Over the last decade the economic relationship between China and the U.S. has grown more adversarial. For instance, last year the Biden Administration took steps to deny China’s ability to import computer chips used in AI applications, and earlier this year it moved to limit the imports of Chinese EVs into the country. Also, both Presidents Biden and Trump frequently used Section 301 authority to impose tariffs on hundreds of billions of dollars of imports.
These actions, along with a variety of others, have collectively served to reduce trade between the two countries. China’s exports to the U.S. fell over ten percent in 2023, and appear to be on pace to decline again in 2024. With Donald Trump having indicated he would increase tariffs if he is re-elected, the diminution of trade between the two countries seems destined to continue.
Given the precipitous decline in trade between the two countries, some have suggested that we are heading towards a complete economic decoupling between the two economies in the near future. However, the notion is unrealistic: It is hard to conceive of such an outcome absent some sort of armed conflict. The two countries’ economies are inextricably linked and curtailing this relationship without a verified national security risk would be misguided and impose an enormously costly burden on the citizens of both countries.
Although trade between the two countries has diminished in the last few years, the bilateral trade relationship between the U.S. and China remains the greatest in the world. The total trade between the two countries totaled nearly $2 trillion last year, most of which was in strategically unimportant goods such as televisions, textiles, and furniture. U.S. consumers benefit greatly from the import of these goods, and the increase in trade with China is a major reason that until the post-Covid boom, inflation had been largely quiescent in the U.S. for the previous two decades.
These trade flows also served to change the U.S. economy in largely beneficial ways, as it has evolved to provide more services and higher-value-added products. Undoing this evolution is not only virtually impossible but also undesirable: Ending trade with China will not cause U.S. manufacturers to pick up and make low-value-added goods here instead, and doing so would not necessarily be a welcome thing. Such industries would create relatively few jobs--the only way for these products to be made in anything remotely resembling a cost-effective way in the U.S. would be for the process to be largely automated, and those jobs that would be created would pay relatively little. In an economy with an unemployment rate below four percent, they would add little to the country’s wage bill.
Political tensions between the two countries have nudged U.S. wholesalers to look for new trading partners or subcontractors in other countries. However, either step would take years to accomplish, as the size of this trade is simply too vast to accomplish such a thing in a short period of time.
For instance, Apple’s main contractor for iPhones, Foxconn, has over one million employees in China, the majority of whom work to produce Apple products. While the company has recently opened production facilities in India and Vietnam, it cannot easily or quickly transition more output to either country.
China’s export-driven, government-managed economic paradigm is constraining its economic growth, and its impending demographic problems (its labor market has begun to shrink) threaten to derail its efforts to achieve an economy that rivals that of the US.
While China certainly remains a geopolitical rival to the U.S., as long as its neighbors feel threatened by its actions, reduced growth in the country is not necessarily a benefit to us. Its decades of near double-digit economic growth helped to lift a billion of its citizens out of poverty, which is unabashedly a good thing for both China and the rest of the world.
Our trade strategy should be focused not on attempting to impoverish its citizenry or to cut trade links between the two countries: It should solely focus on denying the Chinese government access to things that would benefit its military or strengthen the government’s surveillance state.
Trading commoditized products like electronics or agricultural goods, televisions, or even simple DRAM chips does not materially benefit the Chinese military, and there is no reason why such trade should not continue. Likewise, current efforts to block Chinese-owned genomics companies from operating in the U.S. would only further diminish America's competitive advantage in the innovation economy while further supporting the harmful practice of data localization, which has hindered a wide variety of cross-border data research.
If the Chinese government were to instigate a war with Taiwan, of course, all bets would be off, and the country’s trading relationship and our standard of living would be made subservient to military exigencies. That this appears to be a real possibility is one reason so many firms are seeking to extricate their supply chains from the country.
But continued economic engagement with China is good for both our consumers and their citizens, which is no small thing. And while Russia’s invasion of Ukraine shows that economic engagement is no guarantee of peace, having China’s economy dependent in a very real way on the U.S. doubtless serves as a deterrent for the Chinese to challenge America to a military duel.
It’s clear that at least for the time being, both the U.S. and China see a benefit to easing economic tensions, which is one reason why Chinese Prime Minister Xi Jinping recently met with several U.S. CEOs and scholars.
The U.S. should continue to support and enable trade between our nations while also constraining China’s ability to obtain advanced technology with legitimate military applications. However, it is essential to our security and economy that we understand where the real threats loom before restricting trade based on flawed information.
