The Key Contradictions In China-US Economic Relations

Photo: www.huffingtonpost.com
Photo: www.huffingtonpost.com

The US-China relations in the trade-economic sphere differ in their double standards and are characterised by broad cooperation as well as by the deep contradictions existing in it. In developed and developing countries these leading countries essentially influence the geo-political and geo-economic developments of international relations, hence the modernity and significance of the present analysis follows.

The major feature of China-US economic relations is their interconnection[i]. However, the deeper the interdependence, the larger the scope of the clash of interests. A whole range of trade-economic contradictions (trade deficit, currency dispute, external dept, economic liberalization, leakage of technologies) is conditioned by deep political motives, since both sides often use those contradictions to restrain and exert pressure on each other.

The followingsroblems existing in China-US economic relations:

  • bilateral trade disbalance
  • currency problems
  • investment policy
  • growth of China’s fuel and energy demand
  • regional competition

The Problems of Trade Deficit and Surplus

Trade between the US and PRC (People’s Republic of China) dramatically increased, when  China became a member of the WTO (World Trade Organization) in December, 2001. In parallel with this, the trade deficit of the US increased. Many American analysts believe that the reason for trade disbalance etween two countries is the unfair economic and currency policy of China, which has its own impact on the US economy.

The United States Merchandise Trade with The People’s Republic of China

Year Imports from China Export to China Trade deficit of the US with the PRC
1995

2000

2005

2010

2012

2014

$46 billion

$100 billion

$243 billion

$365 billion

$426 billion

$466 billion

$12 billion

$16 billion

$41 billion

$92 billion

$111 billion

$124 billion

$34 billion

$84 billion

$202 billion

$273 billion

$315 billion

$342 billion

2016 $463 billion $116 billion $347 billion

Source: U.S. International Trade Commision. URL: http://dataweb.usitc.gov/scripts/cy_m3_run.asp

The table does not include trade in services where the US has a surplus over the PRC[ii].

There are concerns in the United States that trade deficit results in the loss of jobs there. An American average worker earns $12.16 per hour, while Chinese employee earns $1.36.  Because of the American expensive labor force, those companies that are unable to run their factories in the US, do this in China. Chinese position on this issue is that the trade deficit doesn’t impact on the decrease of jobs, but the technological progress.

The other concern is that the US consumers support the labor force of other countries. In case of merchandise trade deficit the US purchases factory products manufactured overseas. In case of exporting to the US, the product of Chinese factory employee is likely to have a higher value, than innternal market of China.

The Chinese side blames the US for such issues, stressing that China is working toward the trade balance, but its actions are unilateral. Furthermore, the components of many products with “Made in China” trademark exported to the US are produced in other countries, therefore China does not benefit much from that export[iii]. But even in trade statistics the full value of such products is calculated at the expense of China.

The report of the Ministry of Commerce of the PRC notes that China has never sought trade surplus and has taken active measures over the years to expand imports from the US[iv]. Today it is the third largest importer of American goods conceding the US partners in The North American Free Trade Agreement (NAFTA). Still in 2010, the predictions of the United States Department of the Treasury on the issue that the US merchandise exports to China were up 36 percent compared to 2009, were realized[v].  In 2010, the American export to China reached record 32%, and Chinese export to the US  to 23%.

The Chinese condemn American since the latter controls the export of high technologies, and urge the American side to abandon the Cold War mentality, reduce control over the exports to China and increase the export of high-tech products. Conscious of the enormous potential of China, the United States, in its turn, strives to maintain certain advantage over it and reasonably doesn’t increase the export level.

Currency Dispute

In 1994 China pegged yuan to dollar at a rate of 8.3:1. This was a common and reasonable step for a developing country. At first, China’s trade balance with such rate was close to zero and didn’t create difficulties. But the problem was that China had a rapid growth in production, which had to be adjusted in time.  China was getting more competitive in merchandise trade, nevertheless resisted the urges to adjust the exchange rate. It was at this point that China developed a very large trade surplus that rose above 10 percent of GDP. Pegging the currency to the dollar in the face of a large trade surplus requires the central bank to accumulate reserves, and China’s reserves over this period rose to a global high of $4 trillion. [vi]

China has been implementinglow and controlled Revaluation policy since 2005, which, however, was ceased in 2008, because of the world financial economic crisis. In fact, there is a group of countries in East Asia (South Korea, Indonesia, Malaysia, The Philippines, Taiwan, Singapore and Thailand), which national currencies are based on yuan. The American side insists that since Chinese currency rate is  lower than the ones driven by market conditions, China gains an advantage in trade exchange. Because of the currency disputes in 2009 the USA established customs duties on 35% of the Chinese goods, which was considered by The People’s Republic of China s a manifestation of American protectionism. It is worth mentioning that China denies all accusations concerning the “games” with the Chinese yuan. There are no grounds for a serious rise of yuan rate.  The main reason for theS deficit in trade with China is not the yuan rate, but the structure of trade and investment between the two countries.  China justifies the law rate of its currency arguing that its increase will put its citizens and entrepreneurs in a difficult situation and the Chinese economy will collapse. In case of its fall, both the US and the global economy will fall-off.

