A New Era of Uncertainty in U.S.-China Economic Relations

Part of Chapter 6 | U.S.-China Bilateral Economic Relations

By Amy P. Celico
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Our economic relationship with China has never been so important to the United States, and our economies have never been so intertwined—with ever more opportunity for expansion. It took real political leadership in Beijing and Washington 20 years ago, along with a hugely supportive American business community, to set our economic relationship on this incredible growth trajectory through negotiation of China’s Word Trade Organization (WTO) accession in 2001, resulting in U.S. goods and services trade with China growing from only a little more than $100 billion in 2000 to an estimated $659.4 billion in 2015. Investment ties, too, have grown and diversified, with Chinese investment in the United States outstripping U.S. investment in China for the first time in 2015.1

Unfortunately, along with this expansion in the scale and scope of our economic ties, the imbalance in U.S.-China trade has continued to grow. And our economic relationship has become more contentious over the past decade, with our two countries disagreeing on what rules should govern access to our respective economies. In the aftermath of the global financial crisis, protectionist policies in both countries—and around the world—have increasingly challenged accepted principles and rules for trade. The United States and China both have more to gain from enhancing our economic relationship and continuing to act in concert to promote global economic growth, but this will require commitments from both countries to find common ground on contentious trade and investment issues, including how national security considerations should impact market access policies. Like 20 years ago, political leaders in both countries will face tough calls to take our economic relations to a renewed level of mutual benefit.

Bilateral economic relations since the global financial crisis

China’s incredible growth trajectory over the past 20 years brought significant and distinct opportunities for the United States. In the immediate aftermath of China’s WTO accession, China’s lowered barriers and low-cost labor market made it a top destination for American manufacturers, and our companies invested heavily in China to make products to sell in global markets. Later, in the wake of the global financial crisis, China emerged as a major consumer market, growing at a remarkable pace in large part due to the Chinese government’s commitment to reform and its investments in becoming an “innovative society.” Consumption is expected to drive a greater portion of future Chinese economic growth, again assisted by government policies that encourage consumer spending and investment in strategic emerging industries.2

The development of cooperative channels, including multilateral forums like the G20, to deal with shocks to the global economic system in the wake of the global financial crisis provided the United States and China with a new way to broaden our economic ties beyond bilateral trade to also discuss fundamentals of the global economic system. Indeed, this necessity for cooperation became a new foundation for our overall bilateral relationship. Over the eight years of the Obama administration, few issues on the global stage were effectively managed without U.S. and Chinese joint leadership, from stabilizing the global economy, to negotiating a nonproliferation deal with Iran, to combating the effects of climate change. Together our two countries touted the importance of multilateral institutions and a strong free trade agenda to promote economic integration and stability. Much of this focus on the benefits of globalization led to growth in our two economies, and it also led to deepened bilateral dialogue as the United States and China also grappled with similar challenges—proliferation of public debt, aging populations, infrastructure needs, productivity concerns, and the impact of environmental degradation.

But despite our successes together helping to stabilize global markets and grow our bilateral trade relationship, the tide in the United States—and elsewhere around the world—is turning away from global economic integration and toward nationalism and enhanced protectionism. Why? Imbalances in trade ties and the displacements resulting from the global financial crisis showcase the losers in a more globalized economic system. And these losses have created anxiety in the United States and other developed and developing economies. Meanwhile, Washington and Beijing express increasingly divergent views toward the rules governing economic issues, like the role of the state in markets and how the digital economy should be managed. Many have become skeptical, if not downright dismissive, of the ability of global governing institutions to help ensure all countries adhere to the same open, rules-based trade practices. In this environment, many countries, the United States included, have begun to consider new ways to protect their domestic economies from perceived and real unfair trade practices.

