The United States and China are the two top players when it comes to global trade. The United States currently sits at #1 in terms of nominal GDP. However, gaining speed behind them at #2 is China. It goes without saying that the trade relationship between these two countries has global repercussions. This is especially true when there is a dispute because other countries will want to avoid taking sides.
Understanding the trade relationship between these two countries can make you a more savvy investor or forward-thinking business person. Knowing how the two countries rely on each other can help you make decisions and predict where the relationship is likely to head next.
As such, this article represents is a look at the trade relationship between the U.S. and China from the perspective of an investor or business person who is interested in opportunities related to China.
How China Fits on the Global Stage
In most major economic categories, China has been creeping up to become one of the highest-ranked countries in the world. This increase in productivity has mainly been the result of their transition to more of a free-market country. After implementing changes to their markets in 1979, China has been experiencing unprecedented levels of economic growth.
Right along with its economy, China’s trade has also been exploding over the past few decades:
➢ In 1995, China’s imports and exports of goods were valued at a total of $280.9 billion (just 3 percent of global trade at the time)
➢ However, by 2018, its total trade in goods had jumped to a value of $4.6 trillion (12.4 percent of global trade)
Currently, this 12.4% is enough to make China the world’s top trading powerhouse, followed by the United States at 11.5 percent of total trade. Germany is in third at 7.7 percent. Considering the bulk of goods that are manufactured in China these days, it’s not all that surprising that they are sitting at #1 in terms of trade. We’re willing to bet that the bulk of goods you purchase will have a small Made In China sticker somewhere on them.
When it comes to who China is actually trading with, their top partners are the United States, Hong Kong, Japan, South Korea, Vietnam and Germany. It’s interesting that all of these countries are close geographically, with the exception of the United States and Germany (which are #2 and #3 in global trade). For China, trade has become an increasingly important part of their overall economy, and it has been a significant tool used for economic modernization.
China has been seeing increasing tensions with at least one of their trade partners, the United States. We will touch more on this in a later section but China’s relationship with the US has heightened business uncertainties, given that the US is the country’s main trade partner. In 2017, China had a trade surplus of $275 billion with the United States (an all-time record).
To help compensate for this risk, the Chinese government has been adopting looser economic policies to ensure that the country can keep growing despite tensions with their top trade partner.
Now let us take a look at the relationship from the United States’ viewpoint.
How the U.S. Fits on the Global Stage
The United States is currently the world’s largest economy and the largest exporter and importer of goods and services. Trade has been a key component to American prosperity and is what fuels its economic growth, good jobs for its citizens, a continuously rising standard of living and also helps Americans provide their families with affordable goods and services. This is why the United States puts an emphasis on global trade and this is a constant talking point from their politicians.
Let’s take a look at a few stats offered by the Office Of The United States Trade Representative:
➢ In 2017, the U.S. was the world’s largest goods and services trading nation, with exports of goods and services totaling $2.35 trillion
➢ In 2017, agricultural goods accounted for $264 billion in total (two way) U.S. trade. Exports were $143 billion; Imports $121 billion; and the trade surplus was $22 billion
➢ In 2017, services accounted for $1.3 trillion in total (two way) U.S. trade, up 5.6% from 2016, and up 56% from 2007. The United States is the largest services trading country in the world
The United States has been immensely successful at trade and is well equipped for it. As a nation, they have a fair bit of natural resources they can offer as well as innovative companies and hard-working citizens. This, coupled with an entrepreneurial spirit, has created a country that takes trade very seriously and sees the results that come from it.
There are a lot of reasons why the United States places such a high emphasis on trade. First, engaging in trade can help bring jobs to the country, which is very good for citizens and putting people to work. Second, effective trade can help offer new products or services that were previously unavailable to its citizens. Last but not least, trade encourages investment (which leads to faster economic growth).
Given that the United States and China are two of the top countries in the world when it comes to their production, imports/exports and trade, it’s worth taking a closer look at their relationship.
The United States vs. China Trade War
We wouldn’t be able to write this article without mentioning the trade war that erupted between the two countries over the last couple of years. If you’re not familiar, a trade war is not a literal war but instead, it’s what happens when one country retaliates against one another by raising import tariffs or placing other restrictions on the other country’s imports. This happened between China and the U.S. when Donald Trump initiated tariffs on China’s imports.
A brief history of the trade war would look something like this:
- The war started in July 2018, with both countries exacting tariffs on $34 billion dollars worth of goods from the other country
- The U.S. has escalated the trade war several times and has implemented tariffs on over $400 billion dollars worth of Chinese goods to date. China generally has responded each time the United States has acted but on a much smaller scale (about $120 billion worth of U.S. goods). The leadership between the two countries has also been back and forth, flipping between butting heads and praising one another
- Most recently, these countries reached an agreement for a trade deal (that is currently in Phase One)
It’s important to note that the trade war is still ongoing but has taken a back seat to the pressing matter of the coronavirus. As it currently stands, these two countries reached an agreement for a new trade deal. Phase One of this deal is set to begin in the upcoming year (2021) and China has stated that the effects of the coronavirus will not change their deal. The main agreement from the deal was that the United States agreed to cut tariffs on certain Chinese goods and in exchange, China will purchase American goods (specifically farming goods, energy and manufactured goods).
China also agreed to increase purchases of US goods by up to $200 billion over the next two years. It’s also worth noting that the deal included a few other obligations on the part of the Chinese. First, there was a section on intellectual property. China has long been accused of pressuring companies into handing over technology to the Chinese government in exchange for market access. For example, if Google wanted to set up a location in China, they would probably be pressured into handing over their software so that the Chinese government could use it. Google might even be pressured into handing over data surrounding their users. China has agreed to restrict this practice moving forward.
The final aspect of the trade deal had to do with currency. China has long been accused of artificially devaluing their currency to make the country seem more attractive to foreign investors. If the Chinese currency is less valuable, investors’ money can buy more goods in China, so they’re more likely to want to invest. China has agreed to limit this practice moving forward as well.
It will be interesting to see what happens with this trade war and deal if Donald Trump is removed from office (which could happen in November if Joe Biden wins the election). If he wins reelection, then the deal will most likely continue as normal. However, if Joe Biden wins the election then his administration may choose to take the relationship in a different direction.
We hope that you found this article valuable when it comes to understanding the current trade relations between the United States and China. If you’re interested in reading more, please visit our blog as well as the “New Here?” section of ChinaFund.com.