companies think differently from politicians. Some Chinese researchers hold the opinion that it would be difficult to change the complementarity of the U.S.-China trade in the short term, where the degree of interdependence is quite high. In some product lines, China is still irreplaceable, in which the price advantage of Chinese products is prominent. Under the circumstance that American consumers mostly opt for cost-effective products to hedge against high inflation, the U.S. still needs to seek to expand the scale of imports from China.

Regarding the growth of U.S.-China trade data and the widening of the U.S. deficit, researchers at ANBOUND are less optimistic and see that “cold politics, warm economy” is an extremely fragile balance that can only be achieved under special circumstances. More often than not, if the “political coldness” continues, this will inevitably affect economic and trade relations. This is especially that in the current state, the U.S. and its Western allies have launched the most extensive geopolitical united front since the end of the Cold War. Should such a development persists, it will gradually lead to a large-scale “economic coldness”. Tellingly for China, which relies on reform and opening up in its participation in globalization to achieve economic success, “cold politics, warm economy” is the worst situation that it should attempt to avoid falling into.

Some believe that the approximately USD 700 billion trade in goods between the two countries, and China’s surplus of more than USD 380 billion with the U.S. signify a huge commercial presence. This, of course, is a reality, yet it should be realized that the U.S.-China economic and trade relations are not static and it takes time for changes to occur. In addition, under the overall trade scale, there are some subtle changes in the structure and quality of trade.

First of all, sources of American trade are slowly changing. In 2022, U.S. imports from the EU surpassed those of China. In the same year, it imported USD 553 billion of products from the EU (a deficit of USD 203.9 billion with the EU), higher than the USD 537 billion in imports from China. At the same time, U.S. exports to the EU have also increased significantly compared to 2021. After cutting off multiple economic ties with Russia after the war in Ukraine, the EU shifted its purchase of energy products from the U.S. The export of crude oil, fuel oil, and natural gas to Europe is the reason why the total U.S. exports in 2022 grew faster than imports. Notably, the increase in U.S.-EU trade is long-term and structural. In addition, the U.S. has also maintained close trade relations with many countries. If one looks at the U.S.’ trade deficit, in addition to China and the EU, it also includes Mexico (USD 130.6 billion), Vietnam (USD 116.1 billion), Canada (USD 81.6 billion), Germany (USD 73.7 billion), Japan (USD 68 billion), Ireland (USD 66.1 billion), South Korea (USD 43.9 billion), etc. It should also be pointed out that the increase in U.S. imports in 2022 is related to the strong dollar, and the appreciation of the dollar has promoted a large number of imports. In fact, as the issuing country of the dollar, so long the U.S. maintains its position as a global superpower, trade deficits, and external debts will not be much of a concern for it.

While the U.S. maintains trade exchanges with China, it has not stopped suppressing and sanctioning the latter in the field of science and technology. Since the Biden administration took office, the U.S. government has not eased the “decoupling” with China in trade, finance, and technology. Among these fields, technology has become the main focus. In addition to expanding the entity list, promoting the restructuring of key industrial chains, and continuously imposing restrictions on China in the semiconductor industry, sources show that the Biden administration also plans to completely prohibit investment in some Chinese technology companies and strengthen scrutiny of other investments, as part of the plan to crack down on the influx of U.S. companies into sensitive industries of China. The sources also reveal that the forthcoming rules could follow the sweeping restrictions imposed by the U.S. in October 2022 on exports of technology such as American artificial intelligence (AI) chips, chip-making tools, and supercomputers to China. Reportedly, to take into account the commercial interests of American companies, the Biden administration may implement hierarchical restrictions. In addition to prohibiting certain investments, a large number of transactions will be considered “notice and go”, requiring investors to simply inform the government of their plans without risking non-approval.

Researchers at ANBOUND believe that the current geopolitical, economic, and trade relations between the U.S. and China have dual aspects. The first is conventional trade, involving ordinary ongoing commodities and the scale will continue to increase. Another aspect is science and technology, as well as certain important investment fields. Due to the deterioration of geopolitical relations, the U.S.’ restrictions and suppression of China in the field of science and technology have not diminished at all, but instead have been carried out gradually and orderly at that. Such a pattern of dual aspects will be maintained for a relatively long period. China needs the market space of the U.S., especially when the political relationship is tense, it has to maintain warmer economic and trade relations with the U.S. due to the characteristics of its economy, as well as its development stage. On the other hand, the U.S. needs to meet the market needs, and China’s cheap manufacturing capacity is indispensable in providing goods to American consumers. In addition, it also needs to consider the economic profits of American companies in China. Because of these respects, China will not close its doors easily. However, in the field of science and technology, U.S. restrictions will still be carried out. This is related to key industries and technologies, and even more related to the U.S. national strategy of “containing” China.

On the whole, in terms of U.S.-China relations, the U.S. is on the active side, while China is on the passive part. The U.S. has advantages for it to maneuver, while it is less so for China. These advantages are determined by the level of technology, economic dependence, geopolitical structure, and geo-economics influence. Facing the increasingly complex international political and economic situation, what does China need most at present? We believe that, just like in the 1990s, China still needs an environment of peaceful development and globalization in the next two decades. However, the world will no longer treat China like it used to.

Final analysis conclusion:

The U.S.-China trade still maintained growth in 2022, with a large surplus on China’s side. Such an economic pattern will last for a long time. However, this does not change the dual aspects of the political and economic relationship between the two countries. The economic and trade relationship formed in the era of globalization will continue to evolve in the future, with the U.S. on the active party.

He Jun is a researcher at ANBOUND