For example, from an American perspective, progress has slowed in China in recent years on key economic initiatives launched by China’s accession to the WTO, including commitments on market access liberalizations, greater regulatory transparency, unfettered national treatment, and enhanced IP protection—all fundamentals that support China’s own economic development as well as its positive relationship with the United States. And while trade flows have continued to grow, the ability of American companies to compete in China has been increasingly hindered by Chinese rules that promote domestic companies and limit foreign participation in the China market, including, for example, delayed market approvals, investment restrictions, and new industrial policies requiring technology transfer and data localization for foreigners to remain in the market. To put in place rules that protect U.S. investors against discrimination and arbitrary treatment (with the United States promising the same for Chinese investments), Washington and Beijing undertook Bilateral Investment Treaty negotiations in 2008, but these negotiations have stalled repeatedly, due to resistance in both countries at different times.

To address these concerns in the bilateral economic relationship, the United States and China enhanced the Strategic and Economic Dialogue and tried to use the G20 to promote a reinvigorated trade agenda, but our two countries—the twin engines of global growth—continue to struggle over principles and rules governing enhanced economic integration and ways to promote the benefits of trade. This has allowed protectionist voices in both our countries to advocate closing our economies off rather than be hurt by the limitations of a free trade agenda.

A new administration’s goals for U.S.-China economic relations

The current, decidedly more protectionist sentiment in the Trump administration reflects a growing perception that American workers, consumers, and companies have been hurt by globalization and trade deals negotiated in the past, which allow artificially cheap goods to flood the U.S. market and leave American companies vulnerable to unfair competition abroad. During last year’s American presidential campaign and since his election, President Trump has focused on renegotiating trade agreements and reducing trade deficits to protect American companies and workers and remedy unfair trade practices. With China, many were worried the new administration might take unilateral action over our $347 billion trade deficit.3

Given this background, it was reassuring when, on March 1, the Office of the U.S. Trade Representative (USTR) released a surprisingly conventional President’s 2017 Trade Policy Agenda, prioritizing: 1) opening foreign markets to U.S. exports, 2) enforcing U.S. trade laws, and 3) negotiating trade agreements that benefit American workers, businesses, farmers, and ranchers.4 And with the Chinese government, the Trump administration is already pushing on two fronts—to remove market access restrictions harming U.S. exporters and investors in China, and to enhance protections against unfair trade coming from China into the U.S. market.

The trade imbalance and North Korea were President Trump’s two priority topics for discussion with President Xi when they met in Florida in April 2017, issues President Trump continues to explicitly link. While the Mar-a-Lago Summit was successful in reducing tensions on both issues and did allow the new administration to pivot from its combative campaign rhetoric about China to a more cooperative tone for dealing with challenges in the bilateral economic relationship, there clearly are tough times and more uncertainty ahead in the economic relationship.

A new U.S.-China “Comprehensive Economic Dialogue” (CED) was established at the presidents’ Mar-a-Lago summit to guide our bilateral cooperation, splitting apart the strategic and economic tracks of the Obama administration’s Strategic and Economic Dialogue, and elevating cybersecurity and people-to-people exchanges into four distinct pillars. The economic pillar is cochaired on the U.S. side by the secretaries of commerce and treasury and on the Chinese side by Vice Premier Wang Yang. The CED first met in Washington in July, concluding with an unprecedented absence of public commitments to specific actions.

Following the Mar-a-Lago Summit and a disappointing first CED meeting, Trump administration officials have reiterated that, if the United States cannot achieve balanced trade by convincing China to reciprocate higher levels of market access, then more defensive means will be adopted. Concerned about global overcapacity, the administration has already begun investigations into whether imports of aluminum and steel are detrimental to U.S. national security, under Section 232 of a 1962 Trade Expansion Act. More recently, the Trump administration is also considering an investigation under Section 301 of the 1974 Trade Act to examine whether China’s intellectual property protections and technology transfer requirements constitute unfair trade practices that burden U.S. commerce. All three of these investigations could result in imposition of unilateral sanctions against imports to the United States, and there are rumblings these actions could start a trade war. Distinct from years past, the American business community is more divided on China, and some industries are unlikely to fight for stability in the bilateral economic relationship unless they see the prospect for real progress on the market access challenges they face in China.

