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Soft Landing vs. Ballast Retreat

Jan 29, 2024
  • He Weiwen

    Senior Fellow, Center for China and Globalization, CCG

Last year, 2023, will be remembered as the year of the soft-landing in relations between China and the United States. Through repeated high-level official visits and dialogues covering state relations, finance, economy, trade, investment and climate change, there was a gradual de-escalation of tensions between the two countries. The historic San Francisco meeting between Chinese President Xi Jinping and U.S. President Joe Biden, anchored the bilateral relationship on the principle of peaceful coexistence and thus charted a path toward gradual stabilization and improvement in the overall relationship for 2024 and beyond.

Last year will also be remembered, on the other hand, as a year of “ballast retreat” — a reference to trade, which is usually seen as a stabilizing factor in the overall relationship.

According to trade data released by China Customs, two-way trade registered an 11.6 percent drop from 2022, the sharpest since 2019, when unilateral tariffs were imposed by the United States. Chinese exports to the U.S. fell by 13.1 percent, the sharpest fall in the 45 years since diplomatic ties were established in 1979, outstripping the drop-offs in 2019 and 2009, the year of the financial crisis. Both were off 12.5 percent. Total two-way trade volume — $664.45 billion — was less than in 2021, albeit higher than in 2020, or a retreat of two and a half years.

Last year also saw Chinese exports to the U.S. fall more that it did with other developed economies, including the European Union (off 10.2 percent), Japan (off 8.4 percent) and South Korea (off 7.2 percent). As a result, the U.S. share of Chinese imports and exports fell from 16.9 percent in 2014 to 14.8 percent in 2023, and its share of China’s global exports fell from 12.9 percent to 11.2 percent — a retreat that made it the third-largest market for China, behind ASEAN and the EU.

Official U.S. trade statistics also proved that paradigm. The Bureau of Economic Analysis found that during the January-November period of 2023, U.S. global imports fell by 5.1 percent compared with a year ago. During this period, its imports from North America (Mexico and Canada combined) remained basically stable, off 0.5 percent but up 4.7 percent from the EU. Imports from China were down sharply by 21.2 percent. In dollar terms, U.S. global imports fell $153 billion. Three-fourths of the fall came from Trans Pacific Rim (TPR), off $117.35 billion. However, over 90 percent of that was from China, at $ 105.94 billion. Apparently, the U.S. has been in the process of a supply chain shift from China and East Asia to North America and the Atlantic.

This shift was especially pronounced in the advanced technology products trade. During the first 11 months of 2023, U.S. global exports of ATP increased by 6.9 percent year-on-year, with its exports to the EU up sharply (26.4 percent) but down sharply (9.5 percent) to China. Its ATP imports fell by $2 billion globally. The fall came predominantly from TPR, which was off $26.28 billion. The latter, in turn, was totally from China, which was off $28.59 billion. Against that trend, its ATP imports increased by $16.5 billion from the EU.

China-U.S. bilateral trade was less a problem of market demand, or product competitiveness, and more of a supply chain shift, pushed by Washington’s policy of reducing dependance on China based on its national security narrative and its aim for resilient supply chains, which require friend-shoring based on “shared value.”

Gina Raimondo, the U.S. secretary of commerce, has said that, a sweeping ban or restrictions on the export of high-tech products to China, America’s China trade policy reflects the notion of a “small yard with a high fence.” In truth, the yard is huge. 

The fragmentation challenge 

The sharp drop-off in China-U.S. trade is not only a bilateral phenomenon but also mirrors a global trend of geopolitical segmentation and geoeconomic fragmentation. The sharp export drops in Vietnam, India and other Asian countries have also shown a similar pattern. According to a recent UNCTAD report projected shrinkage in global trade of nearly 5 percent in 2023 amid geopolitical strains and shifting trade patterns. The report said that during the period from Q1 2022 to Q3 2023, trade between near neighbors increased by 6.4 percent; but it fell by 4.3 percent between remote neighbors, and as much as 5.1 percent between very remote neighbors.

Countries have been showing a preference for politically aligned trade partners — a trend known as “friend-shoring” — from 2020 to 2022. Each year saw on average of around 5,400 new discriminatory trade and investment measures worldwide, nearly doubling the number before the pandemic.

Kristina Georgieva, IMF managing director, has warned that the world will lose 5 percent of GDP (the equivalent of Japan) if it is fragmented into two camps aligned with the U.S. or China.

As World Bank report on Jan. 9 — titled Global Economic Prospects — provided a gloomy picture of the world economy. The report estimated that world GDP growth will be only 2.4 percent, lower than the 2.6 percent of 2023, thus making the past five years (2020-24) the weakest half-decade performance in 30 years.

Growing geopolitical tensions could bring new short-term harm to the global economy. The world trade growth rate in 2024 is projected to be only half what it was 10 years before the pandemic. The report estimated GDP growth rate in developing economies at 3.9 percent for 2024, 1 percentage point lower than the past 10 years. By the end of 2024, one-fourth of developing countries and 40 percent of low-income developing countries will grow at a lower rate than on the eve of the pandemic. 

Indermit Gill, World Bank vice president and chief economist, has said that the 2020s will be a wasted decade if there is no significant track correction. 

Global and bilateral efforts 

Under these circumstances, the World Economic Forum annual meeting in Davos (Jan. 15-19) appealed for rebuilding trust, and achieving security and cooperation in a fractured world. More than 80 government leaders and 2,000 business leaders the world over called for global cooperation rather than fragmentation. Chinese Premier Li Qiang called for strengthening international industrial specialization and collaboration to keep global industrial and supply chains stable and smooth. He said that what truly serves the common interests of all is to fully respect the laws of international industrial specialization and firmly advance trade and investment liberalization.

Under these circumstances, China and the U.S. should work together to address both global economic fragmentation and China-U.S. supply chain disruptions, to let bilateral trade grow again as an integral part of the post-San Francisco vision.

First, global approach. Both sides should intensify their involvement in multilateral and regional efforts to rebuild trust and enhance worldwide free, non-discriminatory trade flows, instead of friend-shoring and values-based, disrupted supply chains.

Second, bilateral approach. Both governments need to intensify dialogues for strategic reassurance, reduce geopolitical stand-offs and try their best to reach consensus on national security boundaries. This will minimize the base of the so-called “small yard, high fence.”

Third, working level approach. Joint working groups on export control information and business should look for practical issues and handicaps in bilateral trade and try to remove or reduce high-tech bans, restrictions and tariffs and discuss a number of significant deals.

Fourth, business level approach. There should be tremendous growth of business exchanges, subnational and people-to-people exchanges and more trade and investment activities. Both governments should provide all possible assistance.

It is much desired that, through joint efforts, China-U.S. bilateral trade will bottom out quickly and, after a short period of consolidation, start to grow again. A sound, integral China-U.S. supply chain will not only help reinforce the ballast of the overall bilateral relationship but will also contribute to economic growth in both countries and in the world as a whole.






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