Chen Wenling: Understanding the US-China Economic and Trade Relations

  • Time:2021-03-10
  • source:CCIEE

By Chen Wenling, Chief Economist, China Center for International Economic Exchanges

The US-China economic and trade relations are a major international issue. On February 24, Wang Wentao, Minister of Commerce of China said that China always believes that the essence of US-China economic and trade relations is based on mutual benefit and win-win results. The interests of both parties are deeply integrated, cooperation will benefit both parties and confrontation will hurt both. Thus, cooperation is the only choice.

China and the United States should shift to close cooperation because this will not only help them to fight the current COVID-19 pandemic but also deal with their deep-seated domestic contradictions in the future, as well as jointly coping with global challenges. When discussing the issue of “US-China economic and trade imbalance”, we should take this perspective into account.

The US-China economic and trade imbalance is a false proposition.

If we calculate the US-China economic and trade balance, we should add together the onshore trade, service trade, and offshore trade that the US generates with the Chinese market. In 2019, the US exported 122.7 billion dollars of goods to China, the value of trade in services was 83.8 billion, and the sales of US companies in China were 700 billion. These three items add up to approximately 906.5 billion US dollars.

In the same year, the export volume of Chinese enterprises to the United States was 418.67 billion U.S. dollars, accounting for less than half of the actual US trade with China (906.5 billion). According to the 2017 figures, the total value of US trades with China was 940 billion, which is also more than China’s exports to the US.

Therefore, the so-called “China-US trade imbalance” is a false proposition. Calculated on the basis of onshore and offshore trade, the volume of US trade with the Chinese market greatly exceeds Chinese companies’ exports to the US. The gap will be even greater if the exports of the US-funded companies in China are also included.

Why is it so difficult to eliminate the trade imbalance?

In accordance with the established concept agreed by both China and the US, the so-called “US trade deficit with China” can be completely eliminated. The trade deficit cannot be eliminated because of the following three problems.

First of all, the US export control of high-tech products to China has led to a huge trade deficit. If the US export control towards China is lifted, the US exports to China will increase substantially. The export control covers 3,100 categories. China’s import of export-controlled products from the US accounted for 17% of all its imports from the US in 2001, and this figure dropped to 8% in 2018, and below 6% in 2019 and 2020. It can be seen that the US export control of high-tech products has affected its export to China seriously. For example, China’s annual import of chips amounts to more than US$300 billion, of which imports from the United States account for only about 1/3.

Secondly, the US government’s tightening of investment made by Chinese companies affects the offshore trade of Chinese companies in the US. Chinese corporate investment in the US was 45.6 billion US dollars in 2017, dropped to 28 billion in 2018 and 4.8 billion in 2019. When the COVID-19 pandemic broke out in 2020, the investment almost stopped completely. Chinese companies are investing less and less in the United States and the potential trade which might be generated by such kind of investment is difficult to estimate. This problem is obviously caused by the restrictions imposed by the US government.

Thirdly, the high tariffs imposed by the US government on Chinese exports have also led to a decline in China’s imports from the US. The decision of the Trump administration to impose additional tariffs on 550 billion worth of Chinese exports to the United States has also affected China’s imports from the United States.

If the United States can make improvement in these three areas, the trade deficit with China will drop significantly and there may even be a trade surplus.

The US-China trade imbalance is a global problem.

The US-China trade imbalance is not a problem between China and the United States, but a global problem.

Firstly, the United States now imports goods from 102 countries and has a trade deficit with all of them. The largest trade deficit is with China, accounting for 45% to 48% of the total deficit, and this is related to the US industrial structure. At the end of World War II, the US manufacturing industry accounted for more than 70% of its gross domestic product (GDP) but now it has dropped to about 11%. The products produced by the US manufacturing industry are far from satisfying the domestic market demand and thus, more than 60% of the goods need to be imported.

Secondly, from the perspective of US goods trade + service trade + offshore trade, the US is still the world’s largest trading country and needs to allocate resources globally, otherwise the United States will find it difficult to feed itself. It is very difficult for the US to promote the prosperity of the domestic market and meet the basic needs of the people without imports from other countries.

Thirdly, importing goods from other countries will make the US a winner, not a loser. The foreign exchange reserves of central banks around the world total more than 12 trillion US dollars and China has more than 3 trillion US dollars. Such huge foreign exchange reserves are actually payment deposits for US trade.

The United States needs to move on the right path.

Some time ago, the US Secretary of State Blinken said in a speech that it is very important for China and the United States to take a step back, and think about it before moving forward. This is very important. However, the US must take the right step forward. It must realize that all the countries are connected and no one can be excluded. The US and China must work together and contain China’s development is completely wrong.

After decades of development, the US-China economic and trade relations have become more interdependent than ever. We must face up to reality and take a step back. This retreat is for better progress and cooperation. No one should contain the other party ruthlessly. If the US still chooses to contain China, it will suffer in many areas, such as economic development and trade.

There are many areas where China and the United States can cooperate, especially infrastructure. In 2011, the China Center for International Economic Exchanges and the Peterson Institute for International Studies conducted a study on the two-way investment in infrastructure between China and the US and the result is that the US infrastructure has an investment gap of approximately US$3.6 trillion.

On the 11th “US-China CEO and Former Senior Officials’ Dialogue” held in Washington in 2011, Chinese entrepreneur Nan Cunhui said that his company is preparing to invest in smart grids in the United States. After he has gone through three years of formalities in the United States and 125 seals, the investment approval process has not been completed yet. Recently, there were large-scale power outages in Houston, which is unbelievable. The smart grids of Chinese companies function very well and can be restored within minutes or even seconds after a power outage. If the United States had liberalized smart grid investment for Chinese companies earlier, perhaps such kind of serious power shortage would not have occurred.

The same is true for high-speed rail. Some experts in the United States once said that high-speed rail was obsolete as early as the 1950s, and the speed of Boeing aircraft was several times that of high-speed rail. Is it true? I do not think so. High-speed rail has become one of the most advanced, convenient and safest means of transportation. In 2018, the United States imported 400 urban railroad locomotives from Australia, but the parts and tracks are defective. Even so, the US would not import from China or cooperate with China. Why is this?

In summary, the United States needs to change its thinking. Its largest partner should be China and thus, the US should not see China as its largest strategic competitor and contain China.

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