Prospects for cooperation going forward

Even with a commitment to cooperate on areas of disagreement, Washington and Beijing are headed for continued difficult times in our economic relationship, as both countries seek to enhance protections of our domestic markets and promote enhanced trade and investment ties. The U.S. government wants American companies to enjoy the same level of market access in China as Chinese companies enjoy in the United States, and the Chinese government wants more assurance that the U.S. market remains open for its companies’ investments. Enhancing openness to our respective markets was one point made by both sides in Mar-a-Lago summit discussions about ways to remedy our current trade imbalance, but there are sticking points on both sides, including how national security issues should be allowed to justify market access restrictions.

In the United States, there is broad, bipartisan support to enact tougher policies with China on economic issues to rebalance and expand our economic relationship, including instituting the principle of reciprocity to govern trade and investment policies with China and for increased national security-based scrutiny of Chinese investments in the United States. It will be difficult for Washington to push both for widening access to the China market and restricting access to ours, but the current imbalance in market access between our two countries is no longer sustainable for American policy makers and our companies. The Chinese government’s responsiveness to addressing the trade imbalance will be at least as important as the way the Trump administration chooses to push for reciprocity. Positive Chinese proposals could channel the Trump administration’s push for reciprocity toward more mutual openness – a solid foundation for the bilateral economic relationship. A less responsive China would force the Trump administration to choose between implementing reciprocal restrictions on China’s market access in the United States or accepting an imbalanced status quo, a politically untenable position for President Trump unless he continues to offer China some kind of trade concessions in return for assistance reining in North Korea’s nuclear and missile program.

As was the case in the 1990s, political leadership will be necessary to make the difficult domestic decisions to take our bilateral economic relationship to a new level. Secretary of State Tillerson has said that U.S.-China relations have reached a “pivot point” after more than four decades of “no conflict,” while Chinese Foreign Minister Wang Yi has called on both sides to use President Trump’s planned fall trip to China to help “map out relations for the next 50 years."5 One area ripe for action must be a recommitment by both sides to pursue a high-standard Bilateral Investment Treaty. Our two presidents should also recommit to use the G20 to promote market access liberalizations that can remedy some of the challenges brought on by global economic integration. Rising above the fray, both the United States and China have a profound long-term interest in committing to an expanded, mutually beneficial bilateral economic relationship, as our two presidents affirmed in April 2017. But to achieve such an outcome, both sides will need to resist a continued focus on protectionism, make some difficult domestic policy decisions, and renew their commitment to the benefits of an open trading system, for the good of both our countries and the global economy.

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[1] Rhodium Group, China Investment Monitor: Tracking Chinese Direct Investment in the U.S., 2017, rhg.com/interactive/china-investment-monitor.

[2] Organization for Economic Cooperation and Development, OECD Economic Surveys: China, March 2017, http://www.oecd.org/eco/surveys/china-2017-OECD-economic-survey-overview.pdf.

[3] U.S. Department of Commerce Bureau of Economic Analysis, International Data: U.S. International Transactions, Expanded Detail by Area and Country, June 20, 2017, https://www.bea.gov/iTable/iTable.cfm?reqid=62&step=1#reqid=62&step=7&isuri=1&6210=1&6200=3&6211=28.

[4] Office of the U.S. Trade Representative, The President’s 2017 Trade Policy Agenda, March 1, 2017, https://ustr.gov/sites/default/files/files/reports/2017/AnnualReport/Chapter%20I%20-%20The%20President%27s%20Trade%20Policy%20Agenda.pdf.

[5] Ministry of Foreign Affairs of the PRC, “Wang Yi Meets with Secretary of State Rex Tillerson,” August 2017, http://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1483164.shtml.