The U.S. Can Still Benefit From Economic Ties With China
A common understanding of why U.S.-China relations have cratered since the 2016 election of former President Donald Trump is that the world’s two largest economies had gone from being complementary to being increasingly competitive and zero-sum, such that any achievement by China was seen as a loss for the United States. Nearly a decade later, with another Trump presidency a possibility, the two countries now seem locked in an antagonistic relationship across all dimensions and increasingly at odds in two of the most consequential conflicts since the end of the Cold War: Russia’s invasion of Ukraine and the expanding war in the Middle East.
With regard to the economic relationship, however, there are ways to find common ground, which is especially important not only for U.S. companies that are deeply invested in China, but also for the United States’ reputation among the Chinese private sector and the Chinese people. These two constituencies should always matter, no matter who is in power in Beijing. Cooperation on economic issues would directly address their concerns and problems.
For the greater part of China’s reform era, which began in 1978, U.S. businesses were the key ballast that kept the relationship on an even keel, even when the countries’ governments were at odds over Beijing’s suppression of pro-democracy students in 1989, its behavior in the South China Sea and tensions over the status and treatment of Taiwan. U.S. investment in China opened up new markets for companies like General Motors and Starbucks. It also provided a new destination for manufacturing, which was critically important to Apple’s and, more recently, Tesla’s global success. U.S. consumers benefited from lower prices and more options. Hundreds of thousands of Chinese students invested in the U.S. by pursuing their education there, recognizing that the U.S. system of higher education offered a superior alternative to the closed political atmosphere at home.
China’s success during the same time period was due to a combination of tireless hard work by its people, loads of foreign investment into manufacturing and smart government policies that strategically managed the introduction of foreign capital into key industries. In the auto sector, for example, China welcomed the world’s top brands, but only through joint ventures with struggling state-owned firms. Trading market access for manufacturing know-how and technology, China’s car industry is now globally competitive and even on the cutting edge in electric vehicles, or EVs.
Of course, even during this honeymoon period, the U.S.-China economic relationship was far from perfect. Beijing’s entry to the World Trade Organization in 2001 drove more manufacturing to China, leaving U.S. workers in some regions to suffer long-term impacts on their employment prospects. The “China Shock” is at least partly blamed for rising nativist and populist strains in both major U.S. political parties. In China, rapid economic growth and industrialization resulted in environmental catastrophes, from air pollution to water and soil degradation that severely affected Chinese people’s health outcomes. Rampant inequality and land appropriations by local governments in search of new revenue fueled social unrest that by 2010 resulted in more than 300 mass incidents per day. Imbalances in U.S.-China relations fueled speculative booms in both countries that culminated in the 2008 global financial crisis. For China, its post-2008 reliance on property market and infrastructure investment to fuel growth is now coming home to roost, with local governments’ debt levels at unprecedented levels.
The U.S. and China’s economic needs can still be complementary if domestic political considerations on both sides can allow for the other to play a role in achieving them.
Many of the tensions between the U.S. and China are due to geopolitical competition that emerged as a result of Beijing’s growing ambition and capacity to extend its power, influence and reach globally—and Washington’s negative reaction to this challenge. It would be pollyannaish to expect that future relations will be smooth, and certainly no one should expect a return to the previous era. However, both countries’ economic needs can still be complementary if domestic political considerations on both sides can allow for the other to play a role in achieving them.
In the U.S., the administration of President Joe Biden has passed historic legislation to rebuild U.S. infrastructure and reinvest in manufacturing, especially for the transition to greater reliance on green energy. In China, there is broad consensus among economists and even some policymakers that structural reform is needed to boost household consumption and provide a more equitable and resilient social safety net, especially as China ages rapidly.
No matter who wins the 2024 presidential election in the U.S., it is unlikely that the tariffs Trump imposed in 2018 will be removed. To the contrary, they may even be raised in areas where the U.S. needs to catch up to China, such as in production of EVs and their components. As U.S. Treasury Secretary Janet Yellen remarked on her trip to China this month, the U.S. will not accept another China Shock that decimates U.S. jobs and industry in the technologies needed for the green transition.
However, the U.S. could do more to welcome private Chinese investment in this sector, where the U.S. needs innovation and competition, just not at the expense of domestic jobs and supply chain resiliency. Allowing private Chinese companies, such as BYD and CATL—the global leaders in EVs and EV batteries—to invest in the U.S. would demonstrate good will and openness, as well as confidence in the U.S. economy’s attractiveness. At a time when optimism among Chinese business owners is at record lows, the U.S. offers an alternative to the ideologically rigid policies of Chinese President Xi Jinping.
The U.S. could also play a role in China’s need for structural reform, by rejecting Xi’s desire to export his way out of slow growth—but not only because it risks job displacement and further deindustrialization in the United States. Washington can make the case more strongly and persistently that export-led growth risks further regional inequality in China and continued financial repression of Chinese households. Through high-level diplomacy and Track 2 discussions on the economic relationship, U.S. policymakers and thought leaders can try to convince their Chinese counterparts that structural reforms in the Chinese economy will do more for sustainable growth there while reducing inequality in both countries. The U.S. should make its case not only based on its own self-interest, but also because such structural reforms prioritize the needs of the Chinese people over the interests of Communist Party insiders.
This kind of cooperation recognizes that there is a need for limited decoupling and a significant amount of restraint to allow each country to deal with problems at home that are in large part a result of the earlier all-out embrace of globalization. Even if Xi rejects these attempts as U.S. interference in China’s internal affairs, the Biden administration should make its case directly to the Chinese people, to the extent that’s possible. As Yellen’s visit demonstrated, the Chinese public is intensely interested in what U.S. policymakers have to say. The Biden administration’s desire for a foreign policy that benefits the middle class doesn’t need to be only a domestic message.
At a time when anti-China sentiment seems like the only bipartisan consensus in Washington, this sort of thinking is often dismissed as naïve and unrealistic. But the reality is that the two countries’ economies still offer each other many benefits, some of which are crucial to the challenges they both face. Foregoing those benefits is not realism. It is irresponsible.
Mary E. Gallagher is the Amy and Alan Lowenstein Professor of Democracy, Democratization, and Human Rights Professor at the University of Michigan, where she is also the director of the International Institute. She was the director of the Kenneth G. Lieberthal and Richard H. Rogel Center for Chinese Studies from 2008-2020. Her WPR column appears every other Tuesday.