The US-China economic relationship comprises a complex structure of trade worth billions of dollars each year. This trading partnership with China, which has been on for over three decades, plays a vital role in the United States’ economy.
For instance, imports of China’s goods into the U.S. market are lower-priced and beneficial to both U.S. firms and consumers. U.S. manufacturing firms who use Chinese-made materials in their production can lower costs. Similarly, several U.S. companies send materials to China for a final assembly, which reduces manufacturing costs.
US-China trade also involves two-way trade in services, a vital aspect of both nations’ economic relationships. As soon as China joined the WTO, exports of services from the U.S. began to grow. Some of these services are transport, travel, banking, entertainment, software, insurance, telecommunications, law, and engineering sectors.
History of U.S. Trade with China
1979 – 1999
A diplomatic reestablishment of U.S. trade with China began in the 1970s with China’s new economic reforms and liberal trade regime. Before this time, China’s trade institutions had experienced growth following the communist takeover in 1949. However, three decades later, its trading systems were inefficient, leading to the adoption of new reforms.
Both nations signed a bilateral trade agreement in 1979, spurring rapid growth in imports and exports. In that same year, two-way trade between the U.S. and China amounted to $4 billion. It then rose to almost $100 billion by the end of 1999.
2000 – 2015
In October 2000, President Bill Clinton signed the US-China Relations Act, granting China permanent normal trade relations with America. This move paved the way for China to join the World Trade Organization (WTO) in 2001, further strengthening both nations’ trade relationship.
The US-China economic ties continued to expand each year, and by 2005, import and export between the U.S. and China had risen to $284 billion. In 2006, China surpassed Mexico to emerge as the United State’s second-largest trade partner, after Canada. In 2008, China beat Japan to become the largest U.S. treasuries holder, at around $600 billion.
By August 2010, China had surpassed Japan as the world’s second-largest economy, with a GDP of $5.88 trillion by the end of the year. It then took over from the United States in 2013 to emerge as the world’s largest trading nation. With China’s rapid economic growth, the country was undoubtedly playing a vital role in international trade.
By the end of 2015, imports and exports between both countries were at $599 billion. According to the U.S. State Department of Commerce, exports of goods and services to China supported an estimated 911,000 jobs in 2015, with 601,000 jobs supported by goods exports and 309,000 jobs supported by services exports.
2016 – 2018
Two-way trade between the U.S. and China dropped slightly to $578 billion in 2016 but rose to $635 billion in 2017. Before this time, trade tension rose between the two nations due to the United States’ large trade deficit with China.
As of 2018, total exports and imports were $120 billion and $539 billion, respectively, making the trade deficit peak at $418.9 billion. In that same year, U.S. treasuries held by China in 2018 was pegged at $1.2 trillion.
Up until February 2019, the United States’ largest trading partner in exports was China. Currently, China is America’s third-largest export market behind Canada and Mexico, with total trade in goods and services at $634.8 billion in 2019. However, from 2019’s imports and exports of goods, the U.S.’s deficit became $345 billion, indicating a 17.6% decrease from 2018.
The total goods export was $106.4 billion, 455% up from 2001 (pre-WTO accession) and accounted for 6% of overall U.S. exports in 2019. Furthermore, the U.S. top goods export to China in the 2-digit harmonized system (H.S.) for that year included machinery, aircraft, optical and medical instruments, and vehicles.
Similarly, leading exports in services to China in 2019 were in the travel, intellectual property, and transport sectors. These services exports were at an estimate of $56.5 billion, roughly 952% up from 2001. In total, exports of goods and services from the U.S. to China totalled $163.0 billion in 2019.
The total import of goods totalled $451.7 billion, which were up 342% from 2001 and accounted for 18.1% of overall U.S. goods imports in 2019. The top categories of imported goods from China into the U.S. in the 2-digit H.S. for 2019 were machinery, furniture and bedding, toys and sports equipment, and plastics.
