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Record Trade: What Does It Mean?

Feb 17, 2023
  • Zhong Yin

    Research Professor, Research Institute of Global Chinese and Area Studies, Beijing Language and Culture University

Two-way trade in goods between the United States and China hit a record high in 2022 — $690.6 billion — even as political tension heightened between the world’s top two economies, according to official U.S. data released on Feb. 7. U.S. exports to China increased by $2.4 billion to $153.8 billion, while imports of Chinese products rose by $31.8 billion to $536.8 billion. The previous record was $658.8 billion in 2018. According to Beijing’s statistics, trade volume reached to around $760 billion.

This trend seems utterly out of conformity with the notion of a decoupling of the Sino-U.S. economic relationship, as was expected by many as tensions increased. Why is it that? Will the trend be sustainable or is it an accident or an abnormal outlier? What does this mean for Sino-U.S. relations currently and in the future?

Three things can explain this seemingly paradoxical phenomenon:

First, the U.S. decoupling with China, begun by Donald Trump and strengthened by Joe Biden, was never expected to be total or quick. Based on the huge benefits of linking to China, the U.S. on one hand allows its companies to continue doing business — letting them make a profit in China’s market — while remaining at ease with the fact that China’s diverse quality merchandise at low prices serve U.S. consumers and enterprises.

Considering today’s high inflation and the uncertain prospects for the U.S. economy, China’s goods are not only desirable but have even become necessities for American consumers at all levels. At the same time, for China, exports continue to be a crucial pillar of overall economic growth. That’s why so much trade has survived the tariffs imposed under Trump and continued under Biden.

Second, for the purpose of maintaining U.S. technological supremacy, the Biden administration, following in Trump’s footsteps, has introduced a raft of its own measures aimed at bolstering U.S. chip manufacturing and slowing China’s ability to develop its own advanced semiconductors. Steps have also been taken to decouple China in fields said to touch upon U.S. national security. Further, Congress passed legislation to target alleged Chinese “human rights abuses.”

Yet, all these do not necessarily entail a wider trade rift because technology competition and trade are not mutually exclusive. Actually, only 5 percent of Sino-U.S. trade is in any way associated with national security. The commodities that have increased in China’s export lineup are mostly daily necessities, while those coming from the U.S. to China are agricultural products, such as beans and corn, in which U.S. farmers have a big say domestically.

Third, the increasing political tensions in recent years may have had more impact on fixed-capital flows than on trade. Clearly, U.S. companies have slowed new investment in China. According to an analysis from the Rhodium Group, “the risk/reward calculation has tilted against continuing to operate in China.”

Businesses are concerned not only about the growth outlook for China itself, but also about rising geopolitical tensions. Moves by the U.S. to cultivate new supply chains away from China are an underlying contributing factor. On the other hand, Chinese investment in the U.S. has also dropped to low levels. Although this trend of declining mutual investment is not yet reflected in trade, in the long run it will very likely reduce trade, since mutual investment and trade between two countries are, for the most part, positively correlated.

Given all the above, the record trade between U.S. and China in 2022 is nothing unusual. It is just a natural reflection of both the current and future state of their relationship. The two sides still need each other economically, so for China the philosophy of intertwining with U.S. more deeply and do away with political uncertainties still counts in decision-making circles. Meanwhile, the U.S. government has to compromise with the thirst of interest groups for Chinese goods and its domestic market.

However, there are signs that the political turbulence of the last few years is having an impact on two-way commerce. Based on data for January through November last year, China accounted for just 13.1 percent of overall U.S. trade, the lowest level in at least a decade and down from its peak of 16.4 percent in 2017. On the other hand, the U.S. has sunk to become China’s third-largest trading partner, behind ASEAN and the European Union. Considering this, a pure increase in bilateral trade, per se, will not be enough to counter the broad trend of negative developments in the bilateral relationship.

In addition, the domestic atmosphere inside the U.S. with regard to China is getting harsher. The Taiwan issue and other matters, such as the recent balloon incident, may increasingly become a political liability to the promotion of bilateral trade in U.S. In October, the Biden administration imposed sweeping new curbs designed to curtail China’s access to technology critical to its growing military power. Last month, a Dutch maker of semiconductor equipment, ASML, said that “rules are being finalized” on export controls to China, apart from the report that the Netherlands and Japan have joined the United States in restricting sales of some computer chip machinery to China. Furthermore, the U.S. government remains hesitant to resolve the tariff issue with China.

Given all these factors, a recent report from Boston Consulting Group predicted that U.S.-China trade would decline by $63 billion annually between 2023 and 2031, a drop of about 10 percent, as a result of geopolitical tensions and rising Chinese labor costs. The forecast heralds gloomy prospects for future Sino-U.S. trade. 

Historically trade has played a very important stabilizing role in smoothing the Sino-U.S. relationship. Last year’s record trade shows that, even with the superficial hostilities between the two, the internal dynamics for economic interaction and trade remain resilient. The United States should respect this fact and allow trade continue to play out as a Sino-U.S. asset, rather than the ultimate liability. 

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