The budget deficit of the US has been increasing since the economic crisis in 2008. Possessing $3 trillion in its foreign currency reserve, China has become the largest lender of the US. In March, 2013, China had $1.32 trillion of the treasury securities of the US in its reserve. Today the debt of the US to China is $600 billion. Some US analysts are worried that China can devalue the American dollars. However, according to the sources close to China’s financial system, China can use these dollars outside the country[vii]. China successfully maneuvers the US debt and its reserve dollars, if the United States hurries to deal with such issues as human rights, restrictions on technology exports to China, Taiwanese conflict, and so on. The US, in its turn, does not pay its debt to keep China dependent.

According to the predictions of the economists of the Peterson Institute for International Economics, yuan will become base currency along with dollar by 2030 (that is, the rates of world currencies will depend on the national currencies of the US and China), and till 2037, the block of yuan-dependent countries will be finally formed[viii].

The influence of yuan is especially significant in East Asia, where it is ahead even of dollar. From 2005 up to 2008 in three of ten countries of this region yuan was considered to be a dominant base currency (the other six currencies were tied to dollar, and one to euro), and then, from 2010 to 2012 the number of those countries increased from three to seven. Currently, the dollar domination in Asia is restricted to Hong Kong, Mongolia and Vietnam. It is noteworthy that in this region the role of the dollar is more decisive in smaller countries, whereas yuan dominates in large economies.

In response to China’s economic expansion, the United States made the famous “Pivot to Asia”, in order to suppress China’s economic and military growth with its diplomatic, economic, and strategic engagement in the eastern region. Meanwhile, at the Asia-Pacific Economic Cooperation summit, B. Obama announced that the US and eight other countries have signed a Trans-Pacific Partnership Agreement on free trade, wherefrom Chine was excluded. The countries included in this US-led agreement had a great potential to hinder China’s strengthening position in the region. However, in January 2017, by the Presidential Memorandum of Trump, the United States withdrew from the Trans-Pacific Partnership Agreement. China, in its turn, has been actively working within the frameworkf the Regional Comprehensive Economic Partnership and the Asia-Pacific Free Trade Area, which are considered to be the counterweight alliances of the Trans-Pacific Partnership. At first glance, Trump’s Memorandum opens the doors to China to take leadership in the region. However, in our conviction the United States will retain its influence here in the form of bilateral relations with the East-Asian countries.

Disproportionate Policy of Foreign Investments

China’s policy over the foreign direct investments is highly disproportionate. According to an Organization for Economic Cooperation and Development measure of investment restrictiveness, China is the most closed of major economies (especially in the sector of modern services such as finance, telecommunications, media and logistics). Even in the relatively open sectors the American companies have problems in China since the property rights are poorly protected.

In this case, Chinese companies benefit from their protection in the domestic market and then buy their competitors in the United States and Europe. In recent years, the review process has approved Chinese purchases of Smithfield Foods (a U.S. pork production enterprise) and Syngenta (a Swiss agricultural chemical company with large U.S. operations)[ix].

Since 2015 China has been selling its reserves to keep the currency value higher, and its 4 trillion reserve reached up to $3.1 trillion. However it has started to grow again, the reason for which is primarily the outward investments of state-owned enterprises.

China’s Fuel-energy Policy and The Growth of Regional Influence

China’s fuel and energy policy is also a matter of discussion in China-US relations. 40 % of world oil demand falls into China’s lot: this means that this fact has a great impact on the formation of oil price today. In September 2013, during his visit to Middle East countries, the President of China Xi Jinping proposed two initiatives[x]:

  • reconstruct the Silk Road Economic Belt
  • build a Maritime Silk Road.

These programs are aimed to strengthen the economic ties among China, Middle Asia, and Europe.  Within the past few years, China has created the Asian Infrastructure Investment Bank and the even more ambitious and potentially consequential “One Belt, One Road” initiative to build a vast transportation network[xi].