Additionally, the U.S.’s 2019 services exports to China were at an estimated $20.1 billion. They include services in the transport, travel, and research and development sectors as the top categories. Total imports of goods and services for 2019 was $471.8 billion.
U.S. Trade with China Today
China remains the largest foreign holder of U.S. treasuries. The country is one of America’s foremost suppliers of advanced technology products and its largest import source. From January to October 2020, the total trade in goods between the United States and China was $444.5 billion.
Currently, total U.S. exports of goods to China as of October 2020 sits at over $95 billion. Also, total imports of goods from China into the U.S. is $348.7 billion. These figures give a trade deficit of $252.8 billion.
US-China Trade War
The bilateral relationship between the U.S. and China was often tense due to the large trade deficit between them. The trade deficit exists because of the low U.S. exports to China compared to high China’s imports to the U.S.
Some economists and policyholders claim that the large trade deficit results from China’s unfair trade policies, which distort trade and investment flow. Some of these policies include industrial policies that favoured Chinese state-owned enterprises, a disagreement on their WTO obligations, discriminatory innovation policies, and failure to protect U.S. intellectual property.
Other stakeholders claimed that the large deficit resulted from China’s currency, which is pegged to the dollar and intentionally undervalued for years. As a result of China’s trade policies, the country could manufacture goods at competitive prices and keep its exports low.
Therefore, U.S. manufacturers that had to compete with Chinese goods had to lower their products’ cost. More U.S. jobs were lost as firms started outsourcing their jobs to China and India since they pay lower wages to workers. In summary, U.S. manufacturing jobs had declined by 35% between 1998 and 2010.
In March 2018, President Donald Trump’s administration announced the imposition of tariffs on Chinese imports to manage the deficit. Trump imposed a 10% tariff on Chinese Aluminum exports. Later on, in July, he announced a 25% tariff on Steel exports, which impacted $34 billion worth of Chinese imports.
Some of the over 800 products subject to import tariffs include solar panels, television, medical devices, and washing machines. These tariffs depressed the stock markets after their announcement, and this act from the U.S. started the trade war.
In response, the Chinese government also imposed tariffs on over 500 US exports valued at $34 billion. Notable among the products was soybean, one of the United States’ largest exports to China. Other commodities that attracted tariffs include seafood, beef, and dairy.
The U.S. government’s tariffs were partly intended to pressure China into removing its strict requirement on U.S. firms operating in China. This rule required U.S. companies to transfer technology to Chinese companies to gain access to their market. President Trump said in May 2019 that he believes the high cost of tariffs will force China to make a favourable deal.
However, the Chinese government argued that the U.S. government intended to stifle China’s growth and that the war was negatively impacting the world. The Chinese also stated that the U.S. had extravagant expectations and was making negotiations difficult.
Effects of the Trade War
The trade war negatively impacted the economies of both nations. In the United States, prices of consumer goods increased, and farmers began experiencing financial difficulties. According to Reuters’ report, the American manufacturing sector fell into its deepest slump in over a decade, in December 2019. This decline was attributed to the trade war.
In China, the trade war led to a slowdown in its economic and industrial output growth. The reason was probably due to American firms shifting their supply chain to other Asian countries. The trade war also harmed the economies of other nations and instability in the stock market.
However, several positive impacts were also recorded. One such positive result was the increase in the rate of employment across the U.S. The trade war also helped to reduce the United States trade deficit with China in 2019
The Signing of a New Deal
On December 13, 2019, the U.S. and China announced the signing of a new deal. China stated that it would increase its purchases of high-quality agricultural products from the U.S., and the U.S. agreed to halve the existing 15% tariffs.
On January 15, 2020, President Donald Trump and Chinese Vice Premier Lui He signed the US-China Phase One trade deal. The new agreement, which took effect from February 14, focuses on intellectual property, technology transfer, food and agricultural products, financial services, and other issues. Both nations enacted the Phase One deal through a bilateral mechanism.