WASHINGTON — The United States and China stand as two major economic powerhouses. Together, they account for over 40% of the world’s production of goods and services.Thank you for reading this post, don't forget to subscribe!
When Washington and Beijing engage in an economic conflict, as they have for the past five years, the rest of the world also faces the impact. A rare high-level summit, such as the upcoming meeting between President Joe Biden and Xi Jinping, could have global implications.
Improved US-China relations could bring positive effects to the world economy, which has been confronted with various crises since 2020, including the COVID-19 pandemic, surging inflation, escalating interest rates, as well as turbulent conflicts in Ukraine and Gaza. The International Monetary Fund forecasts a slower global economic growth of 3% this year and 2.9% in 2024.
Ishwar Prasad, a senior trade policy professor at Cornell University, expressed, “The clash between the world’s two largest economies during such a challenging time exacerbates the negative impact of various geopolitical upheavals on the global economy.”
Expectations have risen for the possibility of Washington and Beijing mitigating some of their economic tensions at the Asia-Pacific Economic Cooperation summit commencing on Sunday in San Francisco. The gathering will bring together 21 Pacific Rim countries, collectively representing 40% of the world’s population and almost half of global trade.
The Biden-Xi meeting on Wednesday is anticipated as the most significant event on the sidelines of the summit, marking the first time the two leaders will engage in talks in a year, during which the divide between the two countries has deepened. The White House has managed expectations, advising against anticipating immediate success.
Prasad also suggested that the benchmark for deeming the talks a success is relatively low. “Preventing a further deterioration in bilateral economic relations would already be beneficial for both sides,” he remarked.
US-China economic relations had been deteriorating for years before the full-fledged trade war erupted in 2018 at the behest of President Donald Trump. The Trump administration accused China of breaching commitments made upon its accession to the World Trade Organization in 2001 to open its extensive market to US and other foreign enterprises seeking to offer their goods and services there.
In 2018, the Trump administration commenced imposing tariffs on Chinese imports to retaliate against Beijing’s actions to challenge American technological supremacy. Many experts concurred with the administration’s assessment that Beijing had indulged in cyber espionage and unjustly demanded trade secrets from foreign companies as a condition for entering the Chinese market. China countered Trump’s sanctions with its own retaliatory tariffs, making American products costlier for Chinese buyers.
Upon assuming office in 2021, Biden upheld Trump’s confrontational trade policies, including the tariffs on China. Presently, the US tariff rate on Chinese imports exceeds 19%, up from 3% in early 2018, before Trump’s tariffs were imposed. Likewise, according to calculations by Chad Bown of the Peterson Institute for International Economics, the Chinese import tariff on US goods has risen to 21%, up from 8% prior to the commencement of the trade war.
One of the planks of Biden’s economic strategy is to lessen America’s reliance on Chinese factories, which came under strain when the global supply chains were disrupted by COVID-19, and to bolster alliances with other Asian nations . As part of this strategy, the Biden administration established the Indo-Pacific Economic Framework for Prosperity last year with 14 countries.
In some respects, under Biden, the US-China trade tensions are even more intense than under Trump. Beijing is aggrieved by the Biden administration’s decision to impose and expand export controls, aimed at preventing China from acquiring advanced computer chips and the equipment required to manufacture them. In August, Beijing responded with its own trade restrictions: Chinese exporters of gallium and germanium, metals utilized in computer chips and solar cells, were mandated to obtain government licenses for shipments of these metals abroad.
Beijing has also taken assertive measures against foreign firms in China. In a move to counter espionage, Chinese authorities this year conducted raids on the Chinese offices of the US consulting firms CapVision and Mintz Group, interrogated Shanghai employees of the Bain & Company consultancy, and announced a security review of the chip maker Micron.
Some analysts speak of the “decoupling” of the world’s two largest economies after decades of deep interdependence for trade. Indeed, US imports of Chinese goods plunged by 24% through September compared to the same period in 2022.
The schism between Beijing and Washington has placed numerous other countries in a delicate quandary: having to choose sides when they seek to engage in trade with both nations.
The IMF argues that this form of economic “fragmentation” is detrimental to the world. The lending agency comprising 190 nations estimates that heightened trade barriers will trim $7.4 trillion from the global economic output after the world adjusts to the increased trade barriers.
And these barriers are expanding: The IMF reported that last year, nations imposed nearly 3,000 new trade restrictions, up from less than 1,000 in 2019. The agency predicts that international trade will grow by a mere 0.9% this year and by 3.5% in 2024, a significant decline from the annual average of 4.9% during 2000–2019.
The Biden administration emphasizes that it does not seek to undermine China’s economy. Treasury Secretary Janet Yellen met with her Chinese counterpart, Vice Premier He Lifeng, in San Francisco last Friday and aimed to set the stage for a Biden-Xi summit.
Yellen remarked, “Both China and the United States share the mutual objective of creating a level playing field and establishing an ongoing, meaningful, and mutually beneficial economic relationship.”
Xi also has motivations to endeavor to restore economic collaboration with the United States. China’s economy is under significant pressure. Its real estate market has collapsed, there is widespread youth unemployment, and consumer confidence is low. The crackdown on foreign businesses has unsettled international companies and investors.
“With severe headwinds facing the Chinese economy and many American companies withdrawing from China, Xi needs to persuade investors that China is still an attractive place for trade,” commented Wendy Cutler, vice president of the Asia Society Institute, and a former US trade negotiator. “It’s not going to be an easy task.”
Complicating the situation is that tensions between Washington and Beijing extend far beyond economic matters. Under Xi’s leadership, the Chinese Communist Party has cracked down on dissent in Hong Kong and the autonomous Muslim region of Xinjiang. The Chinese government has advanced territorial claims in Asia, engaged in deadly border disputes with India, and issued threats to the Philippines and other neighboring countries regarding parts of the South China Sea it asserts. It has repeatedly warned Taiwan, which it views as a rebellious Chinese province.
US-China tensions could escalate next year due to the presidential elections in Taiwan and the United States, where criticism of Beijing is one of the only points that unites Democrats and Republicans.
It appears that Xi’s policies are costing China favor in the battle for global public opinion. In a recent survey across 24 countries, the Pew Research Center reported that the United States was viewed more favorably than China in all but two (Kenya and Nigeria).
Can China alter its stance?
At the Center for Strategic and International Studies think tank in Washington, Representative Raja Krishnamurthy, an Illinois Democrat serving on the House committee overseeing China, expressed optimism that Xi has reversed course before – last year, China abruptly announced the end of stringent measures within its Exclusive Zero-Covid policies, which had debilitated its economy.
“We need to afford that possibility consideration while safeguarding our interests,” Krishnamurthy stated optimistically. “That’s what I hope we can achieve from this meeting as well.”