The skeptic stance of Trump’s administration toward the intergovernmental organizations (IMF, WTO) and the freezing of activities in it allows China fill the gap. Bringing up sustainable and promising projects, China threatens the weakening of the US impact in the regions. This refers also to the relations with separate countries. Philippine President Rodrigo Duterte’s abrupt and unexpected rapprochement with China is but the most dramatic example of a former American ally succumbing to the gravitational pull of China’s regional economic weight[xii].

China’s military rise creates contradictions in China-US relations as well, which is obvious especially in the East Asian region. The American fears concerning the fact that the expansion of foreign trade with China, especially in the sphere of modern technologies promotes the strengthening of China’s military potential, are not groundless. They note, that China is able to use its economic achievements of the last 25 years at the regional and global levels against the United States. According to the Stockholm International Peace Research Institute data, the military costs of China were $188 billion in 2014, and the US costs were $640 billion. However, China uses the income gained as a result of the consumption of Chinese products in the American domestic market to strengthen its military potential, which is increasing year after year. Washington is also concerned about the fact that China obtains the American technological innovations via different paths and modernizes its military.

Conclusion

During his presidential campaign, Trump promised to increase customs duties on Chinese goods. The reason of his “Protectionist” position is believed to be a way of gaining confidence from the US citizens, especially the unemployed ones, and giving them hope that the American market will be protected from the expansion of the Chinese goods and the number of jobs will increase.

However Trump’s promise hasn’t been realized yet and most likely will not be realized. The reason for China becoming such a powerful economic competitor was that Dan Xiaoping have begun the open economic foreign policy since 1980s,  and the country benefited a lot from the American investments and technological transfers.  As a result, 55% of Chinese export falls to the lot of American companies and the employees. The explanation for avoiding to input economic sanctions is that in case of their realization, the United States will be equally shocked. Moreover, it is possible that today China will be affected less from the customs duties, than for example 10 years ago, since it is no longer limited to the US market by the exportation of goods and foreign investments.


  1. CRS Report R41108, S.-China Relations: An Overview of Policy Issues, Susan V. Lawrence. , August 1 2013
  2. CRS Report RL33536, China-US trade issues, by Wayne M. Morrison
  3. Guangkai X., International Situation and Security Strategy, China Institute for International Strategic Studies, Beijing, 2009
  4. https://www.brookings.edu/- Brookings հետազոտական ինստիտուտի պաշտոնական կայք
  5. Lio Zongyi, China’s Economic Relations with SAARC: Prospects and Hurdles, China International Studies, September/Octember 2014
  6. Research Report on China-US Economic and Trade Relations, Ministry of Commerce of the People’s Republic of China, May 25th , 2017,

http://images.mofcom.gov.cn/www/201705/20170525093626470.pdf

  1. Timothy F. Geitner. China’s Currency Policies and the U.S.-China economic relationship


[i] The interrelation of the economies of these countries demonstrate the fact that in case of a 1% decline in the GDP in the US, Chinese exports fall in the American market by 4-5%, look: Guangkai X., International Situation and Security Strategy, China Institute for International Strategic Studies, Beijing, 2009, P. 66

[ii] For details look: CRS Report RL33536, China-US trade issues, by Wayne M. Morrison

[iii] The example of Apple Iphone is brought in the report http://images.mofcom.gov.cn/www/201705/20170525093626470.pdf

[iv] http://images.mofcom.gov.cn/www/201705/20170525093626470.pdf , p. 71

[v] https://www.treasury.gov/press-center/press-releases/Pages/tg858.aspx

[vi] https://www.brookings.edu/research/the-future-of-u-s-china-trade-ties/

[vii] CRS Report R41108, U.S.-China Relations: An Overview of Policy Issues, Susan V. Lawrence. , August 1 2013, p. 41

[viii] http://armef.com/news/category/comment/article/article_1377676743

[ix]  https://www.brookings.edu/research/the-future-of-u-s-china-trade-ties/

[x] Xi Jinping, President of the Peoples Republic of China, Speech at the Indian Council of World Affairs, New Delhi, 18 September 2014

[xi] https://www.academia.edu/34495264/Trump_and_the_Asia-Pacific_Do_the_Ties_Still_Bind

[xii] https://www.academia.edu/34495264/Trump_and_the_Asia-Pacific_Do_the_Ties_Still_Bind


Author: Armine Muradyan. © All rights are reserved.

Translator: Armine Poghosyan, English.


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