The U.S.-China Relationship amid China’s Economic Woes
Earlier this month, Commerce Secretary Gina Raimondo visited China with the goal of both promoting commercial ties between the United States and China while remaining firm on U.S. restrictions on the Chinese economy. This dichotomy—increasing economic ties while simultaneously increasing economic restrictions—reflects the complex nature of the U.S.-China relationship today.
Secretary Raimondo’s visit comes on the heels of several moves by the United States targeting the Chinese economy. President Biden has not only maintained the Trump-era tariffs on Chinese imports but has bolstered some restrictions. On August 9th, the Biden administration released an executive order that halts new investments into China’s semiconductor, quantum computing, and artificial intelligence industries. This executive order complements earlier economic policies issued by the Biden administration on national security grounds, including the export control rules on advanced semiconductors released in October 2022 and the CFIUS executive order in September 2022.
At the same time, the Chinese and U.S. economies are highly integrated. China is the United States’ third largest trading partner after neighbors Mexico and Canada, and the United States’ primary supplier of imports. From China’s perspective, the United States is China’s largest trading partner and largest purchaser of Chinese exports. And the relationship is growing—the total value of U.S.-China trade reached an all-time high in 2022.
Further complicating the matter, reports emerging this summer appeared to show signs of trouble in the Chinese economy. China’s real estate sector, long an engine of growth, may be in the midst of a collapse as overleveraged firms struggle to meet debt repayments. Municipal governments are reported to face trillions of dollars of debt, greatly contributing to China’s record 280 percent debt-to-GDP ratio. Consumer confidence in China is also reportedly grim, and actions from the authorities are doing little to bolster confidence. When China’s urban youth unemployment rate hit a record 21.3 percent in June, authorities simply stopped releasing youth unemployment data altogether.
Given the United States and China’s already complex relationship, a weakening Chinese economy raises two key questions from the U.S. perspective. First, to what extent are China’s current economic issues a result of U.S. economic restrictions, and second, how will China’s current economic issues impact the U.S.-China relationship going forward?
Impact of U.S. Restrictions
The answer to the first question is obvious: U.S. restrictions alone are not causing the ongoing economic issues in China. The Chinese economy is both massive and complex, and the country’s current economic woes stem from multiple issues.
At the same time, U.S. restrictions are having some adverse effects on the Chinese economy. While value chains connecting the two nations remain highly intertwined, the tariffs imposed by the Trump administration have had a noticeable negative impact on U.S.-China trade. Between 2017 and 2022, while China’s total exports to the U.S. increased, the share of U.S. imports from China fell from 22 percent to 16 percent. Crucially, compared to other countries, China’s export growth was significantly lower in products subject to U.S. tariffs. The Biden administration’s export controls, while imposed relatively recently, have also had direct consequences. SMIC, China’s largest semiconductor manufacturer, saw revenues fall as much as 18 percent following the October 2022 export controls.
Further, U.S. restrictions may be contributing to a broader “chilling” effect on the Chinese economy. Global businesses understand that investing in China and entering partnerships with Chinese suppliers presents some risk as future U.S. restrictions may disrupt their business plans. For instance, even if the current U.S. export controls are limited in scope, all U.S. semiconductor firms must weigh the risk that those export controls will expand in the future and encompass their products. Companies may determine that it is prudent to diversify and invest in and develop relationships with other countries, even if that comes at a higher up-front cost.
Some recently released data supports this view. U.S. imports from China across all sectors decreased 24 percent in the period of January-May 2023 compared to the same period in 2022. Beyond just trade, U.S. restrictions may be chilling investment into China. According to figures published by China’s State Administration of Foreign Exchange, foreign direct investment in China from Q2 2023 decreased 76 percent from the previous quarter and 87 percent from Q2 2022, hitting the lowest quarterly level since 1998. A Financial Times investigation also found that foreign investors sold a net $12 billion of Chinese stocks in August alone. While the two nations are still economically intertwined, businesses and investors may be recognizing the geopolitical trends and reducing ties with China on their own.
A Dynamic Relationship
The answer to the second question—how China’s current economic issues will impact the U.S.-China relationship going forward—is more complex.
Given China’s current economic situation, it may seek to improve relations with the U.S. in the near-term, or at least prevent relations from worsening. As investment into China is already decreasing, for instance, China may be wary of retaliating against the latest U.S. economic restrictions as this may further deter foreign investment.
Moreover, the United States has recently sought to lower the temperature of the economic conflict. Along with the European Union, the United States is now framing its trade and investment restrictions as “de-risking” from China, instead of decoupling. The former, as a more benign sounding term, is designed to depict U.S. moves as both cost-effective and targeted, suggesting that the United States does not seek to harm the Chinese economy overall. Secretary Raimondo signaled as much during her recent trip, stating “while we will never of course compromise in protecting our national security, I want to be clear that we do not seek to decouple or to hold China’s economy back.”
Even so, there are reasons to believe that the U.S.-China economic relationship that has been built on innovation, manufacturing, and trade will continue to deteriorate. There are indications that China views this new ‘de-risking’ strategy with skepticism, with some Chinese state-run papers asserting that de-risking conceals the same level of hostility as decoupling, just under a different name. China may believe that Biden’s moves are part of a larger goal to reduce economic ties between the two nations despite the change in nomenclature.
To be sure, it is China’s industrial policies that began the decoupling process. Reducing reliance on Western suppliers of critical technologies is a key part of China’s national security and economic policy. Industrial policy initiatives such as Made in China 2025, as well as Beijing’s 14th five-year plan, aspire to reduce China’s dependence on foreign technology. And progress towards achieving this self-reliance is well underway: China’s dependence on foreign factories to manufacture goods has decreased by one-third since Xi Jinping assumed leadership in 2012. While U.S. restrictions may make it more difficult for China to achieve its goal of self-sufficiency in the near-term, they certainly have underscored its long-term importance to Chinese leadership.
Moreover, it may simply be premature to declare that China’s economy is in a downward spiral. There have been several “bubble scares” in China over the last decade that did not result in a collapse. Moreover, there are signs that Chinese consumer spending is increasing, and there remain bright spots in the Chinese economy such as the electric vehicle industry which reportedly stole the show at this month’s Munich Auto Show.
There are good reasons for not escalating economic frictions with China. China remains a significant global player and its policies can harm U.S. commercial interests. Past actions from China have incurred costs on U.S. companies, such as its ban on chips from U.S. chip-maker Micron which could cut off as much as 10 percent of Micron’s total revenue. Further, just this past month U.S. chip giant Intel called off a planned acquisition of Israeli semiconductor-maker Tower Semiconductor due to significant delays in China’s review of the merger.
Given that the U.S. and Chinese economies remain deeply interconnected, U.S. sanctions and Chinese retaliations will damage both economies. The U.S. must remain wary of China’s appetite for retaliation, which may impair critical U.S. industries that are still dependent on Chinese suppliers and consumers. Recognizing this, the U.S. has sought to calm the waters. The recent visits of four senior Biden administration officials to China demonstrate a commitment to maintaining cordial ties. Meanwhile, the U.S. should factor in the potential for greater geopolitical instability into its near- and long-term strategy. Changes to the international economic system will take time, particularly in China-centric supply chains or those where a relatively small number of international entities dominate key segments.
Christopher Borges is an associate fellow with the Geoeconomics Center at the Center for Strategic and International Studies in Washington, D.C. Andrea Leonard Palazzi is a research associate with the Trustee Chair in Chinese Business and Economics at CSIS.