By Yuhan Zhang
Published by The Straits Times on 6 March 2023
Since 2018, the United States has been responding to China’s meteoric economic rise and its own relative decline with a slew of protectionist policies, such as subsidies, at-the-border and behind-the-border trade barriers, and foreign investment restrictions. These policies have naturally elicited retaliations from the Chinese government. As a result, over the past few years, great-power competition between the United States and China has intensified.
However, despite this intensification in competition and increase in trade protectionism, bilateral trade and investment have not diminished. What explains this contradictory phenomenon?
Despite the ongoing US-China trade war, US exports to China in 2021 witnessed a 21.4 per cent increase from the previous year to US$151 billion (S$203 billion). US imports from China also increased by 16.5 per cent to US$506 billion. More notably, US trade with China in 2021 rose above the prior five-year average.
In 2022, bilateral trade continued to grow. China remained the top source of US goods imports, which reached US$537 billion in 2022. In the same year, US goods exports to China exceeded US$153 billion. The top commodity sectors in US-China bilateral trade are machinery and mechanical appliances, chemicals, plastics, rubber, and leather goods.
It is undeniable that both the Trump and Biden administrations have strengthened export controls to China. Still, the US Bureau of Industry and Security approves the majority of Chinese export and re-export licence applications.
Between 2017 and 2021, approved licences for tangible items, software, and technology to China increased impressively from approximately 3,000 to nearly 4,000, although the average processing time doubled over the five years, suggesting that US scrutiny has indeed become stricter.
On the investment front, despite tougher regulations such as the US’ Foreign Investment Risk Review Modernisation Act and China’s Measures on National Security Review of Foreign Investment, foreign direct investment in the US from China increased from US$35.4 billion at the end of 2018 to US$38.5 billion in 2021.
Moreover, Chinese venture capital investments in the US increased to US$3.2 billion in 2020 from US$2.3 billion in 2019. More than half of these investments were in the health, pharmaceuticals, and biotechnology sectors.
In the meantime, US investments in China also have not diminished. US foreign direct investment in China was US$123.9 billion in 2020, a 9.4 per cent increase from 2019. In the artificial intelligence sector alone, from 2015 to 2021, US investors accounted for 17 per cent of global investment transactions into Chinese companies. In addition, 37 per cent (US$40.2 billion) of the total capital raised for Chinese artificial intelligence companies involved US investors.
US multinationals such as McDonald’s, Starbucks and Ralph Lauren are expanding – rather than pulling back – their investments in China.
One explanation for the continuing trade and investment ties between the two countries is that both countries are deeply embedded in the global supply chains, making “decoupling” nearly impossible in the near and medium term.
Another reason for continuous two-way investments is that both the US and Chinese markets are enormous. Profit-driven companies in both countries are incentivised to continue doing business with one another.
The third reason is that there is a bidirectional causal relationship between foreign investment and trade. Finally, multinational firms (including US firms) remain bullish on the long-term growth prospects of China’s huge consumer market – the second largest in the world.
In the future, from a neoliberal economic perspective, and if both countries want to maximise economic gains for themselves, both the US and China need to strengthen trade and investment through bilateral and multilateral channels.
At the bilateral level, not only should high-echelon officials communicate with each other, but – perhaps more importantly – influential multinational corporations also need to engage with local communities.
Wanxiang America is a good example of how a company can maintain responsible stewardship and successfully navigate great-power rivalry. As a subsidiary of China-based company Wanxiang Group, it has invested massively in the US market, including the automobile and clean energy sectors; created numerous American jobs; and donated roof-top solar panels to more than 50 American schools.
With more community-based companies emerging, mutual understanding and economic interconnectedness will be entrenched and reinforce each other, moving both countries towards a cooperative equilibrium.
At the multilateral level, many platforms, such as the World Trade Organisation, Indo-Pacific Economic Framework, and the Regional Comprehensive Economic Partnership, are either ineffective or exclusive.
Yet the World Economic Forum and G-20 Summit can play an important role in establishing a direct line of communication by providing a venue for policymakers to meet, reduce misperceptions, and correct misinterpretations of each other’s strategic intentions and policies.
For instance, Chinese Vice-Premier Liu He recently delivered China’s investment pitch in Davos, Switzerland, making it clear that “foreign investments are welcome and the door to China will only open up further”, which will likely boost investors’ confidence and promote bilateral economic cooperation.
Likewise, when the US-China relationship seemed to be in freefall on the heels of then US Speaker Nancy Pelosi’s visit to Taiwan, the meeting between presidents Xi Jinping and Joe Biden during the G-20 Summit in November 2022 may have helped to get it back on track.
While many are concerned about great-power competition and pessimistic about US-China relations, the silver lining is that two-way trade and investments are continuing.
Now it is high time for both sides to use bilateral and multilateral avenues to further such cooperation, which will benefit not only the great powers themselves but also the international community at large.
Yuhan Zhang is the associate director of Berkeley Apec Study Centre at UC Berkeley. An economist, he is a corporate adviser to US multinational corporations and a researcher at the Carnegie Endowment for International Peace.
This article was first published on the website of the Asian Peace Programme, an initiative to promote peace in Asia housed in the Asia Research Institute, National University of Singapore.